New IRS Information Reporting Obligations for Corporate Actions Affecting Tax Basis Become Effective

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The new year brings with it new tax reporting obligations with respect to certain corporate actions affecting tax basis. Although the new reporting obligations were enacted as part of the Energy Improvement and Extension Act of 2008, they became effective as of January 1, 2011, and the Internal Revenue Service (“IRS”) only recently issued final regulations.

The tax reporting rules provide that any domestic or foreign corporation (or entity treated as a corporation for federal income tax purposes) must file an information return with the IRS or publish on its website certain information if an organizational action (such as a stock split, a merger or an acquisition) affects the tax basis of any “specified security.” A “specified security” generally includes any share of stock (including any American Depositary Receipt). The required information includes, among other things, the type or nature of the organizational action and the quantitative effect of the organizational action on the basis of the security in the hands of a U.S. taxpayer as an adjustment per share or as a percentage of the old tax basis (including a description of the calculation, the applicable Internal Revenue Code provision upon which the tax treatment is based, the data supporting the calculation such as the market values of securities and valuation dates, any other information necessary to implement the adjustment including the reportable taxable year, and whether any resulting loss may be recognized).

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