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Reporting Nonqualified Deferred Compensation for Year of Merger or Acquisition

When negotiating a merger or acquisition, reporting the acquired company’s payments of nonqualified deferred compensation (NQDC) or other reportable payments made before closing likely is not one of the key deal terms. However, if the acquiror will require the acquired company to terminate and pay out its NQDC plans before closing, particularly to non-employees (such as independent directors of the acquired company who will not continue with the acquiror), the parties should consider addressing who will be responsible for reporting those payments come tax reporting time.

Internal Revenue Procedure 99 – 50 discusses two ways the entities involved in a merger or acquisition can report information to the Internal Revenue Service required under certain Forms 1042‑S, all forms in the series 1098, 1099, and 5498, and Forms W‑2G. Payments of NQDC to non-employees (such as independent directors) generally are reported under the Form 1099 series[1].

  • The default standard procedure” is that each party that makes or receives payments or withholds or collects taxes that are reportable on Form 1099 is responsible for information reporting of those transactions. See IRS Rev. Proc. 99 – 50, Section 4.
  • The alternative procedure” allows the predecessor and successor to agree that the successor assumes the predecessor’s entire information reporting obligations. See IRS Rev. Proc. 99 – 50, Section 5.

However, under the alternative procedure, the predecessor is relieved of its information reporting obligations for the acquisition year only if and to the extent that the agreement meets, and the successor satisfies, each of the following requirements:

  • The predecessor and successor must agree upon the specific forms the successor will assume”.
  • On each form assumed, the successor must combine: 
    1. the payments made or received on account of a person by the predecessor in the pre-acquisition portion of the acquisition year with
    2. the payments made or received on account of that person by the successor in that year, if any, and must report the aggregate amount(s) on account of that person for that year.
  • On each form assumed, the successor must combine the amount of any tax withheld under Internal Revenue Code Sections 1441, 1442, 1443, 3402(q), 3402®, 3405, and 3406(a).
  • The successor must file a statement with the Internal Revenue Service indicating that the appropriate forms are being filed on a combined basis in accordance with the provisions of Revenue Procedure 99 – 50
    • The statement must include the name, address, telephone number, and Employer Identification Numbers of both the successor and predecessor, and the name and telephone number of the person responsible for preparing this statement.
    • Statements for different forms subject to the alternat procedure have different requirements. Statements related to the 1099 series must be filed separately from the form and Form 945 and must be mailed to the following address on or before the date those forms are due:

      Internal Revenue Service
      Martinsburg Computing Center
      230 Murall Drive
      Attention: Chief, Information Returns Branch
      Mail Stop 360
      Kearneysville, WV 25430

Practically, in a merger or acquisition where the successor is the only surviving entity, the successor may end up responsible for the reporting, whether done under the standard or alternative method. In either case, the successor will need access to the predecessor’s payment records. Consequently, acquiring companies should be aware of this issue generally when negotiating an acquisition and plan accordingly.

1 Starting with tax year 2020 (i.e., with reports due in 2021), current and deferred compensation payments to nonemployees are reported under Form 1099-NEC, which replaced the Form 1099-MISC for nonemployee compensation payments. See our article here.

DISCLAIMER: The information provided is for general informational purposes only. This post is not updated to account for changes in the law and should not be considered tax or legal advice. This article is not intended to create an attorney-client relationship. You should consult with legal and/or financial advisors for legal and tax advice tailored to your specific circumstances.

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