TEI member comments on Form 5471: July 2007.

Note: These comments are a compilation of recommendations received from TEI's members on Form 5471.

After the June 6th meeting with the IRS, TEI circulated 13 questions among the members of its IRS Administrative Affairs and International Tax Committees, soliciting their views on issues relating to the Form 5471 and possible modifications. Many of the questions were drawn from issues discussed during the June 6th meeting. In addition, in its monthly email to members, TEI asked generally about issues relating to the form and possible modifications. Although the responding group is relatively small (17), the data they provided are extensive. The information provided by each respondent is enclosed.

Specifically, TEI asked its committee members the following questions:

1. What processes do companies have in place to collect data and prepare and review the form? Specifically, (a) do internal company management reporting systems support Form 5471 reporting; (b) how and in what format do companies assemble key Form 5471 information; (c) how (if at all) is Form 5471 data used for internal reporting; and (d) what processes are in place to ensure timely and accurate filing?

2. What specific problems have companies identified in either their data collection or form preparation?

3. What changes should be made to provide relevant information to the IRS without unduly burdening companies?

4. What questions, if any, have you received from your IRS examiner about Form 5471? The IRS expressed interest in questions about Schedule F (Balance Sheet), but members were asked not to limit their responses to that schedule.

5. Would an additional line or question on the form eliminate the inquiry?

6. What areas of the form do you prepare solely for the IRS?

7. One suggestion made during the meeting is the viability of using a series of "screening questions" to determine whether a company needs to submit the entire form. For example, if a company reported an item listed in Schedule I (Summary of Shareholder's Income from Foreign Corporation), it would be required to submit the entire form. If it did not report an item, it would need to submit only summary information. What do you see as the pros/cons of this "screening question" approach?

8. In addition, the possibility of adding a question to Schedule G (Other Information) was raised, specifically, inquiring whether any transactions covered by the form are the subject of a transfer pricing study. What do you think of this suggestion?

9. If the question pertained to section 338 elections, would you be able to collect the information fairly easily?

10. Do you believe the 2009 filing season is a realistic goal?

11. What are the specific steps that your company would need to undertake to revise internal systems to meet that deadline?

12. What costs (human, dollar) would you anticipate being involved in this effort?

13. If possible, please provide a rough timeline for the steps you have outlined above.

Members' Summary Comments

Respondent #1: There are opportunities to improve Form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations) through streamlining the information required, as well as using e-filing more efficiently.

With the condensed time requirements in which companies must complete their financial reporting obligations--in addition to complying with the internal control requirements of the Sarbanes-Oxley Act of 2002 (SOX)--there has been an increase in the number of initiatives to leverage financial reporting system software and develop standardized information request packages that support the preparation of Form 5471. Consequently, most companies have the means by which they can gather and report financial reporting information and efficiently reflect this information on their Form 5471. This may not be the case, however, for mid-size and smaller companies that do not have this type of infrastructure in place.

The proposal to use a series of "screening questions" could facilitate more focused, efficient, and accurate compliance reporting. This could come at a cost to the taxpayer, however, depending on the nature of the questions and the type of response (e.g., yes/no or taking action in response to a group of questions (category of filer)). For example, if yes/no questions were asked about the existence of foreign base company income and the underlying nature of that income (e.g., foreign personal holding company, foreign base company sales, or foreign base company services income), would inadvertent errors trigger the assessment of penalties? The "screening questions" approach would appear to be more useful to mid-size and smaller companies, but there is risk that a vehicle designed for their convenience could ultimately prove more costly.

Alternatively, a group of "screening questions" could be used to determine a new category of filer (e.g., category 6 filer) that would be entitled to provide less information on Form 5471. The series of screening questions could consist of: (i) the type of activities engaged in; (ii) the magnitude of income statement; (iii) whether the company has generated foreign base company income; (iv) the size of balance sheet; and (v) whether the controlled foreign corporation has invested in U.S. property.

An item not specifically addressed in the questions is the consequence of e-filing. Forms 5471 can no longer be filed as a PDF attachment with the filing of a consolidated Form 1120. What is potentially time consuming and ultimately inefficient for taxpayers is the e-filing of Form 5471 because specific diagnostics are syntax driven and must be cleared before an accurately prepared Form 5471 can be accepted as filed.

Respondent #2: By way of background, our company profile is:

* Software applications used by respondent company: (i) GDX-electronic intranet data gathering package; (ii) CorpTax--earnings and profits and form preparation; and (iii) CorpInternational--income inclusion and deemed paid foreign tax credit calculator;

* 375 CFC Form 5471 filings for 2006, including 40 Form 8858 (Foreign Disregarded Entity (DRE)) filings;

* Nearly 4,000 pages, an average of 10-11 pages per CFC;

* Basic form is 6 pages, others are attached support schedules, report of changes in ownership, disclosures, elections;

* 40 Form 8858 DRE filings with Form 5471;

* 4 1/2 fulltime equivalents working on E&P, income inclusion calculations, and form processing (from March through August);

* 1 international tax planning manager, reviewing E&P calculations (May through June);

* 2 international division managers, reviewing income inclusion calculations (July) and reviewing Form 5471 filings (August).

In our view, the Form 5471 serves the government two purposes: (i) statistic gathering, and (ii) the local international examiner's audit tool. Because there is no consolidated 5471, the individual CFC form does not tie to any line, on any form, elsewhere in the U.S. consolidated federal tax return. In our experience over the past 20 years of IRS international audit cycles, information document requests (IDRs) are generated from either the attachments to the basic form (elections, statements, disclosures) or from Schedule M (Transactions Between Controlled Foreign Corporation and Shareholders or Other Related Persons). All other schedules containing financial information have generally changed from return as filed to taxpayer proposed changes at the time of the audit.

Real simplification would be to use U.S. GAAP, not U.S. tax, rules for earnings and profits timing adjustments; permanent items and taxes paid would still be applied using U.S. tax rules.

All schedules should be in a single currency--functional currency (FC) if different from U.S. dollar (USD)--except for the taxes paid and income inclusion information that must be in USD. Current schedules often change from USD to FC and back and forth. Cumulative E&P pools have to remain in functional currency.

Current Schedules C (Income Statement) and F (Balance Sheet) are U.S. GAAP schedules. All other schedules are prepared on a U.S. tax basis. Keep in mind, U.S. tax basis contains DREs, although these DREs have no application to U.S. GAAP. Our software vendor has advised us that other clients using its software allow the DREs to roll up into the U.S. GAAP schedules. There is some controversy in the taxpayer community on whether the DREs should roll up into the U.S. GAAP financial statements. A true U.S. GAAP statement, in this company's view, should not reflect a roll up of DREs; a U.S. GAAP statement without a roll up, however, is not reflective of the U.S. tax status of the entity.

Respondent #3: Instead of answering your questions by number, I am submitting the following, which is probably common for foreign-owned companies.

My employer is the U.S. headquarters of a U.K.-based multinational corporation. Therefore, the U.S. entity does not have a large number of CFCs, as it is more tax efficient for our U.K. parent to own foreign subsidiaries outside of the U.S. Group rather than pay dividends up to a higher U.S. tax rate, then down a lower U.K. rate.

We spend a considerable amount of resources, however, on the few CFCs we do have just to provide the financial information for the 5471s. A large portion of time is spent simply converting local books to U.S. GAAP. Since our U.K. parent reports under IFRS/IAS, the foreign subsidiaries report their year-end numbers directly to the U.K. in IFRS. Further, their locally issued audited financial statements are issued under local GAAP (such as Mexican, etc.), and so the financial accountants (U.S., Mexican, or wherever) never generate U.S. GAAP financials. Such task falls to the U.S. tax department (who are not experts in these alternative reporting systems), and we have to struggle and spend considerable time to obtain sufficient information and details (in English!) to do the conversions.

Further, since our CFCs report their financial information directly to our U.K. parent at year-end, the data available for the 5471s are very scanty and the U.S. tax department has to go on a yearly scavenger hunt to try to find the information we need.

So, if we were able to report Schedule C (Income Statement) or Schedule F (Balance Sheet) on IFRS or local GAAP in the instances where we have audited financial statements (in this case issued by Deloitte), it would greatly reduce our burden--especially for subs with insignificant activity. Because U.S. GAAP rules may well converge with IFRS, perhaps IRS would be open to this recommendation.

As for 5471 horror stories, we (gratefully) have not had one in several audit cycles, so I have nothing to add there.

Regarding the potential transfer pricing question on Schedule G, we would be opposed to such a question. There may be occasions where most of the intercompany transactions would be covered by a transfer pricing study, but very immaterial transactions may not have had a study. How would a company answer a Yes or No question like that under penalties of perjury? If we say No the transactions are not covered, that implies that none of the transactions was covered, while in fact all material transactions actually were, etc. That really wouldn't be helpful to the IRS or taxpayers.

Regarding the 2009 transition date, if the changes are material, some people will say it can't happen, while others will applaud. How successful that date would be all depends on the nature of the changes.

If the form is truly simplified, it might work depending on the details and the reporting systems of the individual companies. But then again, we've recently gone through FIN 48, SOX and corporate e-filing with little advanced notice, so I guess we could jump through more hoops--but please note that obtaining information from foreign companies with a language barrier is far more complicated than hiring one of the Big 4 to help with FIN 48.

Answers to Specific Questions

(Please note that not all respondents answered every question.)

Company Processes

1. What processes do companies have in place to collect data and prepare and review the form? Specifically,--

(a) Do internal company management reporting systems support Form 5471 reporting?

Respondent # 1: Our company's financial reporting system allows us to efficiently gather data that is required for the preparation of Form 5471.

Respondent #2: The process our company employs to gather data for Form 5471 is not supported by internal company management reporting systems. Rather, a special module has been constructed to gather information via the company's Intranet from existing systems. This module, called GDX within the Corptax software, is populated manually by relatively new accountants in each of the foreign subsidiaries. Monitoring of this process is centrally administered through an Intranet server by professional tax staff. Once the modules are completed, the data are electronically interfaced into CorpTax for E&P calculations and Form 5471 information reporting. This same module is also used to gather data to perform the U.S. taxable income inclusion computations, including the required effects of the look-through rules.

Respondent #4: First and foremost, our company's processes and procedures related to international tax compliance are not driven by Form 5471 requirements. Rather, we view the form as a by-product of the overall foreign tax credit determination process. Our tax return software (InSource) enables nearly fully-automated generation of Forms 5471, eliminating the need for manual input almost entirely (apart from certain non-numerical fields).

Our internal management reporting systems (including but not limited to the general ledger and legal staff database) provide approximately 75-100 percent of the data required for purposes of the foreign credit determination and Form 5471 preparation (the actual percentage varies by foreign entity). Data that cannot be gleaned from these systems (e.g., taxes for 5471 Schedule E, parts of Schedules H, M, and O) are collected directly from the foreign subsidiaries through an in-house developed web-based system that resides on our Intranet. While the form itself is not used for internal reporting purposes within the company, the data are shared by other internal processes, including but not limited to E&P and tax pool analyses, foreign dividend and deemed paid credit determination, and various restructuring and planning initiatives. Heavy reliance on data generated from our internal systems (and thoroughly reviewed by external auditors), confidence in local and regional tax counsel, and e-filing requirements ensure the forms' accuracy; internal deadlines set far in advance of the overall tax return due date ensure timely filing.

Respondent #5: The company receives an annual GAAP accounting package that includes an income statement, balance sheet, and statement of retained earnings from each of its international markets. These statements are approved by our external auditors and consolidated into the 10K that we file with the Securities and Exchange Commission (SEC) and the annual report that we distribute to our shareholders. We generally do not prepare local financial statements with formal footnotes, etc. because of the expense involved. These local market GAAP financial statements are in the format that we use in our external reports. In addition, each market sends us a corporate tax package that identifies specific information that we need to adjust GAAP reports to the tax-basis filing required by Form 5471. The accounting package is due shortly after year-end and the tax package is due by the end of February.

Respondent #6: We gather international data from our foreign units by using specially designed software (Trial Balance, Balance Sheet, Intercompany Transactions, Assets, etc.) that we then upload into tax preparation software to complete the actual 5471 and related computations. (Output schedules were created to specifically map the data from one system to the other.) The 5471s are used internally primarily for planning purposes to see the E&P for each entity. We spend approximately seven months of the year gathering the necessary data, reviewing it, asking the units questions, and then actually computing E&P adjustments and preparing the 5471 forms.

Respondent #7: Internal management reporting systems provide the functional currency financial information that serves as the initial basis for preparing the Forms 5471. The process for maintaining and uploading the information is handled by the accounting department because it is necessary for U.S. GAAP reporting obligations, in addition to the 5471 reporting obligations.

Respondent #8: The internal systems partially support our Form 5471 filing. We try to obtain as much data as possible from internal financial systems, including balance sheet and income statement. Manual requests are sent to Finance for estimated taxes, Schedule M intercompany information, E&P adjustments, Schedule O, and information needed to calculate any current year dividends and inclusions.

Respondent #9: No, it is a laborious data-gathering task from multiple sources.

Respondent #10: We have been reporting book data on many of the 5471s, so therefore systems are supporting, but forms are not technically correct.

Respondent #11: We gather a lot of the information from Hyperion, although we do have to manipulate the data before importing it into our tax software.

Respondent #12: No, not very well.

Respondent #13: We collect our Form 5471 information from our foreign affiliates using Excel spreadsheets. This information is then entered into the CorpTax and CorpInternational software.

With regard to our company's management reporting systems, there are several different legacy general ledger systems throughout the company that are used by management. This lack of consistency is the principal reason we have used the Excel spreadsheets in the past to collect our data.

(b) How and in what format do companies assemble key Form 5471 information?

Respondent #1: Our financial reporting system (e.g., Hyperion) enables the extraction of data into an Excel format that facilitates the preparation of Form 5471.

Respondent #5: Both our accounting and tax packages are reported via a web-based system and the final tax numbers are manually inputted to a 5471 reporting program.

Respondent #7: Functional currency GAAP-basis financial information serves as the starting point. Appropriate adjustments are calculated and booked to adjust the GAAP basis information to E&P.

Respondent #8: We use Excel and web-based surveys.

Respondent #9: We have piecemeal data searching and report-writer Essbase reports.

Respondent #10: We have used paper forms until required to do otherwise and rely on our software provider, Tax Dimensions. This produces reliable 5471 electronic forms.

Respondent #11: We send out an international tax package to all foreign entities requesting information to support E&P adjustments, Subpart F, and intercompany transactions.

Respondent #12: Primarily, the necessary information is manually entered into tax preparation software based on financial statement information and various tax calculations prepared in Excel.

Respondent #13: As noted above, we primarily use Excel spreadsheets to gather our data

(c) How (if at all) is Form 5471 data used for internal reporting?

Respondent #1: The information used for Schedules C, F, and M of Form 5471 are also used for internal reporting purposes. The data gathered for the preparation of Schedule M will also be used for monitoring the execution of our company's transfer pricing policies.

Respondent #2: No Form 5471 data are used for internal reporting purposes.

Respondent #5: We do not use internal management reports for Form 5471 purposes because management reports sometimes do not include a comprehensive GAAP balance sheet and income statement. Also, Form 5471 tax information and data are not used for any other purpose than tax reporting.

Respondent #8: Minimal--sometimes data are requested for tracking or understanding legal entity activity.

Respondents #7, 9, 10, 11, 12, and 13 reported that Form 5471 data are not used at all for internal reporting purposes.

(d) What processes are in place to ensure timely and accurate filing?

Respondent #1: The combination of SEC reporting requirements and the need to demonstrate controls for SOX purposes require that we have oversight over the information that is reported by our foreign operations. We are responsible for the tax provisions for each of our foreign operations as well as the U.S. provision relating to deemed and actual dividends. Consequently, the processes associated with gathering and analyzing most of the information reported on Form 5471 are tested by our external auditors.

Respondent #2: To ensure timely filing, data are requested from the foreign subsidiaries by March 1, with the following time-table: March-June, E&P; July, U.S. taxable income inclusions; August, Form 5471 and other related form compliance.

Respondent #7: The tax department maintains a tax calendar as a means of ensuring compliance with all tax reporting obligations, including Forms 5471.

Respondent #8: Various project assignment reports and calendar tracking are used. Significant 5471s and those with dividends/inclusions are reviewed. All others are prepared by experienced staff.

Respondent #9: We use: (i) Tax Due Date Calendar, and (ii) outsourced preparation by Deloitte Tax LLP due to limited internal staff.

Respondent #10: The form is part of our normal return filing process.

Respondent #11: The 5471s are reviewed by someone other than the preparer and in some cases there is a second level of review. We keep an index to track when the E&P and Subpart F calculations are complete and also to track when the form has been prepared and reviewed.

Respondent #12: We extensively review preparation of the form and related calculations.

Respondent #13: The international tax department uses a system of checklists and peer reviews to ensure timely and accurate filings. The larger foreign CFCs or ones with potential Subpart F income are further reviewed by the International Tax Director.

Problems Encountered

2. What specific problems have companies identified in either their data collection or Form 5471 preparation?

Respondent #1: It is difficult to obtain information from foreign companies that are not wholly owned (e.g., between 51-percent and 80-percent owned) by the reporting U.S. entity as well as companies that have been acquired. The absence of information or difficulty of obtaining such information affects all aspects of Form 5471 but has severe consequences for the accurate preparation of Schedule M.

Respondent #2: The timetable our company has established to achieve timely reporting creates, in many instances, a double set of reporting and calculations. The March 1 submission date quite often results in foreign subsidiaries providing unaudited financials. Typically, the foreign subsidiaries do not complete their locally audited financial statement process until mid-year. Therefore, the original return contains both audited financial data from subsidiaries that get it done before March 1 and unaudited financial data from those that don't. For those that were not able to submit audited data at the time of the data gathering, those subsidiaries later submit audited data. Recomputations are then made for those subsidiaries after the original return is filed, resulting in proposed affirmative adjustments at the time of the IRS field audit.

Respondent #4: Apart from occasional resistance from a foreign subsidiary to timely respond to our internal queries, our company has had no noteworthy problems with data collection or Form 5471 preparation.

Respondent #5: From a financial viewpoint, the company requests its financial information from each market on a consolidated basis that includes the elimination of intercompany/intra-country transactions. Because Forms 5471 are prepared on a separate company basis, the company has to request additional tax information for each entity; sometimes this information is difficult to get, especially when it has no effect on the company's U.S. tax liability, since a U.S. tax triggering event has not occurred (i.e., dividend, investment in U.S. property, etc.) during the year.

Respondent #6: Data collection is always a struggle because everyone around the globe reports a little differently. We have designed software to aid in this process and provide more standard information, but it is always a struggle to get answers we are comfortable with from people who don't necessarily understand what we're asking. As far as form preparation, tax preparation software does a pretty good job, but there are some things that it just cannot handle, which forces us to track these items outside of the system. The 2005 reporting year was extremely difficult, for example, as the software did not handle American Jobs Creation Act reporting very well.

Respondent #7: We've encountered no specific problems other than volume.

Respondent #8: Schedule M data are very difficult to obtain. Finance must perform detailed account reviews to obtain intercompany data. General data requests are burdensome to financial staff because of limited resources. Electronic filing requirements are extremely difficult to comply with because of the complexity of the Form 5471. We encountered many unnecessary IRS reject diagnostics and validation failures. A high volume of data was required.

It seems that one of the primary purposes of Schedule M is to alert the IRS to the potential for Subpart F issues. Why not have a direct connection between Schedule M entries and the Worksheets A and B referenced in Schedule I? Currently, neither references the other. This might add to the complexity, but Schedule I may be the most complicated and least understood section of the 5471. Most, if not all, items reported on the schedule will have a connection to the data reported in the Schedule M. You would never know that by reading the instructions.

Respondent #9: The form requests information not necessarily found in normal corporate or business operations reports.

Respondent #10: None in particular.

Respondent #11: Identifying foreign base company sales income requires a great deal of effort. We are trying to develop a methodology to generate the information directly from SAP. Also, we spend a great deal of time preparing consolidated balance sheets and income statements for our CFCs with disregarded check-the box branches.

Respondent #12: Getting the necessary information to completely and accurately prepare the schedules for noncontrolled companies can be very difficult. Two specific situations are most difficult: (i) getting financial statement details for entities that are not controlled foreign corporations, but where we acquire 10 percent of the stock of the entity (Category 3 fliers), and (ii) getting E&P and related information for entities where we own only 10 percent of the entity (Category 5 filers).

Respondent #13: We have a difficult time collecting financial data from non-CFCs. Frequently, our company's ownership in a foreign non-CFC is insufficient to compel the foreign entity to comply with our requests for financial data, particularly when our ownership is indirect and extends through several tiers of other foreign ownership structures. With extensive foreign operations, our department sometimes learns of reportable ownership changes in foreign companies several months after the fact. Learning of a reportable ownership change late in the return compliance process can, and does, cause us difficulty.

Often, companies will report local GAAP results to us instead of U.S. GAAP, as we requested.

Because we have so many foreign entities to process, we have had to request that our foreign affiliates report their financial information to us before they have completed audited financial statements in order to meet the federal return deadline. Therefore, there are often reconciliation issues between our tax reporting and our management reporting.

3. What changes should be made to provide relevant information to the IRS without unduly burdening companies?

Respondent #1: Alleviating the burden on companies could be achieved through: (i) allowing Form 5471 and all related attachments to be filed in PDF format; (ii) allowing exemptions from the preparation of Schedule M in instances where there has either been an acquisition or where constructive ownership in the foreign corporation is between 51 and 80 percent (possibly through creation of a new category of filer); (iii) expanding the list of categories of filers who have reduced reporting requirements; and condensing the information requested for Schedules C and F.

Respondent #2: We strongly recommend using U.S. GAAP data for U.S. taxable income inclusion calculations. The current process, i.e., conversion of audited U.S. GAAP data to U.S. tax basis, is time-consuming and error-prone. The sheer volume of foreign subsidiaries, high turnover of responsibilities in the foreign locations, the types of tax basis adjustments, the pressures to meet the reporting timetables, etc. all contribute to creating an environment where it is difficult to ensure timing differences do not get mishandled and inadvertently become permanent differences.

Respondent #4: The IRS removed the paper. Any other changes to the form may actually create additional burden, especially for the software provider (which may indirectly affect the company in the form of increased fees). Our company, however, would not oppose any reduction of current data required to be reported on the form, specifically on Schedule M and Schedule O (i.e., the two schedules that require the largest amount of manual input and for which data could potentially be obtained from another source, such as transfer pricing documentation).

Respondent #5: Other than having a balance sheet reported in local currency, it would be beneficial to have a line for (i) post-1986 retained earnings, (ii) post-1986 deferred taxes, and (iii) post-1986 liabilities that have not reduced earnings and profits. If these amounts were reflected on the balance sheet, an IRS auditor would be able to take post-1986 book earnings and add post-1986 tax adjustments to arrive at post-1986 E&P. Excess tax-over-book depreciation and a few other items would probably have to be handled separately. Since we now use a post-1986 E&P pool for most dividend planning, etc., it would appear we should be looking at a way to accumulate this information on a cumulative basis. Active and passive E&P would have to be dealt with in the taxpayer's supporting documentation.

Retained earnings should also have a line for FASB 52 amounts--since these are not E&P adjustments--and possibly a line for section 987 gain or loss. I would also eliminate the lines for additional paid-in capital, since this would be part of common stock, eliminate the treasury stock line--the company has never used this line--and add a line for "hybrid equity" since any reduction in this amount is treated as a dividend for U.S. tax purposes.

Finally, all Form 5471 amounts should be reported in rounded thousands, since this is how the accounting information is reported by the markets.

Respondent #6: We are collecting, reviewing, and validating information from roughly 200 companies to meet international reporting requirements. Other than automating this process to the extent possible, the only way to truly lessen the burden would be to limit the information collected.

Respondent #7: The screening approach that is mentioned later in this message would reduce the burden on companies while providing the IRS with sufficient information to monitor compliance.

Respondent #8: What is the definition of "relevant information"? Form 5471 was originally created to provide an informational return. Is information really necessary for entities that do not generate current year inclusions? Is detailed intercompany information used by the IRS? Are balance sheet and income statement information key to performing an audit?

Respondent #9: We recommend de-coupling the 5471 from the 1120 and allowing separate reporting within 90 days after the filing date of the 1120, which would reduce the pressure on the 1120 filing process and allow additional time to report the 5471 information with more time allowed to concentrate on its accuracy.

Respondent #11: Schedule M information should be entered based on U.S. GAAP in dollars, rather than converting the local currency amounts at the average exchange rates. Perhaps the Schedule F Balance Sheets for CFCs with check-the-box (CTB) branches could be presented based on separate company U.S. GAAP financial statements, since such balance sheets for the CTB branches are included on Form 8858.

Respondent #12: Minimizing the information required to be provided with respect to non-controlled foreign corporations would reduce compliance costs for taxpayers.

Respondent #13: Several changes could be made to the information required on the Form 5471:

(i) relax requirements to report income statement and balance sheet financial information related to Category 3-only Form 5471 returns; Category 3 filings are those reporting ownership changes and often times these filings are for non-CFCs where the information is not available; and (ii) provide a mechanism to report that financial information is not available and that a good faith effort has been made to collect and report this information. Answering would hopefully offer us penalty protection.

Respondent #14: There should be a way on Schedule J to report immaterial revisions to prior year numbers, e.g., redeterminations of prior year foreign taxes that affect E&P. Currently, a taxpayer must adjust either (i) the beginning numbers (which means Schedule J won't tie to the prior year's 5471), or (ii) the current year's E&P, which is incorrect.

The instructions concerning the reporting of dividend information are also unclear--is this gross distributions or taxable distribution not including distributions of PTI?

Question D on page i of the form requires personal data to be reported for other shareholders, officers, directors, on whose behalf the 5471 is being filed, i.e., name, address, and social security number. It is very hard to collect this data with respect to indirect shareholders with ownership only through attribution. Also, with all of the privacy issues, as long as the 5471 is being filed, why is all of this data asked for? For example, if shareholder A is required to file 5471 and Corporation 1 files the 5471, as long as Shareholder A reports on his return that Corporation 1 has filed the Form 5471, why does the 5471 need to ask for the list of shareholders for whom the filing is made? The requirements have been met. If the corporation didn't file on behalf of the others, this part of the form would be blank. It seems odd that the focus is on identifying persons with reporting requirements that have complied with the law rather than trying to identify those who did not file.

Questions from Examiners

4. What questions, if any, have you received from your IRS examiner about Form 5471? The IRS is particularly interest in questions about Schedule F (Balance Sheet). (Please do not limit your responses to that schedule.)

Respondent #1: Questions have been primarily focused on Schedules M and I. No questions have been raised regarding balances in Schedule F.

As the focus is primarily on the identification and quantification of constructive/ deemed dividends, perhaps the requirement of listing the detail for lines 12 (other assets), 15 (other current liabilities), and 17 (other liabilities) could be relaxed in exchange for requiring the completion of Worksheet B (U.S. Shareholder's Pro Rata Share of Earnings of a CFC Invested in U.S. Property) as part of Line 5 of Schedule F. This would expedite completing Form 5471.

Respondent #2: For the past five audit cycles, there have been no questions about the Form 5471, Schedule E Questions from the local examination team generally arise from Schedule M, the intercompany transaction reporting, and Schedule O, reorganization reporting.

Respondent #4: The company has not received any questions about Form 5471 from its IRS examiners. We do, however, receive multiple inquiries from the IRS's Statistics of Income (SOI) department on an annual basis. Many of these notices indicate that the company did not complete a required schedule (most commonly Schedules E, I, and M), when in fact that schedule was not applicable (e.g., no U.S. inclusions to report on Schedule I). Respondent #5: Most of the questions involving Schedule F obviously revolve around changes in balances from year to year, especially with respect to loans to shareholders and other related persons (a section 956 issue). Since the balance sheet is a U.S. dollar balance sheet, an increase can be due entirely to exchange movements from year to year, even though there has been no increase in the amount of foreign currency invested in U.S. property. Any increase in the U.S. dollar investment as a result of exchange movement is not an incremental section 956 investment and results in additional follow-up by the taxpayer. In addition, if the CFC has loans to related same-country CFCs or other non-U.S. CFCs, additional analysis is needed. It would be much simpler if the CFC's balance sheet were reported in local currency.

In addition, any change in retained earnings (again reported in U.S. dollars) is questioned, especially if the retained earnings beginning balance plus net income does not equal the ending balance of retained earnings. Again, a lot of the change is due to currency fluctuations or FASB 52 currency gains/losses, and not the result of a dividend, etc. A balance sheet in local currency, with a specific line for dividends paid in local currency (on common and preferred), would eliminate the majority of reconciliations in this area.

Respondent #7: The majority of the questions from IRS agents has focused on Schedule M regarding transactions with related parties, with the emphasis on transfer pricing.

Respondent #8: Our audit team generally asks questions only when the information within the various schedules of the 5471 is contradictory--generally due to errors. Any notices we've received from non-local IRS related to not having "0" or "none" in certain fields. These inquiries should be eliminated under e-filing.

Respondent #9: Our company has not been audited yet.

Respondent #10: We have received no recent examination questions.

Respondent #11: None lately.

Respondent #12: We primarily receive questions concerning intercompany transactions and E&P calculations.

Respondent #13: The IRS has given us several IDRs related to individual Forms 5471. Recently, those questions relate to the income taxes reported on the income statement.

Respondent #15: We just began an IRS audit for years 2004 and 2005. Top of the list are the Forms 5471 and pertinent data regarding transactions, loans, etc. We have not received a follow-up with additional questions yet, so I can't offer any useful ideas at this point. But the forms are being audited in detail.

5. Would an additional line or question on the form eliminate the inquiry?

Respondent #1: Inquires raised by IRS International Examiners will be driven by the preliminary risk analysis that they and their examination teams formulate. Therefore, the addition of a line will not necessarily eliminate inquiries.

Respondent #4: The company anticipates that the mandatory e-filing requirement will help to eliminate many, if not all, of the SOI notices, as all required data must be provided to successfully e-file the forms. (Note: The company successfully e-filed all of its 2005 Forms 5471, and has yet to receive a single SOI request for 2005.)

Respondents #2, 7, 8, 9, 10, 11, 12, and 13 responded "no" or "not applicable" to this question.

Data Prepared Solely for IRS

6. What areas of the form do you prepare solely for the IRS?

Respondent #1: The schedules prepared primarily for the IRS are, as follows:

A. Lines I and 2 on page one;

B. Schedule A;

C. Schedule B;

D. Schedule G;

E. Schedule H;

F. Schedule I;

G. Schedule J;

H. Schedule M;

I. Schedule N (if required); and

J. Schedule O (if required).

Respondent #2: In our view, all areas of the form are prepared solely for the IRS. Our company has other management reports it has created to monitor E&P and tax pools by foreign tax credit basket. The form, once prepared, is seldom ever referenced again.

Respondent #4: While none of the data presented on Form 5471 is assembled solely for the IRS, the actual preparation of the form and supporting schedules is prepared for the IRS.

Respondent #7: All of it. The requisite information is maintained in various departments within the company; the information must, however, be obtained and specifically tailored for disclosure on the Forms 5471.

Respondent #8: No specific sections are completed solely at the request of our audit team. Dividends and current year inclusions could be calculated and included in the consolidated return without the use of Form 5471.

Respondent #10: Schedule M.

Respondent #11: Consolidated schedules for CFCs with CTB branches and Schedules M and O are prepared solely for the IRS.

Respondent #12: Balance sheet information is prepared solely for this form.

Respondent #13: Listed below are the areas of the form that are prepared only for the IRS for entities that do not report Subpart F income or reconcile E&P:

A. Page 1, Line 2 a-d, Information related to location of books and records

B. Schedule A--Stock of the Foreign Corporation

C. Schedule B--U.S. Shareholders of Foreign Corporations

D. Schedule G--Other information

E. Schedule M--Transactions between CFC and Shareholders or Other Related Persons

F. Schedule O--Organization or Reorganization of Foreign Corporation and Acquisitions and Dispositions of its Stock

Respondent #14: Data for the Schedule M are extremely time consuming to collect and do not appear to be used. The taxpayer is required to report 20 different types of intercompany transactions, translate them to U.S. dollars, and break out the data based on whether the intercompany transaction is with (i) the U.S. person filing the 5471; (ii) a subsidiary or partnership owned by that U.S. person; (iii) a foreign subsidiary or partnership owned by the U.S. person; (iv) a 10-percent or greater U.S. shareholder of the CFC other than the person filing the return; or (v) 10-percent or more U.S. shareholder of any corporation controlling the foreign corporation.

The instructions are unclear--is this information to be submitted on a cash, accrual, or tax basis? It is impossible for the taxpayer to reconcile the numbers between affiliated taxpayers due to different currencies, different methods of accounting, different settlement dates, etc. between numerous foreign and domestic affiliates. Even in a perfect world, since each entity keeps its records in its functional currency, converting both sides of a foreign transaction to U.S. dollars will not have the same U.S. dollar result.

Companies generally have the information to report intercompany transactions in total, but the companies' financials records do not track the data in the manner being requested. For example, intra-branch activity involving disregarded entities treated as branches of the same CFC should be eliminated and not reported on the 5471 but most companies' records are not kept based on tax filing status.

This is done only for the tax return.

Additions to Form 5471

7. One suggestion made during the meeting is the viability of using a series of "screening questions" to determine whether a company needs to submit the entire form. For example, if a company reported an item listed in Schedule I (Summary of Shareholder's Income from Foreign Corporation), it would be required to submit the entire form. If it did not report an item, it would need to submit only summary information. What do you see as the pros/cons of this "screening question" approach?

Respondent #1: The positive aspect associated with the "screening question" approach is the potential reduction in the compliance requirement relating to controlled foreign corporations.

The concerns regarding the "screening question" approach are:

A. Depending on the nature of the questions, there could be implications from both penalty and financial reporting perspectives (e.g., FIN 48). If there is a high level of specificity associated with the questions, then this may be a trap for the unwary and lead to the assessment of penalties for unintentional but inaccurate responses;

B. The data required for filing Form 5471 may ultimately be requested by the IRS upon examination and relaxing the requirement for filing a complete Form 5471 would compromise the ability to timely and accurately gather this information; and

C. The taxpayers (e.g., mid-size and smaller companies) who would benefit the most from relaxed reporting requirements may not be able to accurately respond to the "screening questions."

Respondent #2: Our company would generally support the suggestion. It would be helpful only for form preparation, not for the data gathering and analysis that take place ahead of form preparation. Actual form preparation itself, because of significant improvements in the tax software, is not the problem. The volume of time is devoted to "getting the numbers right"; the breadth and complexity of the requirements, relative to computing earnings & profits; the U.S. taxable income inclusions; and the look-though calculations are where 90 percent of the effort is concentrated.

Respondent #4: The company is not opposed to a "screening question" approach, provided it is straightforward and not cumbersome (i.e., does not have multiple levels of "nested" screening questions). This may help alleviate the volume of unnecessary SOI requests we have received in the past. (See response to question 4 above.)

Respondent #5: I agree with a screening approach that provides that when a taxable transaction occurs, the auditing of any creditable foreign taxes is limited to a reasonable period of time--say 3 years. This recommendation is long overdue. We have 200 separate entities in France and each one is owned by a parent CFC. We checked the box on all 200 entities to simplify our reporting, but Form 8868 nullified the efficiencies of reporting. None of these entities has any transactions with a U.S. tax consequence.

Respondent #6: This would not save us much time because it is easier to gather the same information from all subsidiaries around the globe, and we do the same analysis for all to track E&P, regardless of the filing requirement. This would just be one additional form we would need to complete each year in addition to the actual Form 5471.

Respondent #7: We view this approach positively. The screening approach would reduce the burden on companies while providing the IRS with sufficient information to monitor compliance.

Respondent #8: Pros--reduced filing requirements that should alleviate some e-filing burden. Cons--will local audit teams request historical data after the fact?

Respondent #9: This approach could be a worthwhile short-cut to eliminate excess or unnecessary compliance efforts, but it would depend on exactly what purposes the IRS uses the data in their statistical analyses for Treasury Department projections and fiscal budgeting.

Respondent #10: Query: can the screening approach still be used if the 5471 is e-filed?

Respondent #11: I like this idea. Less information should be required for entities with no Subpart F or section 956 inclusions, PTI distributions and dividends. Perhaps the IRS could add a few questions to confirm that the taxpayer has reviewed these items.

Respondent #12: It would be very helpful and greatly reduce taxpayer compliance time without affecting the amount of taxes paid to the IRS.

Respondent #13: The pros would be that our department would spend a lot less time ensuring the completed Forms 5471 fit the e-filing record formats and more time in determining accurate Subpart F and section 78 gross-up information. We would also be freed up to spend more time on return disclosures.

A potential con would be that some companies would see such an approach as a way to slacken their efforts to gather the financial information to determine Subpart F income.

8. What do you think of the suggestion of adding a line to Schedule G that is specifically targeted to transfer pricing?

Respondent #1: The focal point for transfer pricing-related inquiries should be initiated from what is reported on Schedule M. It would be difficult to capture the effect of a taxpayer's transfer pricing through a series of questions. The concern is the same for the "screening question" approach if responses required a yes/no answer.

Respondent #4: The company is opposed to adding a question regarding a transfer pricing study to Form 5471. Separation of duty between international compliance and transfer pricing exists not only on the tax staff in the United States, but at most of the foreign units as well (and as such, we would expect to receive inconsistent or incorrect responses to an inquiry of this nature). Furthermore, as U.S. GAAP/tax principles can vary significantly from those of the foreign entity, additional analysis may be necessary to determine the differences, if any, with respect to character, timing, and other attributes of the transaction, particularly if the study in question is between two foreign entities. (In other words, this is not limited to a simple "yes" or "no" question.)

Respondent #5: I doubt whether we could accurately answer this question because we don't know whether we have a "transfer pricing" inquiry or study initiated locally. We continue to ask for information regarding section 482 issues, but our international controllers are reluctant to divulge this information to us.

Respondent #8: We are not sure this would provide helpful information to the IRS, e.g., our royalty expenses should always be subject to a transfer pricing study or some type of annual review. The same concern applies to services. It is also difficult to define what "a study" is.

Respondent #10: The question is too broad and difficult to answer; it could include foreign transfer pricing studies that are not entirely relevant to the IRS. Our company opposes this suggestion because it is burdensome without giving the IRS usable information.

Respondent #11: I do not like the idea, but if a question is added, it should specify what transactions are being inquired about.

Respondent #13: I disagree with this suggestion. The definition of a transfer pricing study would be too vague to be meaningful and subject to so much interpretation as to make the question unanswerable. We currently conduct transfer pricing studies in several jurisdictions on thousands of inventory transactions; would these be covered? Our transfer pricing documentation is meant to sample these transactions so that all transfers are conceivably covered by the study. Finally, the IRS is supposed to issue a blanket request at the start of its audit requesting our transfer pricing studies, and it has done so in the past.

Respondents #6, 7, 9, and 12 viewed the proposal negatively.

9. If the question pertained to Section 338 elections, would you be able to collect the information fairly easily?

Respondent #1: Yes, the information should be readily available because the financial statement auditors would audit the workpapers associated with the section 338 elections as part of their year-end tax provision analysis.

Respondent #2: Regarding section 338 elections, our company's existing systems don't support them. Currently, information to comply with such elections is maintained by the professional tax staff.

Respondent #4: The company could collect information pertaining to a section 338 election without much difficulty, assuming we (or another U.S. party to the sale) are already doing so to file such an election in the first place. We do not, however, see any reason or purpose for duplicate reporting in this regard.

Respondent #5: With respect to section 338 elections in an international context, there should be an affirmative default election, since almost all U.S. taxpayers would make this election for E&P purposes. I recognize this would require a legislative change because section. 338 requires an affirmative election. We've had a lot of problems with this issue, especially when we acquire assets from licensees that are held in corporate form. If we don't timely make the section 338 election, we always have this book/tax difference.

Respondent #6: It would take a fair amount of effort to obtain the information.

Respondent #8: Not sure what this question means. We know which entities have 338 elections in place.

Respondent #9: Yes; we keep that data readily available because of the transactional reporting required in the 1120.

Respondent #10: Are not section 338 elections already separately flagged for examination agents? What would this question add?

Respondents 12 and 13 responded "no."

Effective Date

10. Do you believe that the 2009 filing season is a realistic goal?

Respondent #4: The company believes that the 2009 filing season is a realistic goal, but assumes that this same question has already been posed to the various software providers, since the burden of redesigning the form and conforming it to e-filing standards falls on them.

Respondent #5: The 2009 filing season is a realistic goal. As far as I'm concerned, the sooner the better. If we could be given the flexibility of adjusting our annual GAAP reports to tax E&P without having to reclassify a substantial amount of information, our processing time would decrease substantially and the company could probably get our international operations to prepare the schedules for Form 5471. Our tax reporting package would be an adjusted local currency GAAP reporting package, which could be an attachment or in lieu of Schedules C, F, and H.

Respondent #6: Yes, assuming the IRS gives ample time to react to the new form and its requirement. It will take us three-to-six months to revamp our gathering, review, and form completion processes after the new form is released.

Respondent #8: The timeframe seems realistic if the revisions are taxpayer-friendly (versus requesting more information). Much depends on how substantial the revisions are and whether the software vendors have sufficient time to modify and test for e-filing.

Respondent #13: 2008 is a realistic goal since simplification is the primary reason for requesting the changes. I would think simplification would involve reducing information requested and not adding to it.

Respondent #14: The timeframe suggested by the IRS is too short. It would be better to ask TEI members to take this preparation season to give the matter thought while we are preparing the Forms 5471 and to compile the data after September 15th. It doesn't seem necessary to have a draft 2008 form by fall of 2007.

Respondents #1, 2, 7, 9, 10, 11, and 12 responded "yes."

11. What are the specific steps that your company would need to undertake to revise internal systems to meet that deadline?

Respondent #1: Any required changes should be easily accommodated through our company's existing financial reporting system.

Respondent #2: Since our company uses the CorpTax system, the only internal system changes that would be undertaken would be those related to any new reporting requirements. Hopefully, simplification of the form would result in fewer, rather than more, requirements. Otherwise, no modifications to internal systems would occur.

Respondent #4: To meet the deadline for the 2008 tax return, we must obtain the final draft of the revised form (or a description of specific changes, including new data requirements) no later than September 30, 2008. This would allow enough time to determine whether or not we can obtain new data requirements from an existing internal system, or modify our in-house data collection website as necessary (which must be up and running by early January 2009 to avoid jeopardizing the foreign subsidiary analysis for the 2008 tax return)

Respondent #5: We would need to rely on our tax preparation software vendor to update the software to complete the new forms properly, and then we would have to re-vamp our process for loading from our data collection software into the tax preparation software to ensure everything is picked up correctly on the new forms.

Respondent #7: We're unclear as to the proposed changes, however, it is unlikely that we would have to revise internal systems to obtain the requisite information.

Respondent #8: We would need to: (i) review and understand the revisions; (ii) determine what data sources already exist; (iii) determine what changes are needed to current data requests; (iv) update Excel and web-based tools; (v) work with Finance teams if necessary; (vi) update 5471 procedures: and (vii) train staff.

Respondent #9: We would require six months advance notice before the tax/calendar year of change.

Respondent #13: Again, as long as the revised form required less data, there shouldn't be a need to revise materially our internal systems.

Respondents # 10, 11, and 12 replied they were unable to respond without seeing the revised form.

12. What costs (human, dollar) would you anticipate being involved in this effort?

Respondent #1: The costs would be dictated by the magnitude of the changes in information requirements.

Respondent #4: Because we annually review and update our internal data collection processes for tax law changes or enhancements to internal reporting systems, any incremental cost related specifically to modification of Form 5471 should be nominal.

Respondent #5: The human effort would probably be quite a bit to ensure proper reporting.

Respondent #8: Unknown. Again, it depends on whether the revisions scale back filing requirements or enhance them.

Respondent #9: For our size company and number of entities, the cost would probably be under $250,000.

Respondent #10: Unknown, we are not sure whether it would be material.

Respondent #11: This would depend upon the changes to the form.

Respondent #12: The costs would likely not be significant if the form were changed to simplify the required information for noncontrolled investments, or those investments where there is no U.S. income inclusion.

Respondent #13: Nil.

13. If possible, please provide a rough timeline for the steps you have outlined above.

Respondent #1: The time line associated with: (i) expanding the list of categories of filers; (ii) condensing the information requested in Schedules C and F; and (iii) simplifying the requirements for e-filing Form 5471 and all related attachments, could be accomplished before the 2009 filing season.

Respondent #6: The initial set-up of output schedules from the data collection software to the tax preparation software requires about three months to set-up after all the unforeseen tweaks were made during preparation.

Respondent #8: Detailed timeline depends upon the nature of the revisions. Our 5471 process begins in November/December of the tax year involved. Therefore, our time line for implementing a revised form would have to begin early in the year. If changes are required to be made to financial systems, work would need to begin now for the 2008 tax year, and it would not be certain that we could get such changes timely implemented.

Respondent #9: We would require 18 months.

Individual Schedules

Respondent #2: Suggested changes to Form 5471 are:

Schedule E (Income Taxes, War Profits, and Excess Profits Taxes Paid or Accrued): Current year tax paid or accrued information may be useful for country statistical purposes, but is useless for tracking the cumulative tax pool

Schedule H (Current Earnings and Profits): Additions and subtractions reflect both U.S. GAAP and U.S. tax adjustments to reconcile from Line 1 to U.S. tax basis E&P. If the recommendation concerning the use of U.S. GAAP temporary adjustments for E&P were adopted, then this reconciling schedule is greatly simplified.

Schedule J (Accumulated Earnings and Profits of Controlled Foreign Corporation): This is a key schedule in functional currency and is fairly straightforward. Our company's mechanics frequently have a beginning-of year number that does not agree with prior year's end-of year number because of audit adjustments posted to the beginning post-1986 E&P pool after the prior year's return is filed. Perhaps a reconciling line should be added to Schedule M.

Schedule M (Transactions between Controlled Foreign Corporation and Shareholders or Other Related Person): A USD schedule, this is the best schedule for an international auditor to use. Other than the basic P&L and balance sheet, this schedule requires the gathering of considerable data. We suggest reducing the intercompany transaction columns from 5 to 2: foreign to U.S. and foreign CFC to foreign CFC.

Schedule O (Organization or Reorganization of Foreign Corporation and Acquisitions and Disposition of Stock): The best simplification would be to eliminate this schedule and replace it with a question with a "yes" or "no" answer. There are other disclosures and attachments throughout the return that already provide this information; this schedule is generally duplicative. The required attached organization chart is a very limited "view" of the organization, taking considerable work to create but providing limited value.

We also suggest the following additions to face of the form: (i) provide a section 898 election box; (ii) provide a "final return" box; and (iii) provide the dormant revenue-procedure statement.

Respondent #5: Suggested changes to individual schedules are:

Schedule C should be flexible to permit a U.S. taxpayer to report its GAAP income as it is being reported to it by its CFCs, possibly as an attachment to the schedule. This would avoid any Form 5471/book reporting reconciliations. The only items that should be reported separately are the section 954 categories of income that would result in Subpart F inclusions. The one-size-fits-all schedule is not realistic in today's world.

Line 19 on Schedule C could be eliminated because this line is meaningful only if E&P were determined on an annual, rather than cumulative, basis.

Schedule E's first line should reflect cumulative paid taxes in local currency and USD for a CFC for the period that ends three years prior to the current year. The taxpayer would also report on this schedule the current year's paid taxes and the prior three years' paid taxes both in local currency and USD. In this situation, the IRS auditor could audit the paid taxes for the prior three years to ensure that the taxpayer has correctly reported the CFC's paid taxes and controls are in place to ensure these numbers are accurate and updated. Anything in the cumulative pool would not be subject to audit unless there were major discrepancies in the taxpayer's paid tax pools for the last three years determined on a cumulative basis.

Also, in any box where a number is reported, it would be nice to have the legend "FC" or "USD" in each box (on the left side), to specifically identify the currency. This would avoid confusion since a reader would immediately know which currency is being reported.

Schedule H is completely useless. It is difficult to use or follow and requires much analytical work. Again, this schedule supports an analysis when annual E&P calculations are critical. The schedule should be either changed or integrated with Schedule C. All current E&P should flow from one schedule and should be in local currency. Lines 5(a)-(d) are also very confusing.

Schedule I (Summary of Shareholder's Income from Foreign Corporation) breaks down the types of income that a taxpayer is reporting, but it doesn't identify the section 78 gross-up related to that income. If reported on this schedule, the income and section 78 gross-up amount would then reconcile to the taxpayer's Form 1118.

Schedule J: I question combining post-1986 and pre-1986 amounts on the same schedule. I would assume that few taxpayers have or will be dealing with pre-1987 E&P, especially after the 2005 Homeland Investment Act repatriations. The information is still needed, but taxpayers should file separate Schedules J for pre- and post-1986 E&P.

Schedule M: Amounts reported on the Schedule M amounts should reconcile to the taxpayer's Form 1118. There may be differences between the exchange rate used to book interest, royalties, etc. and the rate used to translate foreign currency amounts on this schedule. This discrepancy may cause confusion when an agent compares a taxpayer's Form 1118 to its Form 5471. Accordingly, it would appropriate that any USD amounts reflected on the 5471 agree to amounts that the taxpayer reports on its U.S. tax return.

In addition, columns (b) and (c) contain amounts from members of an affiliated group that file a consolidated return; there should be a column where the amounts are combined so that this will reconcile to the taxpayer's consolidated Form 1118. The separate columns should reconcile to the U.S. entity's Form 1120.

These amounts on lines 19 and 20 should be reported in the currency of the loan so that any increases or decreases are confined to currency fluctuations.

Respondent #16: Form 5471 requests information that has questionable use. How about requesting useful information such as the tax pools? This would be very helpful when a CFC is acquired or dividends are paid.

I see no value in the information requested on page 1, lines 2a, 2b, 2c, 2d regarding the names and address of agents and the location of the books. Is this really used for anything?

Schedule J should have a line for other additions and reductions such as mergers.

The instructions for the form and its schedules are very weak. The instructions should clarify how check-the-box branches are to be incorporated in the form. Since the entities are corporations for book purposes and Schedules C and F are the book income statement and balance sheet schedules, it would seem that only the CFC should be included. The earnings of the disregarded entities, however, must be included in the earnings and profits on Schedule H to correctly represent the total E&P of the CFC and therefore, U.S. taxable earnings must be included. The form should clarify whether Schedules C and F should provide standalone or consolidated balances.

Schedule J should also provide a line to show E&P transferred to other entities and a line to provide for adjustments to beginning balance due to section 905(c) adjustments.

Schedule O instructions should be expanded, it is currently unclear where to report certain transactions.

Schedule M should be streamlined.

Page 1 should have a check box to indicate if this is a final return. In addition, we have never understood the relevance of the "custodian of records" or "statutory office." Even with a software system, the data need to be reviewed annually because the information changes frequently. The IRS is going to ask the U.S. taxpayer for this information. We cannot see a circumstance where the IRS would go to the "statutory office."

Schedules A (Stock of the Foreign Corporation) and B (U.S. Shareholders of Foreign Corporation): The shareholding information in these two schedules is redundant and could be consolidated into one schedule.

Schedule C: It is useful for us to show both functional currency and USD on this schedule. The addition of field to show the foreign currency exchange rate would be helpful.

Schedule F: It would be helpful to add the functional currency to this schedule.

Schedule J: It may reduce audit time if the tax pool in USD were added to this schedule. We always give the IRS a separate schedule reflecting the taxes for those CFCs that have paid dividends.

Schedule M: Handling this data is labor intensive, especially the breakdown between the columns/type-of-related-party. With the current transfer pricing documentation rules (not just U.S., but worldwide), the data reported on this schedule may be redundant. Could it be removed? Or at least streamlined to a few core data requirements?

Schedule O: This schedule also requires a lot of time to complete. The IRS already has much of the requested information on section 338 or check-the-box elections. Could we attach those elections?

Respondent #17: An additional schedule that should be added to Form 5471 is tax pool information; it will assist taxpayers in tracking this information and not maintaining it offline.

The category of filer definitions and requirements should be more clearly defined and accompanied by examples because I believe there is a fair amount of diversity in practice with respect to taxpayers indicating it is a Category 4 or 5 filer where technically it may be a Category i filer. The requirements with respect to officers of controlled foreign corporations filing obligations should be set forth more clearly with examples of when the requirement is satisfied by the corporation and what can be provided to the U.S. officers to prevent duplicate filings, etc.