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Supplemental comments on Form 5471.

Since the Internal Revenue Service is in the process of developing the forms package for the 1992 filing season, Tax Executives Institute believes it is appropriate to comment on certain issues of continuing concern with respect to the Form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations).

The Institute appreciates the general responsiveness of the Forms Division to the concerns set out in our November 16, 1990, and December 21, 1990, letters concerning the revisions to Form 5471. Although we disagree with some of the conclusions set forth in your February 12, 1991, letter, we commend the Forms Division for providing a timely and detailed response to our comments. We particularly applaud the IRS for providing a de minimis rule for reporting amounts on Schedules C and F. In addition, we believe that permitting taxpayers to attach financial statements in lieu of filling out Schedules C, D, F, and G will help ease the burden of filing the revised form for the 1990 tax year. We remain concerned, however, that some of the requirements embodied on the Form 5471 exceed the IRS's authority to require reporting of certain information.

Ability to Attach GAAP

Financial Statements

In the attachment to the IRS's February 12, 1991, response to the Institute's November 16 and December 21 letters, there is a statement that "$(t$)he regulations do not specifically allow filers to attach their financial statements to their Forms 5471." We respectfully disagree. Indeed, Treas. Reg. $S 1.6038-2(g) explicitly states that financial statements are to "be attached to and filed as part of the return [Form 5471] required by this section" (emphasis added).

While we appreciate the IRS's desire to efficiently "code and edit" information to establish a data base for audit purposes, we suggest the IRS may not -- for administrative convenience -- expand the scope of the information required by regulation. In this regard, Treas. Reg. $S 1.6038-2(f) provides that a taxpayer shall provide "so much of the following information, and in such form or manner, as the form [5471] shall prescribe with respect to each foreign corporation." The regulation details 11 categories of information that must be provided in the prescribed format:

1. Name, address, and identifying number of the foreign corporation.

2. Principal place of business.

3. Date and country of incorporation.

4. Statutory agent in country of incorporation.

5. Name and address of any U.S. branches.

6. Location of accounting records.

7. Nature and principal place of business.

8. Data concerning outstanding capital stock.

9. Data concerning U.S. shareholders.

10. Analysis of current year's earnings and profits.

11. Data concerning certain transactions between related persons.

The regulation does not list the foreign corporation's financial statements among those items that must be provided in the format prescribed by Form 5471. In 1986, the IRS proposed (by means of a revision of Form 5471) to eliminate the use of attached financial statements in lieu of filling out certain schedules. The requirement was withdrawn, however, at least in part because of the IRS's recognition that an amendment of the regulations was required to effectuate the change. To date, the regulations have not been modified. We appreciate that the process for amending regulations, involving not only the participation of the Treasury Department but also a formal notice-and-comment period, can be time-consuming and burdensome. We submit, however, that until the regulations are amended, the deletion of the reference to the use of GAAP statements is impermissible under Treas. Reg. $S 1.6038-2(g).

Translation Rate

As you note on page two of the attachment to your February 12 letter, "the new instructions direct taxpayers to translate functional currency data into dollars at an average rate (selected to achieve the most accurate statistical compilations)." We continue to believe that such a requirement is not authorized by the regulations.

Treas. Reg. $S 1.6038-2(h) requires that "all amounts furnished under paragraphs (f) and (g) of this section shall be expressed in United States currency with a statement of the exchange rates used." The regulation does not require the use of a specific rate. In these circumstances, we believe that the appropriate rate for U.S. dollar GAAP financial statements is the exchange rate required by the GAAP rules.

Moreover, the instructions require the translation of earnings and profits (E&P) at an exchange rate that conflicts with the rate prescribed under section 989 to compute taxable distributions from the foreign corporation. Under section 989(b), taxpayers may be required to translate distributions at a post rate, year-end rate, or a weighted average rate depending upon the manner in which the E&P are taxed (i.e., as a cash dividend or subpart F income). Thus, the accumulated E&P reported on the Form 5471 will not correspond to E&P data reported on the Form 1118 (Computation of Foreign Tax Credit--Corporations). This discrepancy will not only cause confusion, but will not provide the IRS with meaningful data in respect of the taxpayer's tax liability. (1)

In addition, the Form 5471 translation requirement further confuses and burdens taxpayers by creating a U.S. dollar basis E&P that conflicts with Treas. Reg. $S 1.861-12T which provides for the use of a year-end exchange rate to determine the foreign asset base required to source interest expense.

Finally, the instructions require the translation of the provision for income, war profits, and excess profits taxes (line 20 of Schedule C) at the average exchange rate for the year. Thus, the amount will conflict with the amount reported on Schedule E (Income, War Profits, or Excess Profits Taxes Paid or Accrued) which must be translated at the rate in effect on the date the taxes were paid, as required by section 986 of the Code. Such inconsistencies can only compound the confusion caused by the Form 5471's translation requirement.

Reporting on Schedule M

Some confusion persists with respect to the information required to be reported on Schedule M (Transactions Between Controlled Foreign Corporations and Shareholders or Other Related Persons). In our December 21 letter, we asked whether the amounts required to be shown on lines 9 and 18 of Schedule M are cumulative, year-end, average balances, or some other figure. On pages 5 and 6 of the attachment to the February 12 letter, the IRS respond that year-end or average balance information is not sufficient. The response, however, does not specify what figures should be used. Consider the following example:

CFC borrows $10M from its U.S. shareholder on January 1, 1991. CFC makes principal payments of $2M quarterly, in arrears, so that on December 31, 1991, there is $2M outstanding on the loan.

In addition, on July 1, 1991, CFC borrows an additional $5M from its U.S. shareholder. On October 1, 1991, CFC makes one principal payment of $2M on the second loan. On December 31, 1991, $3M is still outstanding.

In the above example, what amounts are to be entered on Schedule M?

In its February 12 response, the IRS also stated that amounts loaned may be grouped, based on loan terms. Does this mean that the form requires an attachment to reflect all loans with different terms?


Tax Executives Institute appreciates this opportunity to present our continuing concerns with respect to the revised Form 5471. Although the issues may fall into the realm of those that we shall ultimately have to simply "agree to disagree" about, we hope you find our comments helpful. As you well know, to expedite the gathering of information form foreign affiliates, corporations must assemble and distribute "tax packages" well before the end of the year. Consequently, we strongly urge that the 1991 Form 5471 be released as soon as possible.

If you have any questions, please do not hesitate to call Ralph J. Weiland, chair of TEI's IRS Administrative Affairs Committee, at (708) 937-8523 or Mary L. Fahey of the Institute's professional staff at (202) 638-5601.

(1) We continue to believe that an information return such as the Form 5471 should require taxpayers to submit only the information necessary to compute their tax liability (or to select returns for audit). Compiling data for statistical purposes is an inappropriate use of the reporting requirements.
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Publication:Tax Executive
Date:Jul 1, 1991
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