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Comments on proposal to exempt dormant subsidiaries from Form 5471 filing requirement.

On behalf of Tax Executives Institute, I am writing to respond to your request for the Institute's comments concerning the filing of the Forms 5471 (Information Return of U.S. Persons With Respect To Foreign Corporations). The Internal Revenue Service is considering the issuance of a revenue procedure that would exempt U.S. corporations from filing a Form 5471 with respect to "dormant subsidiaries." Specifically, you requested the Institute to comment on the efficacy of such a procedure, including a definition for the term "dormant subsidiary."

As we previously notified you by telephone, the Institute wholeheartedly endorses the issuance of a revenue procedure that would exempt U.S. parents from the requirement to file a Form 5471 for their inactive controlled foreign corporations (CFCs). Such a common sense approach to the Form 5471 filing requirement would benefit both taxpayers and the government by reducing the cost and administrative burden of filing what is essentially meaningless information.

An informal survey of the members of the Institute's International Tax Committee revealed that U.S. multinationals may own a substantial number of inactive CFCs. The survey showed that anywhere from 10 to 35 percent of a multinational's subsidiaries may be dormant. The companies generally retain the subsidiaries for several reasons: (1) the cost of liquidating the CFCs is prohibitive; (2) the liquidation of the company may take several years because of the complexities of foreign laws; (3) the shell corporation may protect the corporate name in a given country; or (4) companies may keep "shelf corporations" in some countries (such as Thailand and Malaysia) in case business activities are resumed in that country in the future. Of course, the inactivity notwithstanding, there are substantial costs involved with preparing and filing Forms 5471 with respect to such CFCs. That cost would be minimized under the dormant CFC proposal.

Specifically, in lieu of Form 5471, the Institute suggests that a U.S. corporation be permitted to attach a list to its tax return of those companies to which the exemption applies. Such a list would include the CFC's name, country of incorporation, fiscal year-end, and the taxpayer's ownership percentage. This information should be sufficient to disclose the taxpayer's interest in the inactive CFC.

With respect to the definition of a "dormant" subsidiary, the Institute recommends consideration of the following:

A dormant subsidiary is defined as any controlled foreign corporation (as defined in section 957(a) of the Internal Revenue Code) that does not have any gross income during the current taxable year. This definition shall not apply, however, with respect to a controlled foreign corporation that has made or received any distribution, been involved in a reorganization, or been involved in a stock transfer or sale during the taxable year.

In addition to the exemption for wholly dormant subsidiaries, the Institute recommends that the IRS consider providing an exemption from the Form 5471 filing requirements with respect to CFCs with minimal activities during the taxable year. We suggest taxpayers be permitted to file a short-form 5471 for CFCs having total gross income under a specified threshold (say, $25,000). For example, the name and address of such a CFC could be filed with an attached balance sheet and income statement.

Tax Executive Institute appreciates this opportunity to present our views on the proposal to issue a revenue procedure with respect to dormant controlled foreign corporations. If you have any questions, please do not hesitate to call Raymond G. Rossi, chair of TEI's International Tax Committee, at (408) 765-1139 or Mary L. Fahey of the Institute's professional staff at (202) 638-5601.
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Publication:Tax Executive
Date:Nov 1, 1991
Previous Article:Comments on transfer pricing penalty under Section 6662(e).
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