Form 926 Reporting Transfers to Foreign Corporations: Avoiding Harsh Penalties Ensuring Consistency Between FATCA, FBAR, Form 5471 and Other Foreign Asset Forms TUESDAY, AUGUST 30, 2016, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. You will have to write down only the final verification code on the attestation form, which will be emailed to registered attendees. To earn full credit, you must remain connected for the entire program. FOR LIVE PROGRAM ONLY WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations: -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Live Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.
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Form 926 Reporting Transfers to Foreign Corporations Aug. 30, 2016 Alison N. Dougherty, J.D., LL.M., Senior Manager Aronson, Rockville, Md. adougherty@aronsonllc.com Mark C. Peltz, Principal WeiserMazars, New York mark.peltz@weisermazars.com Hunter Norton, Tax Director Farkouh Furman & Faccio, New York hnorton@fffcpas.com Eric Swerdlow, CPA, Tax Manager Farkouh Furman & Faccio, New York eswerdlow@fffcpas.com
Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
Form 926 Reporting Transfers to Foreign Corporations Presented by: Hunter Norton & Eric Swerdlow Farkouh Furman & Faccio
Background When property is transferred from a U.S. transferor to a foreign corporation (IRC Sec. 6038B) The rules governing Form 926 taxation requirements are in place to prevent taxpayers from avoiding taxation in the U.S. by moving property overseas 6
Transactions If a U.S. person transfers property (including cash, but subject to exception) to a foreign corporation in one of the following transactions, generally the transfer must be reported on Form 926: Secs. 332, 336: Complete liquidation of subsidiary Sec. 351: Capital contribution or transfer to a controlled (80%) corporation solely in exchange for stock Sec. 355 distribution of stock or securities of a controlled corporation Sec. 354: Exchanges of stock and securities in certain reorganizations Sec. 356: Additional consideration in certain distributions (relating to 354 and 355 transactions) Sec. 361 Exchanges of property by a corporation solely in exchange for stock in a reorganization. 7
U.S. Person Classification A U.S. person is defined as: a citizen or resident of the United States a domestic partnership a domestic corporation any estate in which foreign source income is not taxable in the U.S. any trust if a U.S. court has primary supervision and U.S. persons control substantial decisions 8
Special Rules 1. Reporting exception for certain cash transfers - a U.S. person is required to report the transfer of cash to a foreign corporation on Form 926 if: If a U.S. person owns 10% of vote or value or the foreign corporation (directly, indirectly or by attribution) after the transfer; or If a U.S. person transfers $100,000 or more within the 12-month period ending on the date of the transfer Form 926 must be filed. * Note: Foreign currency is not considered cash for these purposes 9
Special Rules 2. Transfers by a Partnership The domestic partners of the partnership, not the partnership itself, must file Form 926 to report their allocable share transfer of property to a foreign corporation. Supplemental information is usually reported by the contributing partnership on the K-1 issued to its partners so they can determine their filing requirement. See sample K-1. 10
Special Rules 3. A U.S. person transferring stock or securities will not have to file Form 926 if either (a) or (b) apply: a) They either own less than 5% of the vote and value of the transferee foreign corporation and: o The transaction qualifies for non-recognition treatment; o The transferor is a tax-exempt entity (and the income is not UBTI); o o The transfer was for services as described in Reg. 1.83-6 and the fair market value of the property transferred did not exceed $100,000; or The transfer is taxable and the U.S. transferor properly reported the income on its timely filed U.S. income tax return that included the year of the transfer b) They own 5% or more of the total voting power or total value of the transferee foreign corporation and: o The U.S. transferor was a tax exempt entity and the income was not UBTI; o o The transfer was taxable to the U.S. transferor and that person reported the income on its timely filed return; The transfer was for services as described in Reg. 1.83-6 and the fair market value of the property transferred did not exceed $100,000 11
Taxability Code Sec. 367 governs transactions with foreign corporations and how they are taxed. These transactions must be reported on Form 926. 367(a) - Gain recognition on transfers of property from U.S. to a foreign corporation: If a U.S. person transfers property to a foreign corporation in one of the transactions required to be reported on Form 926, which would normally be tax free, the foreign corporation shall not be considered a corporation for purposes of determining whether tax-free treatment will apply to the transfer. Loss may not be recognized on any property transferred. 12
Exceptions to Treatment Under Sec. 367(a): Property used in the active conduct of a trade or business (see below) Transfers of stock and securities (subject to conditions (see below) Property used in the active conduct of a trade or business To meet this exception, 4 questions must be addressed: 1. What is the trade or business of the transferee; 2. Do the activities of the transferee constitute the active conduct of that trade or business; 3. Is the trade or business conducted outside of the United States; and 4. Is the transferee property used or held for use in the trade or business? 13
Facts and circumstances test: Property must be used in an active trade or business outside the U.S.; Cannot transfer the property to another person within 6 months; Special rules for leased aircraft and vessels (substantial activities) 14
Property not qualifying for the active trade or business test: Property previously depreciated in the U.S.; Inventory and similar property; Installment obligations and accounts receivable; Property denominated in foreign currency; Intangible property; Certain leased property 15
Exceptions to Treatment Under Sec. 367(a): Transfer of Stock and Securities The transfer of stock and securities of a foreign corporation will not be subject to treatment under Sec. 367(a) if either: The U. S. person / transferor owns less than 5% of the transferee foreign corporation after the transfer; or The U. S. person / transferor enters into a five-year gain recognition agreement with respect to the transferred stock or securities 16
Exceptions to Treatment Under Sec. 367(a): The transfer of stock and securities of a domestic corporation will not be subject to treatment under section 367(a) if all of the following conditions are met: U.S. transferors and 5% shareholders of the target company cannot own more than 50% of the vote or value of the foreign corporation s stock received The transferee foreign corporation must be engaged in an active trade or business outside the U.S. for the 36-month period preceding the transfer 5% shareholders must enter into a gain recognition agreement Similar but separate rules apply for a transfer of stock or securities in a 361 transaction. 17
Transfer of Stock and Securities Certain other transfers of stock and securities are exempt from the application of section 367(a). The transfer of stock and securities in a recapitalization described in Code section 368(a)(1)(E) The transfer of stock and securities section in an exchange described in Code Sections 354 and 356 pursuant to an asset reorganization, which is not treated as an indirect transfer (i.e., generally as part of a triangular reorganization) under the regulations. 18
Transfer of Foreign Branch with Previously Deducted Losses: Special rules losses of a branch that were previously deducted in the U.S. must be recaptured as income upon the transfer of branch assets to a foreign corporation (subject to limitations). The active trade or business exception does not apply to this recapture provision Previously deducted branch ordinary losses are characterized as ordinary income and previously deducted branch capital losses are characterized as longterm capital gain Gain recognition is limited to the overall limitation on the recognition of gains under section 367(a). Gains recognized shall not exceed the gains that would be received on a taxable sale of the transferred items individually and without offsetting individual losses against individual gains 19
Outbound Transfers of Property by a Corporation A domestic corporation that transfers property (other than intangible property described in Code section 367(d)) to a foreign corporation pursuant to a plan of reorganization in an exchange described in Code sections 361(a) and (b) is required to recognize gain under Code section 367(a). 20
Elective exception to 367(a) treatment if compliance with special conditions: The Section 367(a) exceptions for property used in the active conduct of a trade or business outside of the U.S. and for the transfer of certain stock and securities will apply only if the U.S. transferor and each member of a group of five or fewer domestic corporations that control the U.S. transferor (a control group member ) agrees to elect to apply the exception under Reg. 1.367(a)-7(c) and comply with its specific requirements including filing the appropriate election statements. Under this exception, each control group member s basis in the stock of the foreign corporation received in the reorganization in exchange for stock of the U.S. transferor is reduced to an amount that does not exceed a member s proportionate share of the basis of the assets transferred from the domestic corporation to the foreign corporation. The U.S. transferor is required to recognize gain realized on a proportionate share of the transferred assets attributable to non-control group members. The U.S. transferor is required to recognize gain in an amount by which a member s proportionate share of the gain realized on the section 367(a) assets transferred exceeds the member s proportionate share of the fair market value of the stock of the foreign corporation received by the U.S. transferor in the reorganization The U.S. transferor agrees to file an amended return to report gain realized but not recognized in the section 361 exchange if a significant amount of section 367(a) property is disposed of with a principal purpose of avoiding U.S. tax within a 60 month period beginning on the date of distribution 21
Taxability 367(b) - Other Transfers Deals primarily with the transfer of interests in foreign corporations pursuant to the transactions described above. Not reported on Form 926. Section 367(b) does not require recognition of gain, but can require recognition of the earnings and profits of the transferred corporation by the transferor. 22
Taxability 367(c) Capital contribution to controlled foreign corporations and Sec. 355 distributions Capital contributions to controlled corporations are described under section 351 and subject to the provisions of section 367(a) unless one of the exceptions described above applies. Capital contributions to controlled foreign corporations include entity classification elections to treat a foreign pass-through entity as a corporation for U.S. tax purposes. A corporation making a distribution of stock of a controlled corporation subject to section 355 will recognize gain if the distributed stock is foreign and the distribution is to a person other than a citizen or resident of the U.S. or a domestic corporation. 23
Taxability 367(d) Intangible Assets Code section 367(d) generally changes the treatment under code section 367(a) with regard to the transfer of intangible assets to a foreign corporation. The transfer of intangible assets to a foreign corporation are generally treated as a sale of those assets in exchange for a stream of annual payments contingent on the productivity and use of such property over the useful life of the intangible. Intangible assets are defined under Code section 936(h)(3)(B) and do not include foreign goodwill or going concern value or any intangible property not eligible for the active trade or business exception. 24
Taxability 367(e) Certain distributions, liquidations and other transfers If a domestic corporation makes a distribution of property to a foreign corporation in a complete liquidation as described in section 332, the domestic corporation shall recognize gain under section 367(e) applying the rules of section 336 unless - The domestic liquidating corporation distributes property used by it in the conduct of a trade or business in the United States The foreign distribute corporation uses the property for a ten-year period in a trade or business in the U.S. The domestic corporation attaches a statement to its U.S. income tax return for the year of the distribution The foreign distribute corporation attaches a copy of the property description in its U.S. income tax return for the year of the distribution 25
Gain Recognition Agreement ( GRA ) This is an agreement between a U.S. transferor and the IRS whereby the U.S. transferor agrees that if a gain recognition event occurs during the period beginning on the date of initial transfer and ending as of the close of the fifth full taxable year, the U.S. transferor must include in income the gain realized but not recognized on the initial transfer by reason of entering into the gain recognition agreement. A gain recognition event includes the disposition of the stock or securities transferred to the foreign corporation by the foreign corporation, but also includes the disposition of substantially all the assets of the transferred corporation or the disposition of the stock of the transferee foreign corporation received by the U.S. transferor. In order for a GRA to be valid the taxpayer must extend the statute of limitations to the eighth taxable year following the taxable year in which the initial transfer occurs. The U.S. transferor is also required to file an annual certification with its timely-filed U.S. income tax return for each of the five taxable years after the year of disposition that includes a certification that a gain recognition event has not occurred during the taxable year or if a gain recognition event has occurred, the amount of gain subject to the gain recognition agreement. 26
Relationship to Other Foreign Filings Form 5471: property contributed to a foreign corporation by a U.S. person acquiring a 10% ownership also must be reported on Form 5471 schedule O Form 8938: Ownership in specified foreign financial assets: Individuals who own interests in specified foreign financial assets that exceed certain value thresholds must report their ownership annually on Form 8938. The definition of specified foreign financial assets includes among other assets any interest in a foreign entity. Form 8838: If a GRA is entered into, Form 8838 must be filed to extend that statute of limitations. 27
Form 926 Reporting Transfers to Foreign Corporations Alison N. Dougherty August 30, 2016 http://blogs.aronsonllc.com/tax/foreign-financial-asset-reporting-rules/ 2015 2015 All Rights Reserved 805 King Farm Boulevard Suite 300 Rockville, Al 2016 All Rights Reserved 805 King Farm Boulevard Suite 300 Rockville, Maryland 20850 301.231.6200 P 301.231.7630 F www.aronsonllc.com
Form 926 Reporting Transfers to Foreign Corporations 1. Who must file and Form 926 filing thresholds 2. What must be reported on Form 926 2016 All Rights Reserved Aronson LLC www.aronsonllc.com www.aronsonllc.com/blogs 29
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION WHO MUST FILE? U.S. citizen or resident, U.S. corporation, U.S. trust or estate must file Form 926 to report certain transfers of property to a foreign corporation that are described in: 1. I.R.C. 6038B(a)(1)(A) A transfer of property to a foreign corporation in an exchange described in I.R.C. 332, 351, 354, 355, 356 and 361 2. I.R.C. 367(d) A transfer of intangible property to a foreign corporation (See I.R.C. 936(h)(3)(B) for definition of intangibles.) 3. I.R.C. 367(e) I.R.C. 355 distribution and liquidation into 80% foreign parent corporation under I.R.C. Section 332 2016 All Rights Reserved Aronson LLC www.aronsonllc.com www.aronsonllc.com/blogs 30
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION WHO MUST FILE? Transfers by U.S. or foreign partnership transferor U.S. partners of the partnership (and not the partnership itself) must file the Form 926. Each U.S. partner is treated as a transferor of its proportionate share of property that the partnership transferred to the foreign corporation. Partnerships that file a U.S. Form 1065 partnership tax return will usually provide information in the Schedule K-1 footnotes to alert U.S. partners to the potential Form 926 filing obligation. 2016 All Rights Reserved Aronson LLC www.aronsonllc.com www.aronsonllc.com/blogs 31
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION WHO MUST FILE? Report cash transfers if: 1. immediately after the transfer the U.S. person holds directly or indirectly at least 10% of the vote or value of the foreign corporation, or 2. The cash transferred within the 12 months before the date of transfer exceeds $100,000 USD. 2016 All Rights Reserved Aronson LLC www.aronsonllc.com www.aronsonllc.com/blogs 32
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION WHO MUST FILE? Gain recognition agreement is filed Form 926 must be filed to report a transfer of stock or securities to a foreign corporation in all cases when a gain recognition agreement is filed under U.S. Treas. Reg. 1.367(a)-8. Check-the-box election is filed Form 926 must be filed to report a deemed contribution of assets to a foreign corporation when a foreign entity that is already in existence files a Form 8832 checkthe-box entity classification election to be classified as a foreign corporation. 2016 All Rights Reserved Aronson LLC www.aronsonllc.com www.aronsonllc.com/blogs 33
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION 2016 All Rights Reserved Aronson LLC www.aronsonllc.com www.aronsonllc.com/blogs 34
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION Form 926, Page 1, Part I - U.S. transferor information Line 1 Complete lines 1a through 1d if the transferor is a corporation. Line 1a - For a transfer that is part of a corporate reorganization transaction, indicate whether the transferor corporation was controlled with 80% ownership by five or less U.S. corporations. Line 1b List controlling shareholders if transferor did not exist after the transfer. Line 1c - If the transferor is a member of a U.S. consolidated group, then list the name of the parent corporation and file Form 926 with the U.S. Federal consolidated tax return. Line 1d Indicate whether I.R.C. 367(a)(5) basis adjustments were made. 2016 All Rights Reserved Aronson LLC www.aronsonllc.com www.aronsonllc.com/blogs 35
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION Form 926, Page 1, Part I - U.S. transferor information Line 2a Provide name and FEIN of partnership that was the actual transferor. Line 2b Indicate whether the partner of the transferor partnership reported its pro rata share of gain on the transfer of partnership assets. Line 2c Indicate whether the partner is disposing of its entire interest in the partnership in the year of the transfer. Line 2d Indicate whether the partner is disposing of its entire interest in a publicly traded limited partnership in the year of the transfer. 2016 All Rights Reserved Aronson LLC www.aronsonllc.com www.aronsonllc.com/blogs 36
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION Form 926, Page 1, Part II Transferee foreign corporation information Name and address of transferee foreign corporation Include FEIN or reference ID number Country of incorporation or formation Characterization of foreign entity under foreign law Indicate whether the transferee foreign corporation is a CFC 2016 All Rights Reserved Aronson LLC www.aronsonllc.com www.aronsonllc.com/blogs 37
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION 2016 All Rights Reserved Aronson LLC www.aronsonllc.com www.aronsonllc.com/blogs 38
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION Form 926, Page 2, Part III Information Regarding Transfer of Property Column (a) Date of transfer when right, title, interest and possession of cash or property passed to the foreign corporation Column (b) Description of the property Column (c) Fair market value on the date of transfer Column (d) Cost basis or adjusted basis of the property Column (e) Gain recognized on transfer Supplemental information Description of transaction that this contribution was a part of, if applicable 2016 All Rights Reserved Aronson LLC www.aronsonllc.com www.aronsonllc.com/blogs 39
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION Form 926, Page 2, Part III Information Regarding Transfer of Property, Types of Property Cash Stock and securities Installment obligations, accounts receivable and similar property Foreign currency or property denominated in foreign currency Inventory Assets subject to depreciation recapture (Temp. Reg. 1.367(a)-4T(b)) Tangible property used in a trade business Intangible property Property to be leased (Reg. 1.367(a)-4(c)) Property to be sold (Temp. Reg. 1.367(a)-4T(d)) Transfers of oil & gas working interests (Temp. Reg. 1.367(a)-4T(e)) 2016 All Rights Reserved Aronson LLC www.aronsonllc.com www.aronsonllc.com/blogs 40
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION 2016 All Rights Reserved Aronson LLC www.aronsonllc.com www.aronsonllc.com/blogs 41
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION Form 926, Page 3, Part IV - Additional Information Regarding Transfer of Property Line 9 Transferor s ownership percentage before and after the transfer Line 10 State the IRC section that applies to the contribution Line 11 If a gain recognition agreement was required, a statement must be attached that describes the transfer and the amount of gain recognized, in addition to answering questions 11a through d. Line 11a - Gain recognized under I.R.C. 904(f)(3) = disposition of property used in a trade or business outside the United States (for overall foreign loss recapture rule) Line 11b - Gain recognized under I.R.C. 904(f)(5)(F) = gain on disposition of property that would be in income category as separate limitation loss Line 11c - Gain recognized under I.R.C. 1503(d) = dual consolidated loss recapture Line 11d - Exchange gain under I.R.C. 987 = gain on foreign currency translation adjustments for branch and QBU transactions 2016 All Rights Reserved Aronson LLC www.aronsonllc.com www.aronsonllc.com/blogs 42
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION Form 926, Page 3, Part IV - Additional Information Regarding Transfer of Property Line 12 Indicate if a check-the-box election was filed and there was a deemed transfer rather than an actual transfer. Line 13 Indicate if gain on branch loss recapture or depreciation recapture was recognized. See U.S. Treas. Reg. 1.367(a)-4 and 1.367(a)-6 for other reportable items. Line 14 Indicate if exception to I.R.C. 367(a) gain recognition applies for active trade or business property. Line 15 Indicate if transfer of foreign goodwill or going concern value and provide amount transferred. Line 16 Indicate if cash was the only property transferred. Line 17 Indicate if intangible property was transferred. This relates to the I.R.C. 367(d) requirement. If yes, must attach statement describing the intangible property rights transferred per U.S. Treas. Reg. 1.6038B-1T(d). 2016 All Rights Reserved Aronson LLC www.aronsonllc.com www.aronsonllc.com/blogs 43
FORM 926 RETURN BY U.S. TRANSFEROR OF PROPERTY TO A FOREIGN CORPORATION - SUMMARY U.S. citizen or resident, U.S. corporation, U.S. trust or estate must file Form 926 to report certain transfers of property to a foreign corporation. U.S. partners in U.S. partnership transferor file the Form 926. Report cash transfers if: immediately after the transfer the U.S. person holds directly or indirectly at least 10% of the vote or value of the foreign corporation, or The cash transferred within the 12 months before the date of transfer exceeds $100,000 USD. File Form 926 to report transfers of stock or securities subject to gain recognition agreement. Failure to file penalty is 10% of FMV of property on date of transfer limited to a maximum of $100,000 unless intentional disregard. Statute of limitations is extended to three years after required information is reported. 2016 All Rights Reserved Aronson LLC www.aronsonllc.com www.aronsonllc.com/blogs 44
OTHER REPORTING REQUIREMENTS FORM 8938 STATEMENT OF SPECIFIED FOREIGN FINANCIAL ASSETS U.S. individuals file Form 8938 with U.S. Federal Form 1040 Take into account value of stock in foreign corporation for Form 8938 filing threshold 1. Single living in United States - >$50,000 at 12/31 or >$75,000 at any time during calendar year 2. Married filing jointly living in United States - >$100,000 at 12/31 or >$150,000 at any time during calendar year If filing Form 5471, still must attach Form 8938 if within filing threshold If not filing Form 5471, must report information regarding foreign corporation on Form 8938 if within filing threshold 2016 All Rights Reserved Aronson LLC www.aronsonllc.com www.aronsonllc.com/blogs 45
What if Form 926 Was Not Filed? If Form 926 was not filed, there could be other reporting requirements that were missed such as Forms 5471, 8621, 8938 or FinCEN Form 114 Foreign Bank Account Report, etc. Certain IRS amnesty programs may provide relief for the failure to file U.S. international tax reporting forms such as Form 926. Delinquent International Information Return and FBAR Submission Procedures if U.S. taxpayer can establish reasonable cause for the failure to file Streamlined Domestic or Foreign Offshore Filing Procedures for U.S. Individuals A penalty may apply. Offshore Voluntary Disclosure Program for U.S. Individuals Penalties will apply. 2016 All Rights Reserved Aronson LLC www.aronsonllc.com www.aronsonllc.com/blogs 46
ALISON N. DOUGHERTY SENIOR MANAGER ARONSON LLC Direct (301) 231-6290 Main (301) 231-6200 Email: adougherty@aronsonllc.com 805 King Farm Blvd, Third Floor Rockville, MD 20850 Washington, DC Metro Area Alison N. Dougherty provides tax services as a Senior Manager at Aronson LLC. Alison specializes in international tax reporting, compliance, consulting, planning and structuring as a subject matter leader of Aronson s international tax practice. She has extensive experience assisting clients with U.S. tax reporting and compliance for offshore assets and foreign accounts. She provides outbound U.S. international tax guidance to U.S. individuals and businesses with activities in other countries. She also provides inbound U.S. international tax guidance to nonresident individuals and businesses with activities in the United States. She has worked extensively in the area of U.S. international tax reporting and compliance with the preparation of the U.S. Federal Forms 5471, 926, 8865, 8858, 5472, 1042, 1042-S, 8621, 8804, 8805, 8813, 8288, 8288-A, 8288-B, 1116, 1118, 1120-F, 1040-NR, 3520, 3520-A, 2555, 5713, 8832, 8833, 8840, 8843, 8854, 8938 and FBAR. She has counseled U.S. taxpayers regarding the outbound formation, capitalization, acquisition, operation, reorganization and liquidation of foreign companies. She has significant experience with U.S. Federal nonresident tax withholding, foreign partner tax withholding and FIRPTA withholding. She works closely with nonresident individuals and businesses regarding inbound U.S. real property investment. She often assists U.S. taxpayers with IRS amnesty program disclosures of offshore assets and foreign accounts. Alison completed the LL.M. (Master of Laws) in Securities and Financial Regulation in 2004 with academic distinction at Georgetown University Law Center. She completed the LL.M. (Master of Laws) in Taxation in 2000 and the Juris Doctor in 1999 at the University of Denver College of Law. She completed a Bachelor of Arts degree in Foreign Language in 1995 at Virginia Commonwealth University. 2016 All Rights Reserved Aronson LLC www.aronsonllc.com www.aronsonllc.com/blogs 47
Examples Presented by: Hunter Norton & Eric Swerdlow Farkouh Furman & Faccio
Complete Liquidation of a Subsidiary Sec. 332 Domestic corporation D makes a distribution of property in complete liquidation under section 332 to its corporate parent foreign corporation FP. General Rule: Section 367(e) provides that gain will be recognized an outbound liquidation of a subsidiary. As such, the domestic liquidating corporation is not entitled to tax free treatment under section 337 (for a liquidating distribution to an 80% distributee) and FP will recognize gain (but not loss in excess of gains) under section 336 on the distribution of property to FP. Form 926 Reporting (for General Rule): Domestic corporation D would file Form 926 to report the transfer of property to foreign corporation FC. 49
Exception to General Rule: Distribution of property used in a trade or business in the U.S. The foreign distributee corporation must use the property in the conduct of a trade or business in the United States ( Qualifying Property ) for a ten-year period following the date of distribution The domestic liquidating corporation attaches a statement to its timely filed U.S. income tax return for the taxable years of the liquidating distribution certifying that the domestic liquidating corporation and foreign distribute corporation agree to comply with the rules for claiming the exception to gain recognition The foreign distributee corporation attaches a copy of the property description to its timely filed U.S. income tax return for the year that includes the date of the distribution Statements include agreement to waive of any treaty benefits and extension of statute of limitations on assessment and collections regarding the domestic liquidating corporation for 10 years beyond normal due date If within the ten-year period foreign distributee corporation ceases to use the Qualifying Property in a U.S. trade or business, the domestic liquidating corporation shall recognize gain realized, but not recognized, upon the initial distribution of such property by filing an amended income tax return. 50
Form 926 Reporting (for Exception): A domestic liquidating corporation must file Form 926 with respect to a distribution of property in complete liquidation to a foreign distributee corporation that meets the 80% stock ownership requirements of section 332(b). A domestic liquidating corporation completes Part I and II of Form 926 and in Part III it indicates that the required information is contained in the statement required by Regulations section 1.367(e)-2(b)(2)(C)(2). Any property that is not described in the aforementioned statement is reported in Part III of the form. 51
Complete Liquidation of a Subsidiary Sec 332 Exchange FP Shares All Property D Sec 336 52
Transfers of Stock or Securities to Foreign Corporations Secs. 351, 354, 356, 361 Representative Transactions: Scenario #1: Section 351 Exchange U.S. individual A transfers stock of foreign corporation FC to a foreign corporation FA in exchange for voting shares constituting control of FA in a transaction described under section 351. Scenario #2: Section 354 Exchange Domestic corporation D transfers shares of foreign corporation FC to foreign corporation FA in exchange for voting shares of FA issued by FA, and after the exchange FA has control of FC. The exchange of foreign corporation FC shares by domestic corporation D is a transaction described in section 354 and the transaction as a whole is a reorganization described in section 368(a)(1)(B). 53
General Rule: Under section 367(a), FA is not considered a corporation. In Scenario #1, U.S. individual A would recognize gain (but not loss) on the transfer of the shares of FC to FA. In scenario #2, domestic corporation D would recognize gain (but not loss) on the transfer of the shares of FC to FA. Form 926 Reporting (for General Rule): Provided individual A and domestic corporation D reported the gain recognized on the transfer of shares of FC to foreign corporation FA on each of their timely filed U.S. income tax returns, they would not be required to file Form 926. 54
Exception to General Rule: If U.S. individual A and domestic corporation D each enter into a 5 year gain recognition agreement ( GRA ) with the IRS and do not dispose of the shares of FC within 5 years, they will not recognize gain on the transfer of foreign corporation FC shares to foreign corporation FA. Apart from the tax treatment under section 367(a), because this is a transfer of a controlled foreign corporation to a foreign corporation section 367(b) is applicable and can result in the recognition of a deemed dividend by the U.S. transferor corporation. Under section 367(b), if foreign company FC has any earnings and profits, domestic corporation D would recognize a deemed dividend equal to the FC earnings and profits at the time of the transfer. 55
Form 926 Reporting (for Exception): As 5% shareholders, U.S. individual A and domestic corporation D would be required to report the transfer of FC stock to FA on Form 926 despite the fact that gain is not recognized. On Part III of the form, they would describe the transaction including the fact that they have entered into a gain recognition agreement. On Part IV, they would indicate that the transaction was pursuant to sections 351 or 354 as applicable. 56
Transfer Of Stock or Securities to a Foreign Corporation D Other Shareholders FC FA 57
Transfer Of Stock or Securities to a Foreign Corporation D Other Shareholders FA *D files a GRA to receive non-recognition treatment FC Control 58
Transfer Of Stock or Securities to a Foreign Corporation Sec 351 A Other Shareholders A X% FC Stock FA Stock (Control) FC FA 59
Transfer Of Stock or Securities to a Foreign Corporation A FA FC Other Shareholder 60
Outbound Transfers of Property by Corporations Secs. 361(a), 361(b) The shares of Domestic corporation D are owned 30% each by 3 domestic corporations and 10% by one foreign corporation DP-1, DP-2, DP-3 and FP-1 respectively. In a reorganization transaction described in sections 368(a)(1)(C) and 361(a), domestic corporation D transfers all of its assets constituting a trade or business to foreign corporation FC in exchange for shares of FC. Domestic corporation D then liquidates by distributing the shares of FC to its shareholders DP-1, DP-2, DP-3 and FP-1. General Rule: Section 367(a)(5) provides that the exceptions to 367(a)(1) for the transfer of foreign corporation stock or the transfer of an active trade or business do not apply to a section 361(a) or (b) transaction. Consequently, domestic corporation D would recognize gain (but not loss) on the transfer of its property to FC in exchange for FC shares. Form 926 Reporting (for General Rule): Domestic Corporation D would report the transfer of its property on Form 926. 61
Exception to General Rule: Domestic corporation D can minimize gain recognized on the section 361(a) by making an election along with its shareholders to apply the basis adjustment rules of Reg. 1.367-7(c), and by complying with the requirements of the election. These actions will allow the active trade or business exception to apply. Under these rules, the basis of shares in FC received by the shareholders of domestic corporation D, which comprise a control group, is reduced to an amount that does not exceed a proportionate share of the basis of the assets transferred by D to FC. The parties are required to satisfy the following conditions to comply with the basis adjustment election under Reg. 1.367(a)-7(c): The U.S. transferor is controlled by five or fewer domestic corporations that comprise a control group The U.S transferor recognizes gain on the transfer equal to the amount of inside gain which is proportionate to the non-control group members ownership percentage The U.S. transferor recognizes gain on the transfer by the amount by which the inside gain attributable to the control group members exceeds the FMV of the stock distributed to the control group members Each control group member reduces the basis of the shares it received from the U.S. transferor by its proportionate share of the inside gain The U.S. transferor agrees to amend its tax return to report gain that was not recognized upon certain subsequent dispositions by the foreign acquiring corporation (FC) of the property received from the U.S. transferor within the 60 month period beginning on the date of distribution The U.S. transferor and each control member elect to apply the basis adjustment provisions by attaching a statement to their tax returns and enter into a written agreement 62
Form 926 Reporting (for Exception): Domestic corporation D would report the transfer of the property to foreign corporation FC. In Part I it would list its controlling shareholders and indicate that basis adjustments were made under section 367(a)(5). In Part III, domestic corporation D would describe the transaction, and in Part IV domestic corporation D would indicate that the transaction was a section 361 transaction. 63
Outbound Transfer of Property by Corporation DP1 DP2 DP3 FP1 Pre Existing Shareholders 30% 30% 30% 10% D 100% of Assets FC Shares FC 64
Outbound Transfer of Property by Corporation DP1 DP2 DP3 FP1 FC Stock FC Stock FC Stock FC Stock Sec 354 Exchange D liquidates FC stock is distributed to D shareholders D 65
Outbound Transfer of Property by Corporation DP1 DP2 DP3 FP1 Pre-existing Shareholders FC 66
Outbound Transfer of Intangible Property Secs. 351, 361 Domestic corporation A transfers the ownership rights to a patent to foreign corporation FC in exchange for all shares of outstanding stock. General Rule: Section 367(d) provides that if a U.S. person transfers any intangible property (within the meaning of section 936(h)(3)(B)) to a foreign corporation, section 367(a) shall not apply and the rules under section 367(d) shall apply. Under section 367(d), a U.S. transferor will be treated as receiving annual payments contingent upon the productivity or use of the transferred property over the useful life of the property. Therefore, domestic corporation A will be required to recognize ordinary income annual in amounts that reflect the productivity or use of the transferred property by foreign corporation FC. Form 926 Reporting (for General Rule): Domestic corporation A would file Form 926 and would be required to report the transfer of the patent to FC in Part III and in Part IV question 17. 67
Overall Foreign Loss Recapture Upon Asset Disposition Sec. 904(f)(3) Domestic corporation A has a $700 balance in its overall foreign loss account. Domestic corporation A transfers an asset utilized primarily outside of the United States to foreign corporation FC in a sec. 351 transaction realizing $2,000 of gain on the transfer and enters into a gain recognition agreement to avoid the application of section 367(a). Under section 904(f)(3) the $2,000 of gain realized is characterized as foreign source income (even if the gain might not be sourced in this manner under general sourcing rules) and is recognized to the extent of the overall foreign loss account or $700. Domestic corporation A will recapture as U.S. source income the $700 of gain recognized and the remaining $1,300 of realized gain will not be recognized. Form 926 Reporting: Domestic corporation A would report its transfer of the asset used primarily outside of the United States to foreign corporation FC on Form 926 Part III FC on Form 926 Part III. In addition, in Part IV. Line 11a it would indicate that gain was recognized under section 904(f)(3). 68
Thank You Hunter Norton Farkouh Furman & Faccio 460 Park Avenue New York City, NY 10022 212-245-5900 hnorton@fffcpas.com Eric Swerdlow Farkouh Furman & Faccio 460 Park Avenue New York City, NY 10022 212-245-5900 eswerdlow@fffcpas.com
PRIDE. INTEGRITY. LOYALTY. TRUST. Lions create a tight-knit community, allowing them to prosper in a harsh environment. W E I S E R M A Z A R S L L P Providing Our Clients With a Strategic Advantage WeiserMazars LLP is an independent member firm of Mazars Group.
R E T U R N B Y A U. S. T R A N S F E R O R O F P R O P E R T Y T O A F O R E I G N C O R P O R A T I O N P E N A L T I E S, P O S S I B L E D E F E N S E S Regulations issued under IRC Section 6038B(a)(1)(A) generally require that a United States person (a U.S. citizen, a U.S. resident, a domestic corporation or a domestic estate or trust) who transfers property to a foreign corporation must file a Form 926. It should be noted that once such a transfer takes place, other forms may also be required: FinCen Form 114, Report of Foreign Bank Accounts (FBAR) (formerly Form TDF 90-22.1) Form 5471, Information Return of U.S. Person with Respect to Certain Foreign Corporations Form 8938, Statement of Specified Foreign Financial Assets Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund A failure by a United States person to timely file one of the aforementioned forms or a failure to comply with the reporting requirements of these forms may result in monetary penalties, loss of foreign tax credits, and extension of the statute of limitations. 71
R E T U R N B Y A U. S. T R A N S F E R O R O F P R O P E R T Y T O A F O R E I G N C O R P O R A T I O N P E N A L T I E S, P O S S I B L E D E F E N S E S - C O N T D. For purposes of Form 926, Treasury Regulation 1.6038B-1(f)(2) defines the failure to comply with the requirements of Section 6038B as: Failing to report at the proper time and in the proper manner any material information required to be reported under Section 6038B or Providing false or inaccurate information in purported compliance with the requirements of Section 6038B. An example under the Regulation of a failure to comply would be a timely filing of Form 926 reporting that property will be used in the active conduct of a trade or business outside the United States when in fact the property continues to be used in the United States. 72
R E T U R N B Y A U. S. T R A N S F E R O R O F P R O P E R T Y T O A F O R E I G N C O R P O R A T I O N P E N A L T I E S, P O S S I B L E D E F E N S E S - C O N T D. Pursuant to Treasury Regulation Section 1.6038B-1(f)(1), the consequences of a failure to file Form 926 or failure to comply include: A penalty equal to ten percent of the fair market value of the property at the time of transfer unless the United States person can establish that the failure was due to reasonable cause and not willful neglect. The penalty is limited to $100,000 for any exchange unless the failure is due to intentional disregard (see Treasury Regulation Section 1.6662-3(b)(2)). Under Treasury Regulation 1.367(a)-2T(a)(2), transfers to a foreign corporation of property for use in the active conduct of a trade or business outside the United States may qualify as a non-recognition transfer. However, if Form 926 is not filed, by the due date (including extensions) of the United States person s income tax return that includes the date of the transfer, the property will not be considered to have been transferred for use in the active conduct of a trade or business outside the United States for purposes of Section 367(a). Accordingly, the IRS could deny non-recognition treatment and treat the transfer as a taxable sale for fair market value. 73
R E T U R N B Y A U. S. T R A N S F E R O R O F P R O P E R T Y T O A F O R E I G N C O R P O R A T I O N P E N A L T I E S, P O S S I B L E D E F E N S E S - C O N T D. Extension of Statute of Limitations General rule: Taxes are required to be assessed within 3 years after the return is filed. For certain foreign filings, the limitations period does not expire for the assessment of income tax with respect to the return upon which the information should have been reported until three years after the required information is provided to the IRS. For returns filed after March 18, 2010, and returns filed on or before March 18, 2010 as to which the SOL has not yet expired as of March 18, 2010, the extension of the SOL applies to any tax return, event or period to which the unreported information relates: If failure to provide the required information was due to reasonable cause and not willful neglect, the extended time for assessment will be limited to the unreported information. Under Section 6662(j), an additional 40% penalty may be imposed on any underpayment resulting from an undisclosed foreign financial asset. This additional penalty applies to any asset that was required to be reported under IRC Section 6038B if the taxpayer failed to disclose the information. The penalty will not be imposed if the United States person can demonstrate that the failure was due to reasonable cause and the taxpayer acted in good faith. 74
I N T E R N A L R E V E N U E S E R V I C E M I T I G A T I O N O F P E N A L T I E S First Time Abatement (FTA) Waiver First-time noncompliant taxpayers Qualification Requirements: No previous filing requirement or prior penalties for the preceding 3 years with respect to tax returns currently required to be filed, and Filed or validly extended all tax returns currently required to be filed and paid, or arranged to pay, any tax due. General Rule: Not applicable to the failure to timely file international information returns; Exception: If penalty was assessed for failure to file Form 1120 and it qualifies for FTA penalty relief, penalty relief with respect to the penalty for failure to file the international information return may be granted. 75
IRS Mitigation of Penalties Reasonable cause Inability to provide the required information after exercising ordinary business care and prudence. The most common reasonable cause exceptions: Ordinary business care and prudence Death, serious illness or unavoidable absence Fire, casualty, natural disaster, or other disturbance Unable to obtain records Mistake was made Erroneous advice or reliance» Inherent conflict of interest» Inadequate disclosure of facts by the taxpayer to the advisor» Inadequate qualification of advisor» Actual reliance on advisor Ignorance of the law Forgetfulness 76
The terms ordinary care and prudence comes from the seminal Supreme Court case, US vs. Boyle, 469 US 241 (1985). When an accountant or an attorney advises a taxpayer on a matter of tax law, such as whether a liability exists, it is reasonable for the taxpayer to rely on that advice. Most taxpayers are not competent to discern error in the substantive advice of an accountant or attorney. To require the taxpayer to challenge the attorney, to seek a second opinion or to try to monitor counsel on the provisions of the code himself would nullify the very purpose of seeking the advice of a presumed expert in the first place. Ordinary business care and prudence do not demand such actions. (Emphasis added) Various provisions of the Internal Revenue Manual articulate how to determine reasonable cause: What happened, and when did it happen? How did the facts and circumstances prevent the taxpayer from complying? Once the facts and circumstances changed, did the taxpayer make attempts to comply? 77
Offshore Voluntary Disclosure Program (OVDP) To encourage U.S. taxpayers to report previously undisclosed foreign accounts and assets. These programs allow taxpayers to avoid substantial civil penalties and criminal prosecution. Covers all undisclosed foreign accounts and assets required to be reported on the FBAR and foreign information returns with respect to which there are underreported tax liabilities. If a taxpayer reported, and paid tax on, all taxable income derived from foreign accounts and assets, the taxpayer does not need to use the OVDP to file delinquent or amended tax returns if certain conditions are satisfied. 78
Offshore Voluntary Disclosure Program (OVDP)- Cont d. 2012 OVDP No deadline for taxpayers to apply. Penalty rate: 27.5% (or in limited circumstances, a reduced penalty rate of 12.5% or 5%) of the highest aggregate balance in foreign financial accounts or value of foreign assets and entities during the 8-year voluntary disclosure period Additional penalties: 20% accuracy-related penalty as well as failure to file and failure to pay penalties. 2014 OVDP Effective date: July 1, 2104 A continuation of the 2012 OVDP with some significant modifications 50% penalty if the taxpayer maintains an account with a foreign financial institution or had dealings with a facilitator who aided the taxpayer in establishing or maintaining an offshore arrangement, and the institution or facilitator is under government investigation. Reduced penalty of 12.5% and 5% are eliminated due to the expansion of the Streamlined Filing Compliance Procedures. 79
Delinquent International Information Return Submission Procedures Taxpayers who have unreported income or unpaid tax are not precluded from filing delinquent international information returns. Reasonable cause statement required and penalties may be imposed if the IRS does not accept the taxpayer s reasonable cause explanation. The longstanding authorities regarding what constitutes reasonable cause continue to apply and existing procedures establishing reasonable cause, including requirements to provide a statement of facts under penalties of perjury, continue to apply. The additional requirements are as follows: The taxpayer has not filed one or more required international information returns; The taxpayer has reasonable cause for not timely filing the international information returns; The taxpayer is not under a civil or criminal investigation by the IRS; and The taxpayer has not already been contacted by the IRS about the delinquent international information returns. 80
Streamlined Filing Compliance Procedures Available to individuals, including estates of individuals, who failed to report foreign financial assets and pay all tax due with respect to those assets. Eligibility Criteria General Eligibility Requirement. The failure to report all income, pay all tax and submit all required information returns, including FBARs, may not be due to non-willful conduct. Specific Eligibility Requirements Streamlined Foreign Offshore Procedures Applies to U.S. nonresident individuals Non-residency requirement:» U.S. citizens or lawful permanent residents ( green card holders ) no U.S. abode and was physically present outside the United States for at least 330 full days, in the 3 most recent years;» Non-U.S. citizens or non-green card holders substantial presence test is not met in the last 3 years. The individual failed to report the income from a foreign financial asset and pay the tax as required by U.S. law, and may have failed to file an FBAR with respect to a foreign financial account. 81
Streamlined Filing Compliance Procedures-Cont d Specific Eligibility Requirements Streamlined Domestic Offshore Procedures Applies to U.S. resident individuals; Applicable non-residency requirement was not met; Individual filed a U.S. tax return (if required) for each of the most recent 3 years; and Individual failed to report gross income from a foreign financial asset and pay tax as required by U.S. law, and may have failed to file an FBAR and/or one or more international information returns (e.g., Form 5471) with respect to the foreign financial asset. If the IRS has initiated a civil examination or criminal investigation, the taxpayer will not be eligible to use the streamlined procedures. Taxpayers eligible to use the streamlined procedures who have previously filed delinquent or amended returns must pay previous penalty assessments. 82
Streamlined Filing Compliance Procedures-Cont d General Treatment Under the Streamlined Procedures Tax returns submitted will be processed like any other return submitted to the IRS. No acknowledgement of return by the IRS No closing agreement with the IRS. Returns will not be subject to IRS audit automatically but they may be selected for audit and may be subject to verification procedures, additional civil penalties, and, potentially, criminal penalties, if appropriate. Coordination Between Streamlined Procedures and OVDP Use of Streamlined filing compliance procedures disqualifies taxpayer from using the OVDP. Submission of an OVDP voluntary disclosure letter pursuant to OVDP FAQ #24 on or after July 1 2014, disqualifies taxpayer from the streamlined filing compliance procedures. 83
C O N T A C T Mark Peltz WeiserMazars LLP 135 West 50 th Street New York, NY 10020 (P) (E) mark.peltz@weisermazars.com Visit us at: www.weisermazars.com Follow us on: 84