Corporate related parties for reporting purposes.

In International Technical Assistance (ITA) 200238044, the Service concluded that a domestic corporation and a foreign corporation were not related parties and did not have to file reports on sales transactions between them.

Form 5472, Information Reporting of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, has information-reporting requirements for foreign investors in U.S. corporations. Failure to file creates severe penalties. The reporting requirement depends on whether the parties are related and the degree of stock ownership.

Facts

U.S. Corp 1, a domestic corporation, is a reporting corporation owned 55% by Individual A, and 45% by Individual B, both foreign. B is the husband of A's wife's sister. U.S. Corp 2, also a domestic corporation, is wholly owned by Individual C, a U.S. resident and brother of A's wife. ForCorp, a foreign manufacturing corporation, is 20% owned by C, and 80% owned by six other unrelated individuals.

U.S. Corp 1 imports goods supplied by ForCorp, and distributes them to other domestic entities, principally to U.S. Corp 2. The goods comprise a majority of ForCorp's products. Before the formation of U.S. Corp 1, ForCorp sold these goods directly to U.S. Corp 2.

Determining Related-Party Status

Under Sec. 6038A(c)(2), ForCorp would qualify as a party related to U.S. Corp 1 for Form 5472 purposes if it is (1) a 25% foreign shareholder of U.S. Corp 1, (2) related to U.S. Corp 1,A orb or 0) related to U.S. Corp 1 via Sec. 482.

In determining whether ForCorp is a 25% foreign shareholder of U.S. Corp 1, any U.S. Corp 1 stock held by a ForCorp 50% shareholder is constructively held by ForCorp. ForCorp owns no stock directly or indirectly in U.S. Corp 1 through another entity, and has no 50% shareholders through which it can constructively own any U.S. Corp 1 stock. Because it owns no U.S. Corp 1 stock directly, indirectly or constructively, ForCorp is not a 25% foreign shareholder of U.S. Corp 1 and, thus, not a related party under the first test.

ForCorp will be related to U.S. Corp 1 under Sec. 267(b) if both corporations are members of the same controlled group, as defined in Sec. 1536(a), if A, B and C, in the aggregate, own more than 50% of the stock of each of U.S. Corp 1 and ForCorp, taking into account the equal amount of stock of each in the other corporation.

A owns 55% of U.S. Corp 1, but does not directly own any ForCorp stock. Similarly, B owns 45% of U.S. Corp 1, but does not own any ForCorp stock directly. C, who owns 20% of ForCorp, is the brother-in-law of both A and B. Under Sec. 1536, ownership cannot be attributed to siblings, nor can stock that was attributed to a family member be reattributed to another individual. Thus, A's U.S. Corp 1 stock can be attributed to his wife, but not reattributed to her brother C. C's ForCorp stock cannot be attributed to his sister (let alone reattributed from her to A).

Similarly, stock cannot be attributed between B and C--in either direction--because they are brothers-in-law. Because neither A, B nor C owns both U.S. Corp 1 and ForCorp stock, none of the stock they own in either corporation counts toward the greater-than-50% test. Thus, the two corporations are not members of the same controlled group.

ForCorp will be related to A or B only if either one owns, directly or indirectly, more than 50% of ForCorp's outstanding stock, in value, and neither A nor B does (through either a corporation, partnership, trust or estate). Although sibling attribution exists, stock attributed to a family member cannot be reattributed to another individual. C's ForCorp stock can be attributed to his sister, who is A's wife, but cannot be reattributed from her to A. Similarly, his ForCorp stock can also be attributed to B'S wife, who is also a sister of C, but cannot be reattributed from her to B. Even if reattribution were permitted, C owns only 20% of ForCorp stock, which is less than the over-50% requirement. Neither A nor B directly or constructively owns more than 50% of ForCorp and, thus, neither is related to ForCorp.

Because ForCorp is not related to U.S. Corp 1, neither A nor B is related under the second test.

The Sec. 482 ownership/control test is another way to determine if parties are related for Sec. 6038A purposes. U.S. Corp 1 and ForCorp will be related if, under Sec. 482, they are owned or controlled (directly or indirectly) by the same interests. Indirect ownership (although not defined in the Sec. 482 context) presumably means ownership through a corporation, partnership, trust or estate. Under the facts, neither ForCorp nor U.S. Corp 1 is owned directly or indirectly by the same interests.

As to control, the majority shareholder A controls U.S. Corp 1. However, C, the only ForCorp shareholder related to A, owns only 20% of ForCorp stock. This is not a majority interest, because the rest of the ForCorp stock is closely held by a small group of unrelated persons, nor is it apparently a controlling interest. As discussed above, other ways may demonstrate that C has actual control of ForCorp. A presumption of control might arise if income and deductions were shifted arbitrarily, which might be evidence that U.S. Corp 1 and ForCorp are controlled by the same interests for Sec. 482 purposes.

FROM WILLIAM ZINK AND KRISTA STUART,CHICAGO, IL