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Additional information reporting for foreign transactions.

Tax advisers must not only concern themselves with Sec. 6038A's reporting and recordkeeping requirements, but also with the requirements of Sec. 6038B and 6038C. These sections impose severe penalties for noncompliance similar to those under Sec. 6038A.

Form 926, Return by U.S. Transferor of Property to a Foreign Corporation, Foreign Estate or Trust, or Foreign Partnership, required under Sec. 6038B, provides the IRS with information necessary to enforce Sec. 367. Temp. and Prop. Regs. Sec. 1.6038B-1T(b)(1) state:

Notwithstanding any statement to the contrary on Form 926, the form and attachments must be filed with the transferor's tax return for the taxable year that includes the date of the transfer....

Gains arising from transfers of appreciated property pursuant to a corporate organization, reorganization or liquidation generally are not currently taxable if the requirements of Sec. 332, 351, 354, 356 or 361 are met. However, Sec. 367 currently taxes such transactions with foreign corporations by requiring these unrealized gains to be recognized. Sec. 367(d) prescribes special rules on the transfer of intangibles to foreign corporations.

Generally, under Sec. 367(a)(3), there is no current taxation of gains arising from the transfer of appreciated property for use by a foreign corporation in the active conduct of a business outside the United States. However, property will not be considered to have been transferred for such use if Form 926 is not timely filed (Temp. and Prop. Regs. Sec. 1.6038B-1T(f)(l)(i)).

In addition, in the event of such noncompliance with Sec. 6308B, a penalty is imposed equal to 25% of the gain realized on the transfer of property to a foreign corporation (regardless of whether the gain is recognized), unless due to reasonable cause and not willful neglect (see Sec. 6038B(b)).

Sec. 6039C designates all foreign corporations doing business in the United States as "reporting corporations" (RCs) and subjects them to recordkeeping requirements similar to those imposed under Sec. 6038A, regardless of whether the foreign corporation is 25% foreign owned. Thus, these RCs must report transactions with related parties on Form 5472. (See the Tax Clinic item, "California Information Reporting for 25% Foreign-Owned Corporations" on page 285 of this issue.)

An RC also must maintain books and records that are sufficient to meet the requirements of Regs. Sec. 1.6038A-3. For this purpose, records include those of the RC itself, as well as records of any related foreign party that may be relevant to determine the correct U.S. tax treatment of transactions between the RC and related foreign parties (Regs. Sec. 1.6038A-3(a)(1)).

If the required records are in a related foreign party's control, they may be maintained by that party if the conditions for maintaining records outside the United States are met. These conditions are set forth in Regs. Sec. 1.6038A3(f) (Regs. Sec. 1.6038A-3(b)(2)).

Sec.6038C(b)(2) broadens these requirements to include such other information, as required by regulations, that pertains to any item not directly connected with a related-party transaction.

In addition, the case of a transaction between an RC and a related foreign party, the RC may be required to obtain authorization to act as the related party's limited agent solely for purposes of dealing with an IRS request to examine records or produce testimony (pursuant to Sec. 7602) relevant to the transaction's tax treatment or for dealing with any IRS summons for such records or testimony (in accordance with Secs. 7603 and 7604. (See Sec. 6038C(d)(l); Prop. Regs. Sec. 1.6038C-l, and Temp. and Prop. Regs. Sec. 1.6038A-5. See also the Tax Clinic item, "IRS Agents Requesting Sec. 6038A 'Agent Authorizations' at Outset of Examination of the U.S. Reporting Corporation," TTA, Apr. 1992, at 241.)

Failure to comply with the reporting or recordkeeping requirements of Sec. 6039C could trigger the same penalties as those imposed under Sec. 6038A. In addition to the $10,000 monetary penalties described in Regs. Sec. 1.6038A-4, a noncompliance "penalty" may apply, which permits the Service to determine -- the RC's deduction for amounts paid of incurred to the related foreign party; and -- the RC's cost of any property acquired from, or transferred to, such a party.

These determinations may be made in the IRS' a sole discretion and may be based only on information that the Service deems suitable (Regs. Sec. 1.6038A-7(b)).

However, this noncompliance penalty applies only if a related foreign party does not authorize the RC to act as its agent under Regs. SEc. 1.6038A-5 or if there is a failure for furnish information in response to an IRS summons under the circumstances specified in Regs. Sec. 1.6038-A6.
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Author:Anderson, Ronald M.
Publication:The Tax Adviser
Date:May 1, 1992
Words:781
Previous Article:California information reporting for 25% foreign-owned corporations.
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