[Federal Register Volume 63, Number 174 (Wednesday, September 9, 1998)]
[Proposed Rules]
[Pages 48148-48154]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-23882]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-118926-97]
RIN 1545-AV70


Notice of Certain Transfers to Foreign Partnerships and Foreign 
Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.


[[Page 48149]]


ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations under section 
6038B of the Internal Revenue Code on information reporting 
requirements for certain transfers by United States persons to foreign 
partnerships. The proposed regulations would implement the amendments 
made by the Taxpayer Relief Act of 1997 that require a United States 
person who transfers property to a foreign partnership to furnish 
certain information with respect to such transfers. This document also 
contains proposed regulations that would amend the information 
reporting requirements for certain transfers by United States persons 
to foreign corporations to require the reporting of the transfer of 
cash. The proposed regulations would provide guidance to United States 
persons who must furnish this information. This document also provides 
notice of a public hearing on these proposed regulations.

DATES: Written comments must be received by November 9, 1998. Outlines 
of topics to be discussed at the public hearing scheduled for November 
10, 1998, at 10 a.m., must be received by October 20, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-118926-97), room 
5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand delivered between the 
hours of 8 a.m. and 5 p.m. to CC:DOM:CORP:R (REG-118926-97), Courier's 
Desk, Internal Revenue Service, 1111 Constitution Avenue NW., 
Washington, DC. Alternatively, taxpayers may submit comments 
electronically via the Internet by selecting the ``Tax Regs'' option of 
the IRS Home Page, or by submitting comments directly to the IRS 
Internet site at: http://www.irs.ustreas.gov/prod/tax__regs/
comments.html.
    A public hearing has been scheduled to be held in room 2615, 
Internal Revenue Building, 1111 Constitution Avenue NW., Washington, 
DC.

FOR FURTHER INFORMATION CONTACT: Concerning transfers of cash to 
foreign corporations, Philip L. Tretiak, and concerning transfers to 
foreign partnerships, Christopher Kelley, 202-622-3860; concerning the 
hearing and submissions of written comments, Michael Slaughter, 202-
622-7190 (not toll-free calls).
SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collection of information should be 
sent to the Office of Management and Budget, Attention: Desk Officer 
for the Department of the Treasury, Office of Information and 
Regulatory Affairs, Washington, DC 20503, with copies to the Internal 
Revenue Service, Attention: IRS Reports Clearance Officer OP:FS:FP, 
Washington, DC 20224. Comments on the collection of information must be 
received by November 9, 1998. Comments are specifically requested on:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the IRS, including whether the 
information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of the capital or start-up costs of operation, 
maintenance, and purchase of services to provide information.
    The collection of information in these regulations is in 
Secs. 1.6038B-1(b) and 1.6038B-2. This information is required by the 
IRS to identify United States persons who contribute property to 
foreign partnerships and to ensure the correct reporting of items with 
respect to those partnerships. The collection of information is 
mandatory. The likely respondents will be individuals and businesses or 
other for-profit organizations.
    The burden of complying with the proposed collection of information 
required to be reported on Form 8865 is reflected in the burden for 
Form 8865.
    The burden of complying with the proposed collection of information 
required to be reported on Form 926 is reflected in the burden for Form 
926.
    The burden of complying with the proposed collection of information 
in Sec. 1.6038B-2(f)(2) is as follows:
    Estimated total annual reporting burden: 250 hours.
    Estimated annual burden per respondent: 0.25 hours to 1 hour, with 
an average of 0.5 hours.
    Estimated number of respondents: 500.
    Estimated frequency of responses: Once per year.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

Taxpayer Relief Act of 1997

    In the Taxpayer Relief Act of 1997 (TRA 1997), Public Law 105-34 
(111 Stat. 983 (1997)), Congress significantly modified the information 
reporting requirements with respect to foreign partnerships under 
sections 6038, 6038B and 6046A (and also amended section 6501(c)(8) to 
provide that the statute of limitations on the assessment of tax under 
section 6038, 6038B and 6046A does not expire until three years after 
the information required under those sections is reported). Certain of 
these modifications also affect reporting requirements with respect to 
foreign corporations. These regulations under section 6038B are being 
proposed along with regulations under sections 6038 (reporting with 
respect to certain foreign partnerships) and 6046A (reporting of 
certain ownership interests in foreign partnerships). The IRS is also 
developing a comprehensive form (Form 8865) for reporting under all of 
these provisions. A draft version of the form will be issued for public 
comment while the proposed regulations are outstanding.

Section 6038B and Transfers to Foreign Corporations

    Section 6038B, as enacted in 1984, provided that United States 
persons that made certain transfers of property to foreign corporations 
were required to report those transfers in the manner prescribed by 
regulations. Prior to the enactment of TRA 1997, section 6038B imposed 
a penalty for failure to comply with the regulations equal to 25 
percent of the gain realized on the exchange, unless the failure was 
due to reasonable cause and not to willful neglect. Thus, in the case 
of a transfer of cash or other unappreciated property to a foreign 
corporation, no penalty was imposed under section 6038B if the transfer 
was not reported. Section 1144(c) of TRA 1997 modified the penalty 
applicable to

[[Page 48150]]

the failure to furnish information required to be reported under 
section 6038B. The modified penalty is equal to 10 percent of the fair 
market value of the property at the time of the transfer.
    In response to TRA 1997, Treasury and the IRS issued final 
regulations under section 6038B (TD 8770 at 63 FR 33568; June 19, 
1998), in conjunction with regulations under section 367(a), to clarify 
that transfers to corporations of unappreciated property other than 
cash that occur on or after July 20, 1998, generally are required to be 
reported in accordance with Sec. 1.6038B-1(b). The preamble to the 
final regulations stated that rules regarding transfers of cash to 
foreign corporations would be provided in future regulations.

Section 6038B and Transfers to Foreign Partnerships

    Prior to the enactment of TRA 1997, section 1491 imposed an excise 
tax on certain transfers of property by United States persons to 
foreign corporations, partnerships, estates, or trusts. The tax was 
equal to 35 percent of the fair market value of the property 
transferred in excess of adjusted basis and any gain recognized on the 
transfer (built-in gain). Section 1494(c), effective for transfers made 
after August 20, 1996, imposed a further penalty for a failure to 
report.
    Section 1131(a) of TRA 1997 repealed sections 1491 through 1494. 
Section 1144 of TRA 1997 amended section 6038B to require a United 
States person who transfers property to a foreign partnership to report 
the transfer in the time and manner provided in regulations. The 1997 
amendments apply to transfers of property made after August 5, 1997. 
Notice 98-17 (1998-11 C.B. 6) provided the manner of reporting a 
transfer under section 6038B made after August 5, 1997, and before 
January 1, 1998.

Explanation of Provisions

Reporting of Cash Transfers to Foreign Corporations

    These proposed regulations provide that transfers of cash to 
foreign corporations are required to be reported if the U.S. transferor 
holds, immediately after the transfer, directly or indirectly, a 10-
percent interest in the foreign corporation, or the amount of the cash 
transferred by the transferor or any related person to such foreign 
corporation or a related foreign corporation during the 12-month period 
ending on the date of the transfer exceeds $100,000. The transfer of 
cash to a foreign corporation will not be required to be reported 
unless made in a taxable year beginning after the date that final 
regulations requiring reporting are published in the Federal Register.
    The IRS and Treasury invite comments on these requirements and the 
corresponding requirement for foreign partnerships, including a 
description of the types of transfers which could appropriately be 
excepted (for example, capital contributions and returns of cash made 
as part of the normal course of business operations).

Reporting of Transfers to Foreign Partnerships

    The proposed regulations would implement the rules of section 6038B 
by generally requiring that a United States person that transfers 
property (including cash) to a foreign partnership in a contribution 
described in section 721 in exchange for a partnership interest, file a 
return on Form 8865 ``Information Return of U.S. Persons With Respect 
To Certain Foreign Partnerships'', reporting the transfer. Under the 
statutory exceptions in section 6038B(b)(1), a United States person 
must report such a contribution only if (1) the United States person 
holds (immediately after the transfer), directly or indirectly, at 
least a 10-percent interest in the partnership, or (2) the value of the 
property transferred (when added to the value of the property 
transferred by such person to the partnership within the preceding 12 
months) exceeds $100,000 (including the value of property transferred 
in any transfer not described in section 721, a principal purpose of 
which is the avoidance of the reporting requirements of these 
regulations). The proposed regulations would also require a transferor, 
if still a partner, to notify the IRS when a foreign partnership 
disposes of appreciated property contributed by the transferor. This 
information will help in determining whether built-in gain has been 
properly allocated to and recognized by the U.S. transferor. The 
proposed regulations provide that certain indirect transferors need not 
report under this section if certain conditions are met.
    A 10-percent interest is defined by cross-reference to section 
6046A(d), which in turn cross-references section 6038(e)(3)(C) and 
regulations issued under that provision. The term means direct or 
indirect ownership of an interest equal to 10 percent of the capital 
interest or profits interest in a partnership, and an interest to which 
10 percent of the deductions or losses of a partnership are allocated.

Partnerships Excluded From Application of Subchapter K

    The reporting requirements of this section shall not apply in 
respect of any foreign partnership which is an eligible partnership 
described in Sec. 1.761-2(a) that has validly elected pursuant to 
Sec. 1.761-2(b)(2)(i) to be wholly excluded from the application of 
subchapter K. Nor shall the reporting requirements of these proposed 
regulations apply to any foreign partnership validly deemed to have 
wholly elected out of the provisions of subchapter K as specified in 
Sec. 1.761-2(b)(2)(ii). Taxpayers are reminded, however, that a 
precondition to being an ``electing-out'' partnership is that, as 
provided in Sec. 1.761-2(a)(1), ``[t]he members of such organization 
must be able to compute their income without the necessity of computing 
partnership taxable income.'' The IRS and Treasury are concerned that 
in certain cases the necessary books and records are not being 
maintained to allow verification that such computations can indeed be 
made without regard to the partnership. If it appears that, in the 
absence of a reporting requirement under this section, the members of 
the ``electing-out'' partnership cannot make such separate 
computations, this exception to the reporting requirements will be 
reconsidered.

Reporting of Cash Transfers to Foreign Partnerships

    The proposed regulations require the reporting of a cash transfer 
to a foreign partnership in a contribution otherwise required to be 
reported under section 6038B and these regulations. Such transfers were 
required to be reported under Notice 98-17. Reporting of cash transfers 
will help to ensure that any earnings and appreciation attributable to 
the cash are reported by the U.S. transferor, and help to prevent 
United States persons from avoiding the rules applicable to foreign 
trusts. As noted above with respect to cash contributions to foreign 
corporations, Treasury and the IRS are interested in receiving comments 
on specific issues in addition to general comments on this requirement.

Information Required

    The proposed regulations would require a United States person to 
provide certain information with respect to property transferred in a 
reportable contribution. Appreciated property and intangible property 
must be listed item by item on the Form 8865. Other items of property 
may be aggregated and listed according to the following categories: (1)

[[Page 48151]]

inventory; (2) other tangible trade or business property; (3) cash; (4) 
securities; and (5) other property.
    The proposed regulations provide that a United States person 
reporting a transfer to a foreign partnership under section 6038B must 
identify the other partners in the partnership. This allows the IRS, 
for example, to determine whether built-in gain is being properly 
allocated to and recognized by the U.S. transferor under section 
704(c). The proposed regulations except from this rule a United States 
person only required to report because of a transfer of cash, if the 
transferor holds less than a 10-percent interest in the partnership 
immediately following the transfer.

Time and Place for Filing

    The proposed regulations would require Form 8865 to be filed with 
the United States person's income tax return (including a partnership 
return of income) for the year in which the reportable contribution 
occurs. However, if the transferor is also required to report under 
proposed regulation Sec. 1.6038-3(a), then the transfer must be 
reported on the Form 8865 (and filed in accordance with Secs. 1.6038-
3(e) and (h)) for the foreign partnership's taxable year in which the 
reportable contribution occurs. Additionally, if required by the 
instructions to Form 8865, a duplicate Form 8865 must also be filed. 
The proposed regulations would provide alternative filing deadlines 
with respect to reportable contributions that occur on or before the 
date final regulations on this subject are published in the Federal 
Register (see Effective Dates portion of this preamble).

Failure to Provide Information

    Section 6038B(c)(1) and the proposed regulations provide that a 
failure by the transferor to properly report a transfer that is 
required to be reported under section 6038B and these regulations is 
subject to a penalty equal to 10 percent of the fair market value of 
the property transferred. This penalty is subject to a $100,000 limit 
under section 6038B(c)(3), unless the failure is due to intentional 
disregard. In addition, the transferor must recognize gain (reduced by 
gain recognized, with respect to that property, by the transferor after 
the transfer) as if the property had been sold for its fair market 
value at the time of the transfer. In addition, section 6501(c)(8) 
keeps the statute of limitations open with respect to the transferor in 
the case of a failure to report. Any adjustments to the basis of the 
partnership or any partner (direct or indirect) as a result of the gain 
recognized under this provision, shall be made as though the gain was 
recognized in the year in which the failure to report was finally 
determined. Section 6038B(c)(2) and the proposed regulations provide a 
reasonable cause exception to the penalty and gain recognition 
provisions.

Effective Dates

    The amendments to the regulations on the reporting of cash 
transfers to foreign corporations apply to taxable years beginning 
after these regulations are published as final regulations in the 
Federal Register.
    The proposed regulations on the reporting of transfers to foreign 
partnerships apply to transfers made on or after January 1, 1998. 
Notice 98-17 (1998-11 I.R.B. 6) provides reporting requirements for 
transfers made after August 5, 1997, and before January 1, 1998. The 
proposed regulations would permit United States persons who made 
transfers in that period to rely on either Notice 98-17 or the final 
regulations.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in EO 12866. Therefore, 
a regulatory assessment is not required. It has also been determined 
that section 553(b) of the Administrative Procedure Act (5 U.S.C. 
chapter 5) does not apply to these proposed regulations. It is hereby 
certified that the collection of information contained in these 
proposed regulations will not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that the amount of time required to complete the form and file 
the information required under these regulations is brief and will not 
have a significant impact on those small entities that are required to 
provide notification. Furthermore, the number of small entities that 
will be required to file the form is not significant. Accordingly, a 
Regulatory Flexibility Analysis under the Regulatory Flexibility Act (5 
U.S.C. chapter 6) is not required. Pursuant to section 7805(f) of the 
Internal Revenue Code, these regulations will be submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on their impact on small business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be give to any written comments (preferably a signed 
original and eight (8) copies) that are submitted timely to the IRS. 
All comments will be made available for public inspection and copying.
    A public hearing has been scheduled for Tuesday, November 10, 1998, 
at 10 a.m., in room 2615, Internal Revenue Building, 1111 Constitution 
Avenue NW., Washington, DC. Because of access restrictions, visitors 
will not be admitted beyond the Internal Revenue Building lobby more 
than 15 minutes before the hearing starts.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons that wish to present oral comments at the hearing must 
submit written comments and an outline of the topics to be discussed 
(preferably a signed original and eight (8) copies) by October 20, 
1998.
    A period of 10 minutes will be allotted for each person making 
comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.
    Drafting Information. The principal authors of these proposed 
regulations are Christopher Kelley and Philip Tretiak of the Office of 
Associate Chief Counsel (International). However, other personnel from 
the IRS and Treasury Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 is amended by adding 
an entry in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 *  *  *

Section 1.6038B-1 also issued under 26 U.S.C. 6038B.
Section 1.6038B-2 also issued under 26 U.S.C. 6038B. *  *  *

    Par. 2. Section 1.6038B-1 is amended as follows:
    1. The section heading is revised.
    2. Paragraph (b)(1)(i), first sentence, is revised.
    3. The text of paragraph (b)(3) is added.
    4. Paragraph (c), first sentence, is revised.
    5. Paragraph (g) is revised.
    The additions and revisions read as follows:

[[Page 48152]]

Sec. 1.6038B-1  Reporting of certain transfers to foreign corporations.

* * * * *
    (b) Time and manner of reporting--(1) In general--(i) Reporting 
procedure. Except for stock or securities qualifying under the special 
reporting rule of paragraph (b)(2) of this section, or cash, which is 
subject to special rules contained in paragraph (b)(3) of this section, 
any U.S. person that makes a transfer described in section 
6038B(a)(1)(A), 367 (d) or (e)(1) is required to report pursuant to 
section 6038B and the rules of this section and must attach the 
required information to Form 926 ``Return by Transferor of Property to 
a Foreign Corporation''. *  *  *
* * * * *
    (3) Special rule for transfers of cash. A U.S. person that 
transfers cash must report the transfer of cash to a foreign 
corporation if--
    (i) Such U.S. person holds (immediately after the transfer) 
directly or indirectly (determined under the rules of sections 318(a) 
and 6038(e)(2)) at least 10 percent of the total voting power or the 
total value of the foreign corporation; or
    (ii) The amount of cash transferred by such person or any related 
person (determined under section 267(b)) to such foreign corporation or 
a related foreign corporation during the 12-month period ending on the 
date of the transfer exceeds $100,000.
* * * * *
    (c) Information required with respect to transfers described in 
section 6038B(a)(1)(A). A U.S. person that transfers property to a 
foreign corporation in an exchange described in section 6038B(a)(1)(A) 
(including cash and other unappreciated property) must provide the 
following information, in paragraphs labeled to correspond with the 
number or letter set forth in this paragraph (c) and Sec. 1.6038B-1T(c) 
(1) through (5). *  *  *
* * * * *
    (g) Effective dates. This section applies to transfers occurring on 
or after July 20, 1998, except the first sentence of paragraph 
(b)(1)(i), paragraph (b)(3), and the first sentence of paragraph (c) 
apply to taxable years beginning after the date that final regulations 
are published in the Federal Register. See Sec. 1.6038B-1T for 
transfers occurring prior to July 20, 1998.
    Par. 6. Section 1.6038B-2 is added to read as follows:


Sec. 1.6038B-2  Reporting of certain transfers to foreign partnerships.

    (a) Reporting requirements--(1) Requirement to report transfers. 
Any United States person that makes a transfer to a foreign partnership 
in a contribution described in section 721 is required to report 
pursuant to section 6038B and the rules of this section by filing Form 
8865 ``Information Return of U.S. Persons With Respect To Certain 
Foreign Partnerships'' attached to the transferor's income tax return 
(including a partnership return of income) for the taxable year that 
includes the date of the transfer by the due date (including 
extensions) for that return, if--
    (i) The United States person holds (immediately after the transfer) 
directly or indirectly at least a 10-percent interest in the 
partnership; or
    (ii) The value of the property transferred, when added to the value 
of the property transferred by such person or any related person 
(described in section 267(b) or 707(b)(1)) to such partnership or a 
related partnership (described in section 707(b)(1)(B)) during the 12-
month period ending on the date of the transfer, exceeds $100,000. For 
purposes of determining the relevant amounts, there shall also be taken 
into account the value of any property transferred in a transfer not 
subject to section 721, where a principal purpose of such transfer was 
the avoidance of these reporting requirements.
    (2) Requirement to report dispositions--(i) In general. If a United 
States person was required to report a transfer to a foreign 
partnership under paragraph (b)(1) of property with a fair market value 
in excess of basis (built-in gain property), and the partnership 
disposes of the property while such United States person remains a 
partner, that United States person must report the disposition by 
filing Form 8865. The form must be attached to, and filed by the due 
date (including extensions) of, the transferor's income tax return for 
the year in which the disposition occurred.
    (ii) Disposition of property in nonrecognition transaction. If a 
foreign partnership disposes of contributed built-in gain property in a 
nonrecognition transaction and substituted basis property is received 
in exchange, and the substituted basis property has built-in gain under 
Sec. 1.704-3(a)(8), the transferor must report the disposition of the 
substituted basis property in the same manner as provided for the 
contributed property.
    (3) Returns to be made--(i) Separate returns for each partnership. 
If a United States person transfers property to more than one foreign 
partnership in a taxable year, a separate return must be made by the 
United States for each partnership.
    (ii) Duplicate form to be filed. If required by the instructions to 
Form 8865, a duplicate Form 8865 (including attachments and schedules) 
must also be filed.
    (4) Time for filing when transferor also required to report under 
Sec. 1.6038-3(a). If the United States person required to file under 
this section is also required to file under Sec. 1.6038-3(a) for the 
period in which the transfer occurs, then the United States person must 
report under this section on the Form 8865 for the foreign partnerships 
annual accounting period in which the transfer occurred (not its own 
taxable year) and file with its income tax return for that year as 
provided in Secs. 1.6038-3(e) and (h).
    (b) Relief for indirect transferors--(1) Requirements. A United 
States person otherwise required to file a return under this section 
with respect to a transfer to a foreign partnership need not file a 
return if all of the following conditions are met--
    (i) The person does not directly own an interest in the foreign 
partnership;
    (ii) The person is required to file a return solely by reason of 
attribution of ownership from a United States person (as determined 
under the rules of section 6038(e)(3) and the regulations thereunder); 
and
    (iii) A United States person from whom the ownership is attributed 
files all of the information required under section 6038B and this 
section with respect to the transfer.
    (2) Statement required. A United States person who does not furnish 
an information return under the provisions of paragraph (b)(1) of this 
section must file a statement with the person's income tax return--
    (i) Indicating that the filing requirement has been or will be 
satisfied;
    (ii) Identifying the person who has or will file the return;
    (iii) Identifying the IRS Service Center where the return was or 
will be filed; and
    (iv) Providing any additional information as Form 8865 and the 
accompanying instructions may require.
    (c) Information required with respect to transfers of property. In 
respect of transfers described in section 6038B(a)(1)(B), the return 
must contain information in such form or manner as Form 8865 (and its 
accompanying instructions) prescribes with respect to reportable 
events, including--
    (1) The name, address, and U.S. taxpayer identification number of 
the United States person making the transfer;
    (2) The name, U.S. taxpayer identification number (if any), and 
address of the transferee foreign

[[Page 48153]]

partnership, and the type of entity and country under whose laws the 
partnership was created or organized;
    (3) A general description of the transfer, and of any wider 
transaction of which it forms a part, including the date of transfer;
    (4) The names and addresses of the other partners in the foreign 
partnership, unless the transfer is solely of cash and the transferor 
holds less than a 10-percent interest in the transferee foreign 
partnership immediately after the transfer;
    (5) A description of the partnership interest received by the 
United States person, including a change in partnership interest;
    (6) A separate description of each item of contributed property 
that is appreciated property subject to the allocation rules of section 
704(c) (except to the extent that the property is permitted to be 
aggregated in making allocations under section 704(c)), or is 
intangible property, including its estimated fair market value and 
adjusted basis.
    (7) A description of other contributed property, not specified in 
paragraph (c)(6) of this section, aggregated by the following 
categories (with, in each case, a brief description of the property)--
    (i) Stock in trade of the transferor (inventory);
    (ii) Tangible property (other than stock in trade) used in a trade 
or business of the transferor;
    (iii) Cash;
    (iv) Stock, notes receivable and payable, and other securities; and
    (v) Other property.
    (d) Information required with respect to dispositions of property. 
In respect of dispositions, the return must contain information in such 
form or manner as Form 8865 (and its accompanying instructions) 
prescribes with respect to reportable events, including--
    (1) The date and manner of disposition;
    (2) The gain and depreciation recapture amounts, if any, realized 
by the partnership; and
    (3) Any such amounts allocated to the United States person.
    (e) Method of reporting. Except as otherwise provided on Form 8865, 
or the accompanying instructions, all amounts reported as required 
under this section must be expressed in United States currency, with a 
statement of the exchange rates used. All statements required on or 
with Form 8865 pursuant to this section must be in the English 
language.
    (f) Reporting under this section not required of partnerships 
excluded from the application of subchapter K--(1) Election to be 
wholly excluded. The reporting requirements of this section will not 
apply to any United States person in respect of an eligible partnership 
as described in Sec. 1.761-2(a) in which that United States person is a 
partner, if such partnership has validly elected to be excluded from 
all of the provisions of subchapter K of chapter 1 of the Internal 
Revenue Code in the manner specified in Sec. 1.761-2(b)(2)(i).
    (2) Deemed excluded. The reporting requirements of this section 
will not apply to any United States person in respect of an eligible 
partnership as described in Sec. 1.761-2(a) in which that United States 
person is a partner, if such partnership is validly deemed to have 
elected to be excluded from all of the provisions of subchapter K of 
chapter 1 of the Internal Revenue Code in accordance with the 
provisions of Sec. 1.761-2(b)(2)(ii).
    (g) Deemed contributions. If by reason of an adjustment under 
section 482 or otherwise, a contribution required to be reported under 
section 6038B(a)(1)(B) and this section is deemed to have been made, 
the information required to be reported will be furnished timely if 
filed by the due date (including extensions) of, the taxable year 
during which the adjustment is made.
    (h) Failure to comply with reporting requirements--(1) Consequences 
of failure. If a United States person is required to file a return 
under paragraph (a) of this section and fails to comply with the 
reporting requirements of section 6038B and this section, then--
    (i) The United States person is subject to a penalty equal to 10 
percent of the fair market value of the property at the time of the 
contribution;
    (ii) The United States person will recognize gain (reduced by the 
amount of any gain recognized, with respect to that property, by the 
transferor after the transfer) as if the contributed property had been 
sold for fair market value at the time of the contribution; and
    (iii) Adjustments to the basis of the partnership and any relevant 
partner as a result of gain being recognized under this provision will 
be made as though the gain was recognized in the year in which the 
failure to report was finally determined.
    (2) Failure to comply. A failure to comply with the requirements of 
section 6038B includes--
    (i) The failure to report at the proper time and in the proper 
manner any information required to be reported under the rules of this 
section; and
    (ii) The provision of false or inaccurate information in purported 
compliance with the requirements of this section.
    (3) Reasonable cause exception. Under section 6038B(c)(3) and this 
section, the provisions of paragraph (h)(1) of this section will not 
apply if the transferor shows that a failure to comply was due to 
reasonable cause and not willful neglect. The transferor may attempt to 
do so by providing a written statement to the district director having 
jurisdiction of the taxpayer's return for the year of the transfer, 
setting forth the reasons for the failure to comply. Whether a failure 
to comply was due to reasonable cause will be determined by the 
district director under all facts and circumstances.
    (4) Limitation on penalties. The penalty under paragraph (h)(1)(i) 
of this section with respect to any transfer cannot exceed $100,000, 
unless the failure to comply with respect to such transfer was due to 
intentional disregard.
    (5) Statute of limitations. For exceptions to the limitations on 
assessment and collection in the event of a failure to provide 
information under section 6038B, see section 6501(c)(8).
    (i) Definitions--(1) 10-percent interest. 10-percent interest is 
defined in sections 6046A(d) and 6038(e)(3)(C) and the regulations 
thereunder.
    (2) United States person. United States person is defined in 
section 7701(a)(30).
    (3) Foreign partnership. Foreign partnership is defined in section 
7701(a)(2) and (5).
    (4) Substituted basis property. Substituted basis property is 
defined in section 7701(a)(42).
    (5) Value of the property transferred. Under section 6038B and this 
section, the value of the property transferred is the fair market value 
of the property at the time of its transfer.
    (j) Effective dates--(1) In general. This section applies to 
transfers made on or after January 1, 1998. However, for a transfer 
made prior to the date final regulations are published in the Federal 
Register, Form 8865 will be considered timely filed with respect to a 
transfer if filed with the taxpayer's income tax return for the first 
taxable year beginning after the date that final regulations are 
published in the Federal Register.
    (2) Transfers after August 5, 1997 and before January 1, 1998. A 
U.S. person who made a transfer of property required to be reported 
under section 6038B prior to the effective date of these regulations 
may satisfy its reporting

[[Page 48154]]

requirements by reporting in accordance with the provisions of this 
section.
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
[FR Doc. 98-23882 Filed 9-8-98; 8:45 am]
BILLING CODE 4830-01-U