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Form 926 Reporting Transfers to Foreign Corporations: Avoiding Harsh Penalties

TUESDAY, JULY 31, 2016, 1:00-2:50 pm Eastern

FOR LIVE PROGRAM ONLY

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FOR LIVE PROGRAM ONLY

TUESDAY, JULY 31, 2018

Form 926 Reporting Transfers to Foreign Corporations: Avoiding Harsh Penalties

Ryan Charles Gaglio, Shareholder

Stradling Yocca Carlson & Rauth, Newport Beach, Calif.

[email protected]

John Garcia, CPA

Corporate Tax Advisors, Foothill Ranch, Calif.

[email protected]

Notice

ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.

You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

Ryan C. GaglioJohn P. Garcia

July 31, 2018Webinar

John Garcia, CPA, MBA is an owner of Corporate Tax Advisors, an international tax consulting firm. John has over 25 years of experience in tax including heading up tax departments for large multinational firms.

John Garcia, CPA, MBA CTAX

Corporate Tax Advisors

26632 Towne Centre Drive #300

Foothill Ranch, CA 92610

[email protected]

6

Ryan Charles Gaglio, Shareholder

Ryan’s practice focuses on M&A transactions with a particular emphasis on tax planning, including thefederal, state and local tax consequences of acquisitions, taxable and tax-free mergers, and public andprivate tender offers. He also advises companies and executives in connection with executivecompensation matters.

In addition, Ryan has significant experience in federal, state and local tax controversies and disputesand has successfully represented clients at all stages of proceedings before the IRS, the CaliforniaFranchise Tax Board and the California State Board of Equalization, as well as in tax controversiesbefore the U.S. District Court and the U.S. Tax Court.

Ryan was awarded the annual Tax Law Section Award for 2016 by the Orange County Bar Association.

In 2015 and 2016, Ryan was named a "Southern California Rising Star" by Super Lawyers.

Featured Representation

• Represented MagnaCom, a digital communications company, in its acquisition by BroadcomLimited.

• Represented Media Properties Holdings, a portfolio company of The Carlyle Group and H.I.G.Growth Partners, in its acquisition by Cannella Response Television.

• Represented Instantly, a provider of online and mobile audiences and insights technology tools, in itssale to Survey Sampling International.

• Represented Inventus Solutions, a portfolio company of Clearlake Capital Group, in connection withits sale to RPX Corporation (NASDAQ: RPXC).

• Represented eMOBUS, a provider of managed mobility services, in its acquisition by Asentinel, aMarlin Equity Partners portfolio company.

• Represented Ansible, an Enterprise IT automation company, in its sale to Red Hat (NYSE: RHT).

• Represented Skylight Healthcare Systems, an interactive patient care company, in its acquisition byGetWellNetwork, a portfolio company of Welsh, Carson, Anderson & Stowe.

EDUCATION Yale Law School, J.D.

Columbia College, B.A.

PRACTICE AREASCorporate LawMergers and AcquisitionsEmployee Benefits and Executive CompensationTaxTax PlanningFund FormationExecutive Compensation

STRADLING YOCCA CARLSON & RAUTH, P.C.

Ryan Charles Gaglio is a shareholder in Stradling's Corporate and Securities and Tax practicesgroups.

Office: Newport [email protected](949) 725-4042

7

1. Recognize the thresholds for both value and control indetermining whether a taxpayer must file Form 926.

2. Discern the exceptions to filing requirements and gain/loss recognition on transfers to foreign corporations.

3. Identify critical calculations that must be reported in Part IV of Form 926.

4. Demonstrate the interrelation between amounts reported onForm 926 and other foreign information reportingrequirements such as FBAR/FinCEN Form 114.

5. Determine information that must be included in Part III ofForm 926.

8

I. Transactions requiring Form 926 reporting. John

II. What must be reported on Form 926.Ryan

III. Special issues related to partnerships and hedge funds. Ryan

IV. Penalties for noncompliance & TaxPlanning Opportunities. John

9

There are a number of ways to capitalizeforeign corporations:

� Cash for stock

� Loans for interest-bearing/interest free notes

� Loan Guarantees� Contributions or exchanges of property (i.e. stock,

tangible, and/or intangible property) (IRC Sec. 367)

10

Questions You Need to Ask1. Have you recently transferred appreciated

property to a FC?

2. If yes, how did you determine the appropriate capital gain if any?

3. Do you know if the property transfer qualified for deferred recognition or non-recognition treatment?

11

T R A N S A C T I O N SR E Q U I R I N G F O R M 9 2 6

R E P O R T I N G

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Under IRC Sec. 6038B(a)(1)(A), if a U.S. person transfers property to a foreign corporation in one of the following transactions, generally the transfer must be reported on Form 926:� Sec. 332,336: Complete liquidation of subsidiary� Sec. 351: Capital contribution or transfer to a controlled (80%) corporation

solely in exchange for stock.� Sec. 355: Distribution of stock or securities of a controlled corporation.� Sec. 354: Exchanges of stock and securities in certain organizations.� Sec. 356: Additional consideration in certain distributions (relating to 354

and 355 transactions)� Sec. 361: Exchanges of property by a corporation solely in exchange for

stock in a reorganization.� Sec. 367(d) – Outbound transfers of intangibles. DANGER!

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The general purpose of IRC 367(a)(1) is to tax the built-in gain on appreciated property that is transferred in an U.S. outbound transaction. Specifically, IRC 367(a)(1) imposes taxation on the outbound transfer of property by a U.S. person to a FC in what would otherwise be a nontaxable exchange. If an exception to IRC 367(a)(1) is applicable, then the built-in gain on the appreciated property that is transferred in an outbound transaction will remain subject to the general nonrecognition rules.

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A U.S. person is defined as:1. A citizen or resident of the U.S.2. A domestic partnership3. A domestic corporation4. Any estate in which foreign source

income is not taxable in the U.S.5. Any trust if a U.S. court has primary

supervision and U.S. persons control substantial decisions.

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Questions that need to be answered:1. What is the trade or business of the

transferee foreign corporation?2. Do the activities of the transferee constitute

the active conduct of a trade or business?3. Is the trade or business conducted outside

the U.S.?4. Is the transferred property used or held for

use in the trade or business?

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Exceptions to Section 367(a)(1) gain recognition:1. Property - Active trade or business exception (limited)

a. “Hot assets” excluded (i.e. inventory, receivables, foreign currency, specific intangibles)

b. Property previously depreciated in the U.S.c. Assets of foreign branch that incurred losses also excluded.

2. Transfer of domestic stock to foreign corporation. Must meet 5 tests:a. Required reporting.b. 50% cap on foreign stock received.c. 50% limit on total ownership by certain U.S. personsd. >5% of ownership or file GRA.e. Substantial active business.

17

A U.S. person transferring stock or securities will not have to file Form 926 if either (a) or (b) apply:

a) They either own less than 5% of the vote and value of the transferee foreign corporation and:o The transaction qualifies for non-recognition treatment;o The transferor is a tax-exempt entity (and the income is not UBTI);o The transfer was for services as described in Reg. 1.83-6 and the fair market value of the property transferred did not

exceed $100,000; oro The transfer is taxable and the U.S. transferor properly reported the income on its timely filed U.S. income tax return

that included the year of the transfer

b) They own 5% or more of the total voting power or total value of the transferee foreigncorporation and:

o The U.S. transferor was a tax exempt entity and the income was not UBTI;o The transfer was taxable to the U.S. transferor and that person reported the income on its timely filed return;o The transfer was for services as described in Reg. 1.83-6 and the fair market value of the property transferred did not

exceed $100,000

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The transfer of stock and securities of a foreigncorporation will not be subject to treatment under Sec. 367(a) if either:

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� The U. S. person / transferor owns less than 5% of the transferee foreign corporation after the transfer; or

� The U. S. person / transferor enters into a five-year gain recognition agreement (GRA) with respect to the transferred stock or securities

A gain recognition agreement entered into as a condition of avoiding gain recognition under the rules described at must contain the following information, with the heading “GAIN RECOGNITION AGREEMENT UNDER Reg § 1.367(a)-8,” and with paragraphs labeled to correspond with the numbers indicated below:(i) A statement that the document submitted is the U.S. transferor's agreement to recognize gain in

accordance with the requirements under Reg § 1.367(a)-8.(ii) A description of the transferred stock or securities and other information as required under the

rules.(iii) A statement that the U.S. transferor agrees to comply with the Reg § 1.367(a)-8 conditions and

requirements, including to recognize gain, waive the period of limitations, file the certification, and treat a failure to comply as extending the period of limitations on assessment of tax for the taxable year in which gain is required to be reported.

(iv) statement that arrangements have been made to ensure that the U.S. transferor is informed of any events that affect the gain recognition agreement, including triggering or other gain recognition events.

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(v) In the case of a new gain recognition agreement:(A) A description of the triggering event and the applicable exception, if any, that gave rise to the new gain recognition agreement, including the date of the event and the name, address, and taxpayer identification number (if any) of each person that is a party to the event,(B) A description of the class, amount, and characteristics of the stock, securities or partnership interest received in the transaction, and(C) A calculation of the amount of gain that remains subject to the new gain recognition agreement as a result of receipt of boot in nonrecognition transactions, distributions with respect to stock and dispositions that terminate or reduce the amount of gain subject to gain recognition agreement.A statement whether the U.S. transferor elects to include in income gain recognized in the tax year in which the gain recognition event occurs, rather than in the year of the initial transfer.

(vii) A statement whether a gain recognition event has occurred during the tax year of the initialtransfer.

(viii) A statement describing any disposition of assets of the transferred corporation during the taxyear other than in the ordinary course of business.

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Reporting exception for certain transfers – a U.S.person is required to report the transfer of cash toa foreign corporation on Form 926 if:1. A U.S. person owns 10% of vote or value of

the foreign corporation (directly, indirectly orby attribution) after the transfer; or

2. If a person transfers $100K or more within the12-month period ending on the date of thetransfer Form 926 must be filed.

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An outbound transfer of intangible property within the meaning of Section 936(h)(3)(B) (“IRC 367(d) intangibles”) to a FC in a Section 351 or 361 transaction is not subject to IRC 367(a) but rather IRC 367(d) would apply.

Transfer of intangible gives rise to payments over life of property “commensurate with the income attributable to the intangible”

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� Patent, invention, formula, process, design, pattern, or know-how;� Copyright, literary, musical, or artistic composition;� Trademark, trade name, or brand name;� Franchise, license, or contract;� Method, program, system, procedure, campaign, survey, study,

forecast, estimate, customer list, or technical data; or� Any similar item, which has substantial value independent of the

services of any individual.It does not include of foreign goodwill or going concern.

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See T.A.M. 200907024; Treas. Reg. 1.367(a)-1T(d)(5)(iii); Hospital Corp. of America v. Commr, 81 T.C. 520 (1983); and International Multifoods v.Commr, 108 T.C. 25 (1997)

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1. Formation of a new CFC2. Incorporation of a foreign branch3. Check-the-box (CTB) of an existing

Disregarded Entity (DE) to be treated as a CFC.

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Property

� Property for Stock – Section 351.

� Transfer of tangible and intangible property.� Results: (1) Nonrecognition exchange (2) FOREIGN

– Section 367(a) – xfer of appreciated property.

USPCFC

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Documents that will be requested by IRS1. Organizational Chart2. Step plan/tax opinion, if any3. Form 5471 (initial filing)4. Form 926, Part III and IV5. IRC 351 Disclosure6. IRC 6038B Disclosure7. GRA, if applicable

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FBR PropertyCFC

FBR

� Transfer property for stock under Section 351� Results: (1) Nonrecognition exchange (2)FOREIGN


USP

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Documents that will be requested by IRS1. Organizational Chart2. Step plan/tax opinion, if any3. Form 8832 and 88584. Form 5471 (initial filing)5. Form 926, Part III and IV6. IRC 351 Disclosure7. IRC 6038B Disclosure8. GRA, if applicable

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Special rules – losses of a branch that were previously deducted in theU.S. must be recaptured as income upon the transfer of branch assetsto a foreign corporation (subject to limitations).� The active trade or business exception does not apply to this

recapture provision� Previously deducted branch ordinary losses are characterized as

ordinary income and previously deducted branch capital losses are characterized as long-term capital gain

� Gain recognition is limited to the overall limitation on the recognition of gains under section 367(a).Gains recognized shall not exceed the gains that would be received on a taxable sale of the transferred items individually and without offsetting individual losses against individual gains

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DE PropertyCFC

� Year 1 – USP makes CTB of DE to make DE of USP.� Year 3 – USP makes CTB of DE to make CFC of USP.

This is Section 351 xfer.� Results: (1) Nonrecognition exchange (2) FOREIGN


USP

FBRDE

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Documents that will be requested by IRS1. Organizational Chart2. Step plan/tax opinion, if any3. Form 8832 and 88584. Form 5471 (initial filing)5. Form 926, Part III and IV6. IRC 351 Disclosure7. IRC 6038B Disclosure8. GRA, if applicable

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A GAR is entered into to avoid gain recognition and must contain the following:1. Filed in accordance with Reg. 1.367(a)-8.2. Description of transferred stock or securities.3. Meets requirements including recognize gain, waive

SOL, file cert., etc.4. A statement that arrangements have been made to

ensure that the U.S. transferor is informed of any events that affect the GRA.

34

Form 926 Reporting Transfers to Foreign Corporations

1. Who must file and Form 926 filing thresholds2. What must be reported on Form 926

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FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTYTO A FOREIGN CORPORATION –

WHO MUST FILE AND WHAT MUST BE REPORTED?

• U.S. citizen or resident, U.S. corporation, U.S. trust or estate mustfile Form 926 to report certain transfers of property to a foreigncorporation that are described in:

1. I.R.C. § 6038B(a)(1)(A) – A transfer of property to a foreign corporation in an exchange described in I.R.C. §§ 332, 351, 354, 355, 356, and 361

2. I.R.C. § 367(d) – A transfer of an intangible to a foreign corporation (See I.R.C. § 936(h)(3)(B) for definition of intangibles.)

3. I.R.C. § 367(e) – I.R.C. § 355 distribution and liquidation into 80% foreign parent corporation under I.R.C. Section 332

38

FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTYTO A FOREIGN CORPORATION – WHO MUST FILE?

• Transfers by U.S. or foreign partnership transferor – U.S.partners of the partnership (and not the partnership itself)must file the Form 926.

• Each U.S. partner is treated as a transferor of its proportionate share of property that the partnership transferred to the foreign corporation.

• Partnerships that file a U.S. Form 1065 partnership tax return will usually provide information in the Schedule K-1 footnotes to alert U.S. partners to the potential Form 926 filing obligation.

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FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTYTO A FOREIGN CORPORATION – WHAT MUST BE REPORTED?

• Report cash transfers if:1. immediately after the transfer the U.S. person holds

directly or indirectly at least 10% of the vote or value of the foreign corporation, or

2. The cash transferred within the 12 months before the date of transfer exceeds $100,000 USD

40

FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTYTO A FOREIGN CORPORATION – WHAT MUST BE REPORTED?

• Gain recognition agreement is filed – Form 926 must be filed to report a transfer of stock or securities to a foreign corporation in all cases when a gain recognition agreement is filed under U.S. Treas. Reg. 1.367(a)-8.

• Check-the-box election is filed – Form 926 must be filed to report a deemed contribution of assets to a foreign corporation when a foreign entity that is already in existence files a Form 8832 check-the-box entity classification election to be classified as a foreign corporation.

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FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTYTO A FOREIGN CORPORATION

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• Form 926, Page 1, Part I - U.S. transferor information– Line 1 – Complete lines 1a through 1d if the transferor is a corporation.– Line 1a - For a transfer that is part of a corporate reorganization

transaction, indicate whether the transferor corporation was controlled with 80% ownership by five or less U.S. corporations.

– Line 1b – List controlling shareholders if transferor did not exist after the transfer.

– Line 1c - If the transferor is a member of a U.S. consolidated group,then list the name of the parent corporation and file Form 926 with theU.S. Federal consolidated tax return.

– Line 1d – Indicate whether I.R.C. § 367(a)(5) basis adjustments were made.

43


• Form 926, Page 1, Part I - U.S. transferor information– Line 2a – Provide name and FEIN of partnership that was the

actual transferor.– Line 2b – Indicate whether the partner of the transferor

partnership reported its pro rata share of gain on the transfer of partnership assets.

– Line 2c – Indicate whether the partner is disposing of its entire interest in the partnership in the year of the transfer.

– Line 2d – Indicate whether the partner is disposing of its entire interest in a publicly traded limited partnership in the year of the transfer.

44


• Form 926, Page 1, Part II – Transferee foreign corporationinformation– Name and address of transferee foreign corporation– Include FEIN or reference ID number– Country of incorporation or formation– Characterization of foreign entity under foreign law– Indicate whether the transferee foreign corporation is a

CFC

45


46


• Form 926, Page 2, Part III – Information RegardingTransfer of Property

– Column (a) – Date of transfer when right, title, interest andpossession of cash or property passed to the foreign corporation

– Column (b) – Description of the property– Column (c) – Fair market value on the date of transfer– Column (d) – Cost basis or adjusted basis of the property– Column (e) – Gain recognized on transfer– Supplemental information – Description of transaction that this

contribution was a part of, if applicable

47


• Form 926, Page 2, Part III – Information Regarding Transfer of Property,Types of Property– Cash– Stock and securities– Installment obligations, accounts receivable and similar property– Foreign currency or property denominated in foreign currency– Inventory– Assets subject to depreciation recapture (Temp. Reg. § 1.367(a)-4T(b))– Tangible property used in a trade business– Intangible property– Property to be leased (Reg. § 1.367(a)-4(c))– Property to be sold (Temp. Reg. § 1.367(a)-4T(d))– Transfers of oil & gas working interests (Temp. Reg. § 1.367(a)-4T(e))

48


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• Form 926, Page 3, Part IV - Additional Information Regarding Transfer of Property– Line 9 – Transferor’s ownership percentage before and after the transfer– Line 10 – State the IRC section that applies to the contribution– Line 11 – If a gain recognition agreement was required, a statement must be attached

that describes the transfer and the amount of gain recognized, in addition to answering questions 11a through d.

• Line 11a - Gain recognized under I.R.C. § 904(f)(3) = disposition of property usedin a trade or business outside the United States (for overall foreign loss recapturerule)

• Line 11b - Gain recognized under I.R.C. § 904(f)(5)(F) = gain on disposition of property that would be in income category as separate limitation loss

• Line 11c - Gain recognized under I.R.C. § 1503(d) = dual consolidated loss recapture

• Line 11d - Exchange gain under I.R.C. § 987 = gain on foreign currency translation adjustments for branch and QBU transactions

50


• Form 926, Page 3, Part IV - Additional Information RegardingTransfer of Property– Line 12 – Indicate if a check-the-box election was filed and there was a

deemed transfer rather than an actual transfer.– Line 13 – Indicate if gain on branch loss recapture or depreciation recapture

was recognized. See U.S. Treas. Reg. §§ 1.367(a)-4 and 1.367(a)-6 for other reportable items.

– Line 14 – Indicate if exception to I.R.C. § 367(a) gain recognition applies for active trade or business property.

– Line 15 – Indicate if transfer of foreign goodwill or going concern value andprovide amount transferred.

– Line 16 – Indicate if cash was the only property transferred.– Line 17 – Indicate if intangible property was transferred. This relates to the

I.R.C. § 367(d) requirement. If yes, must attach statement describing theintangible property rights transferred per U.S. Treas. Reg. § 1.6038B-1T(d).

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FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTYTO A FOREIGN CORPORATION - SUMMARY

• U.S. citizen or resident, U.S. corporation, U.S. trust or estate must file Form926 to report certain transfers of property to a foreign corporation

• U.S. partners in U.S. partnership transferor file the Form 926• Report cash transfers if:

– immediately after the transfer the U.S. person holds directly orindirectly at least 10% of the vote or value of the foreign corporation, or

– The cash transferred within the 12 months before the date of transfer exceeds $100,000 USD

• File Form 926 to report transfers of stock or securities subject to gain recognition agreement

• Failure to file penalty is 10% of FMV of property on date of transfer limited to a maximum of $100,000 unless intentional disregard

• Statute of limitations is extended to three years after required information is reported

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Form 926 Reporting Issues for Partnerships and Hedge Funds

• Do not file Form 926 with the U.S. partnership’s U.S. Federal Form1065 partnership tax return

• The U.S. partners in the U.S. or foreign partnership that transfers cash or property to a foreign corporation are considered to have transferred a proportionate share to the foreign corporation based on their respective ownership interest in the partnership.

• The U.S. individual or corporate partners file the Form 926 with theU.S. partner’s U.S. Federal income tax return.

• The U.S. partner aggregates all cash transfers during the tax year(or prior 12 months) to each foreign corporation in determining thefiling threshold for cash transfers.

• Do not aggregate transfers by one U.S. partner to all foreign corporations.Only aggregate transfers with respect to each foreign corporation.

53


U.S. Investment Funds with Offshore Investments:Parallel Fund Structure

U.S. Taxable Investors &U.S. Government Investors

Non-U.S. Investors& Tax-Exempt Investors

Fund(Classifiedas Partnership)

Fund(Classifiedas Corporation)

Non-U.S. Investments

54


U.S. Investment Funds with Offshore Investments: Master / Feeder Fund Structure

U.S. Taxable Investors &U.S. Government Investors

Feeder Fund(Classifiedas Corporation)

Master Fund(Classified

as Partnership)

Non-U.S. Investors& Tax-Exempt Investors

Non-U.S. Investments

55


• Portfolio of foreign investments Investments in foreign corporations

Publicly traded company Privately held company

Venture capital and private equity Start-up company

Passive Foreign Investment Company (PFIC) 75% of gross income from passive or investment type income 50% of assets that produce passive or investment type income

Corporation with an active operating trade or business Investments in foreign partnerships

Foreign hedge fund Foreign private equity fund

Investments in foreign corporate debt obligations Investments in foreign government bonds Investments in foreign currencies and virtual currency Investments in foreign derivatives: forwards, futures, options, and swaps

56

Form 926 Reporting Issues and Foreign Investment Funds

• For foreign companies and investment funds—Is the foreign company properly classified as a foreign partnership or a foreign corporation for U.S. Federal income tax purposes?

• Is the foreign entity formed under local law in the foreign country on the per se list of foreign corporations? If yes, then it is required to be classified as a foreign corporation. If no, then it is an eligible foreign entity that could be classified as a foreign partnership either based on

the default classification rule or by filing a U.S. Federal Form 8832 check-the-box election.• Does the foreign company have more than one owner with at least one owner that has

unlimited liability for the debts, obligations, and liabilities of the foreign company? If yes, then the foreign company is classified as a foreign partnership for U.S. Federal tax purposes based

on the default classification rule. If no, then the foreign company is only a foreign partnership if it has more than one owner and a Form 8832

election was filed. If no, the foreign company is a foreign corporation if no owner has unlimited liability and a Form 8832

election was not filed.• Did the foreign company have more than one owner and file a Form 8832 election to be

classified as a foreign partnership for U.S. Federal tax purposes? If yes, then it is a foreign partnership for U.S. Federal tax purposes. If no, then the foreign company is a foreign corporation if the Form 8832 was not filed.

57

Form 926 Reporting Issues for Partnershipsand Hedge Funds: U.S. Tax-Exempt Investors

• Form 926 and U.S. tax-exempt investors in investment funds— U.S. tax-exempt investors typically may include:

Corporate pension plans University and college endowment funds Private foundations Charity endowment funds Individual retirement accounts (IRAs)

U.S. tax-exempt investors may prefer to invest in a foreign blocker corporation instead of directly into an investment partnership to prevent U.S. taxation of unrelated business taxable income (UBTI).

Generally, a U.S. tax-exempt entity’s transfers of cash or property to foreign corporation are reportableon the Form 926.

Form 926 reporting exception for tax-exempt entities if: The U.S. tax-exempt entity transfers stock or securities to a foreign corporation in a transaction

described under I.R.C. Section 367(a), The U.S. tax-exempt entity owns less than, equal to, or greater than 5% of the total vote or value

of the transferee foreign corporation after the transfer, and The U.S. tax-exempt entity did not recognize any unrelated business taxable income (UBTI) from

the gain recognition on the transfer under I.R.C. Section 367(a). No specific Form 926 reporting exemption for IRAs that invest in foreign corporations – Custodian or

U.S. account holder should file form 926.

58

Form 926 Reporting Issuesfor Partnerships and Hedge Funds—PFICs

• U.S. and foreign investment funds typically have investmentportfolios that include PFIC Investments.

• It can only be a PFIC if it is properly classified as a foreign corporation for U.S. Federal tax purposes. The investment prospectus will typically include information for U.S. investors that advise whether the foreign investment company is a PFIC.

• A common misunderstanding that is it is possible to make a QEFelection for any PFIC. The PFIC must agree to issue an annual PFIC statement to the U.S. shareholder which discloses the shareholder’s share of PFIC ordinary earnings, gains, and distributions based on financial statements of the PFIC prepared consistently with U.S. GAAP and U.S. Federal tax principles. Not all PFICs are willing to do this.

• Consider PFIC/CFC overlap issues.

59

Form 926 Reporting Issuesfor Partnerships and Hedge Funds—Schedule K-1 Disclosures

• U.S. investment partnerships including hedge funds are generally requiredto include disclosures in the footnotes to the Schedules K-1 issued to theU.S. partners which advise the partners regarding certain U.S. international information return reporting requirements resulting from the foreign investments.

• Form 926 information return to report transfers to a foreign corporation• Form 5471 information return to report ownership of a foreign corporation• Form 8621 information return to report ownership of a PFIC• Form 8865 information return to report ownership of a foreign partnership• Form 8938 Statement of Specified foreign financial assets• U.S. Treas. Reg. Section 1.1411-10(g) Election with respect to CFC and

PFIC/QEF income

60

OTHER REPORTING REQUIREMENTSFORM 8938 STATEMENT OF SPECIFIED FOREIGN FINANCIAL ASSETS

• U.S. individuals file Form 8938 with U.S. Federal Form 1040• Take into account value of stock in foreign corporation for Form

8938 filing threshold1. Single or married filing separately living in United States - $50,000 at

12/31 or $75,000 at any time during calendar year2. Married filing jointly living in United States - $100,000 at 12/31 or

$150,000 at any time during calendar year• If filing Form 5471, still must attach Form 8938 if within filing

threshold• If not filing Form 5471, must report information regarding

foreign corporation on Form 8938 if within filing threshold

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What if Form 926 Was Not Filed?

• If Form 926 was not filed, there could be other reporting requirements that were missed such as Forms 5471, 5472, 8938, or FinCEN Form 114 Foreign Bank Account Report, etc.

• Certain IRS amnesty programs may provide relief for the failureto file U.S. international tax reporting forms such as Form 926.– Delinquent International Information Return and FBAR Submission

Procedures if U.S. taxpayer can establish reasonable cause for the failure to file – U.S. international reporting and FBAR penalties do not apply.

– Streamlined Domestic or Foreign Offshore Filing Procedures for U.S.Individuals with nonwillful failure to file – A 5% penalty applies for thedomestic offshore program.

– Offshore Voluntary Disclosure Program for U.S. Individuals withintentional or willful failure to file – Penalties will apply.

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Under IRC Sec. 6038B(c)(1), if a U.S. person fails to file aForm 926:� The penalty is equal to 10 percent of the FMV of the

property at the time of the exchange. The penalty shall not exceed $100,000 unless the failure with respect to such exchange was due to intentional disregard.

� Lose trade or business exception for recognizing gain.

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It should be noted that once such a transfer takes place, other forms may alsobe required:

� FinCen Form 114, Report of Foreign Bank Accounts (FBAR) (formerly Form TDF 90-22.1)

� Form 5471, Information Return of U.S. Person with Respect to Certain Foreign Corporations

� Form 8938, Statement of Specified Foreign Financial Assets� Form 8621, Information Return by a Shareholder of a Passive Foreign

Investment Company or Qualified Electing Fund

A failure by a United States person to timely file one of the aforementioned forms or a failure to comply with the reporting requirements of these forms may result in monetary penalties, loss of foreign tax credits, and extension of the statute of limitations.

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Extension of Statute of LimitationsGeneral rule: Taxes are required to be assessed within 3 years after the return is filed. For certain foreign filings, the limitations period does not expire for the assessment of income tax with respect to the return upon which the information should have been reported until three years after the required information is provided to the IRS.

For returns filed after March 18, 2010, and returns filed on or before March 18, 2010 as to which the SOL has not yet expired as of March 18, 2010, the extension of the SOL applies to any tax return, event or period to which the unreported information relates:� If failure to provide the required information was due to reasonable cause and not

willful neglect, the extended time for assessment will be limited to the unreportedinformation.

Under Section 6662(j), an additional 40% penalty may be imposed on any underpayment resulting from an undisclosed foreign financial asset. This additional penalty applies to any asset that was required to be reported under IRC Section 6038B if the taxpayer failed to disclose the information. The penalty will not be imposed if the United States person can demonstrate that the failure was due to reasonable cause and the taxpayer actedin good faith.

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Comparison: https://www.irs.gov/businesses/comparison-of-form-8938-and-fbar-requirements

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Loan

� Capitalize Subsidiary via IC loan.

� Subject to Section 482 and withholding not Section 367.

� Results: (1) Deduction for interest on CFC books (2) immediate return of capital to USP.

� Caution: Be aware of thin-capitalization rules and Section 956.

USPCFC

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Royalty

� Grant rights to use intangible via royaltyagreement.

� Subject to Section 482 and withholding not Section 367(d).

� Results: (1) Deduction for royalty on CFC books (2) immediate return of capital to USP.

� Caution: Be aware of thin-capitalization rules.

USPCFC

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� Value pre-existing intangibles and foreign entity purchases intangibles based on value. Reg. Section 1.482-7(g)(2)

� See Amazon.com v. Commissioner and Veritas case.

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