[Federal Register Volume 64, Number 248 (Tuesday, December 28, 1999)]
[Rules and Regulations]
[Pages 72545-72554]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-32695]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 8850]
RIN 1545-AV69


Information Reporting With Respect to Certain Foreign 
Partnerships and Certain Foreign Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final regulations under section 6038 of 
the Internal Revenue Code relating to information reporting 
requirements for United States persons owning interests in controlled 
foreign partnerships (CFPs). This document also contains

[[Page 72546]]

amendments to the final regulations under section 6038 relating to the 
reporting requirements of U.S. shareholders of certain foreign 
corporations and amendments to the final regulations under section 
6038B relating to the reporting requirements with respect to transfers 
of property to foreign partnerships and to foreign corporations.

DATES: Effective Dates: These regulations are effective December 29, 
1999, except that Sec. 1.6038B-2(a)(5) is effective January 1, 2000.
    Applicability Dates: For dates of applicability, see Secs. 1.6038-
2(l), 1.6038-3(l), and 1.6038B-2(c)(4) and (j)(3).

FOR FURTHER INFORMATION CONTACT: Eliana Dolgoff, (202) 622-3860 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in these final regulations 
have been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control numbers 1545-1615, 1545-1617, and 1545-1317. 
Responses to these collections of information are mandatory.
    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.
    The burden of complying with the collection of information required 
to be reported on Form 8865 is reflected in the burden for Form 8865.
    The burden of complying with the collection of information required 
to be reported on Form 5471 is reflected in the burden for Form 5471.
    The burden of complying with the collection of information required 
to be reported on Form 926 is reflected in the burden for Form 926.
    The estimated annual burden per respondent of complying with the 
collection of information in Sec. 1.6038-3(c)(1)(ii)(B) and (2)(ii)(B) 
varies from .5 hours to 1.5 hours, depending on individual 
circumstances, with an estimated average of 1 hour.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, 
Washington, DC 20224, and to the Office of Management and Budget, Attn: 
Desk Officer of the Department of the Treasury, Office of Information 
and Regulatory Affairs, Washington, DC 20503.
    Books or records relating to this 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

    On September 9, 1998, the IRS published in the Federal Register (63 
FR 48144) proposed regulations relating to the reporting requirements 
under section 6038 of United States persons that are direct or indirect 
partners of CFPs. A public hearing on the proposed regulations was held 
on November 10, 1998, even though no requests to speak at the hearing 
were received. Though no comments were made at the hearing, written 
comments were received. After consideration of all of the written 
comments, the proposed regulations under section 6038 are adopted as 
revised by this Treasury decision. The revisions are discussed in the 
Summary of Public Comments and Explanation of Revisions section of this 
preamble. This document also contains amendments to certain other final 
regulations. These amendments are also discussed below.

Summary of Public Comments and Explanation of Revisions

A. General Comments Regarding the Proposed Section 6038 CFP Regulations

    Some commentators suggested that the final regulations should 
exempt state and local government employee retirement plans from the 
section 6038 reporting requirements. The final regulations provide that 
trusts relating to state and local government employee retirement plans 
are not required to report under section 6038, unless required to do so 
in the instructions to Form 8865, ``Return of U.S. Persons with Respect 
to Certain Foreign Partnerships.''
    One commentator asserted that the reasonable cause exception to the 
section 6038 penalties appears to apply only to failures to file Form 
8865 and therefore would not protect a taxpayer who files an incomplete 
Form 8865 because the taxpayer was unable to obtain all the required 
information from the foreign partnership. The reasonable cause 
exception has been modified to make clear that it applies to both a 
failure to file Form 8865 and to a failure to submit all information 
required to be submitted.
    Commentators requested that the final regulations provide that the 
section 6038 penalties do not apply when there is minor noncompliance 
with the reporting requirements under section 6038. The commentators 
expressed concern that taxpayers will be subject to penalties for small 
discrepancies in the information reported and suggested that the 
penalties apply only if there is a substantial failure to report the 
required information, or if materially false or inaccurate information 
is submitted. Because the IRS and Treasury believe adding such a 
standard might encourage taxpayers to submit incomplete Forms 8865, the 
standard was not added to the final regulations. A taxpayer may, 
nonetheless, avoid application of the section 6038 penalties because of 
minor noncompliance with the section 6038 reporting requirements by 
demonstrating reasonable cause. See Sec. 1.6038-3(k)(4).
    Commentators also requested that the IRS add additional, specific 
reasonable cause exceptions to the section 6038 penalties. For example, 
one commentator requested a specific exception be provided for 
controlling ten-percent partners (see definition in Sec. 1.6038-
3(a)(2)) that are unable to obtain all information required to be 
reported by controlling ten-percent partners. The final regulations do 
not contain additional, specific reasonable cause exceptions. Whether 
there is reasonable cause depends on all the facts and circumstances of 
the particular case. Any person who is unable to obtain information may 
apply for a reasonable cause determination specific to that person's 
situation.
    Finally, a commentator asked that in the case of an affiliated 
group of corporations filing a consolidated income tax return, the 
final regulations not require the members to file separate Forms 8865 
if one member of the group files Form 8865. The final regulations adopt 
this recommendation. The common parent corporation of an affiliated 
group of corporations filing a consolidated income tax return may file 
one Form 8865 on behalf of all other members of the group required to 
file Form 8865 pursuant to section 6038 with respect to a particular 
foreign partnership.

B. Section 6038/Section 6031 Overlap

    Some commentators requested that the final regulations address the 
potential overlap between section 6031 and section 6038. In general, 
section 6031(e) provides that a foreign partnership must file Form 
1065, ``U.S. Partnership Return of Income,'' if it has gross income 
derived from sources within the United States or gross income that is 
effectively connected

[[Page 72547]]

with the conduct of a trade or business within the United States.
    Section 6038 provides generally that a U.S. partner of a foreign 
partnership must file Form 8865 with respect to that partnership if the 
partner individually, or collectively with other ten-percent or greater 
U.S. partners, owns more than a fifty-percent interest in the 
partnership. Therefore, in some cases, both Forms 1065 and 8865 would 
be required to be filed with regard to the same partnership for the 
same tax year of the partnership. Although the two forms are not 
identical, and one is filed by the partnership while the other is filed 
by the relevant partners, the information required by the two forms is 
substantially the same.
    Additionally, some confusion may result from the fact that the two 
forms contain similarly titled schedules. In particular, each form has 
a Schedule K-1 on which information about a partner's distributive 
share of partnership income, deductions, etc., is to be reported. The 
IRS is working to eliminate discrepancies between the two schedules. 
However, even if the discrepancies are eliminated, it is still possible 
the two schedules will not contain identical information because one 
schedule will be prepared by a partner and one will be prepared by the 
partnership.
    In response to the comments that the overlap between section 6031 
and section 6038 reporting will be burdensome to taxpayers when both 
sets of requirements apply, and to help avoid any confusion on the part 
of taxpayers with respect to which Schedule K-1 they should use to 
compute their tax liabilities, the final section 6038 regulations 
reduce the burden imposed by section 6038 in the case of an overlap. 
They provide that if a foreign partnership completes and files Form 
1065, a U.S. person required to report under section 6038 must use a 
copy of the filed Form 1065, including the Schedules K-1, in 
conjunction with fulfilling the person's section 6038 reporting 
obligation. Specifically, the instructions to Form 8865 will state 
which schedules on Form 1065 are considered equivalent to schedules on 
Form 8865. A U.S. partner must attach to the partner's Form 8865 a copy 
of the Form 1065 schedules that are considered equivalent to the 
schedules the partner is required to complete on Form 8865 as a 
controlling fifty-percent partner (see definition in Sec. 1.6038-
3(a)(1)) or as a controlling ten-percent partner. A partner should not 
complete a schedule on Form 8865 when the partner attaches a copy of 
the equivalent Form 1065 schedule to its Form 8865. Should a schedule 
on Form 8865 ask for information that is not required to be reported on 
the equivalent Form 1065 schedule, the partner is not required to 
report that information on its Form 8865 if a copy of the completed 
equivalent Form 1065 schedule is attached to its Form 8865. A partner 
attaching copies of schedules from Form 1065 to its Form 8865 must 
still complete the parts of Form 8865 that the person is required to 
complete as a controlling fifty-percent partner, or as a controlling 
ten-percent partner, and for which there is no equivalent Form 1065 
schedule (for example, a partner must still complete the first page of 
Form 8865 and certain schedules on page two of the form).
    An example of how a person will use a completed Form 1065 to 
fulfill its section 6038 filing obligation is as follows. Section 
1.6038-3(g)(2)(iii) requires a controlling fifty-percent partner to 
report aggregate information about the partners' distributive shares of 
income, gain, losses, deductions and credits. Such information is 
reported on Schedule K of Form 8865. The same information is also 
required to be submitted on Schedule K of Form 1065. The instructions 
to Form 8865 will provide that Schedules K on Forms 1065 and 8865 are 
equivalent. Accordingly, if the partnership completes and files a Form 
1065, a controlling fifty-percent partner filing Form 8865 must attach 
a copy of the Schedule K from the Form 1065 to the partner's Form 8865 
and should not complete Schedule K on Form 8865. The partner must also 
attach all other Form 1065 schedules that are considered equivalent to 
Form 8865 schedules that the partner must complete as a controlling 
fifty-percent partner. Additionally, the partner must still complete 
page one of Form 8865 and Schedules A ``Constructive Ownership of 
Partnership Interest,'' A-1 ``Certain Partners of Foreign 
Partnership,'' A-2 ``Affiliation Schedule,'' and N ``Transactions 
Between Controlled Foreign Partnership and Partners or Other Related 
Entities'' of Form 8865.
    Similarly, a controlling ten-percent partner must submit on 
Schedule K-1 of Form 8865 a statement of the income, gain, losses, 
deductions and credits allocated to the partner's direct interest in 
the partnership. See Sec. 1.6038-3(g)(1)(i). The same information is 
also required to be reported on Schedule K-1 of Form 1065. Therefore, 
if the partnership completes and files Form 1065, the partner must 
attach to its Form 8865 a copy of its Schedule K-1 from the Form 1065 
completed by the partnership and should not complete Schedule K-1 on 
Form 8865. The partner is still required to complete the portions of 
pages one and two of Form 8865 applicable to controlling ten-percent 
partners, as well as Schedule N.
    Another comment asserted that the proposed regulations imposed an 
excessive reporting burden on taxpayers and that they had the effect of 
nullifying the section 6031(e) limitation on reporting required of 
foreign partnerships. The comment suggested that the IRS require only 
those items specifically enumerated in section 6038(a)(1) to be 
reported under section 6038.
    Section 6038 grants the IRS authority to require taxpayers to 
submit more than the items enumerated in section 6038(a)(1). Section 
6038 provides that the Secretary may require the furnishing of any 
other information that is similar or related in nature to that 
specified in the first sentence of section 6038(a)(1), or which the 
Secretary determines to be appropriate to carry out the provision of 
Title 26. The IRS has determined that all of the information that the 
final section 6038 regulations require taxpayers to submit is necessary 
for the IRS to carry out the provisions of Title 26.
    Additionally, as explained above, section 6031(e) and section 6038 
differ with respect to whom they require to report and when the 
reporting obligation applies. Section 6031(e) applies only to the 
requirement that a Form 1065 be filed, to the application of the TEFRA 
partnership-level audit procedures, and to the requirement that a 
partnership report information about its operations, even when there is 
limited U.S. ownership in the partnership. In contrast, section 6038 
requires certain U.S. partners to report information when the foreign 
partnership in which they own an interest has substantial U.S. 
ownership. Section 6031(e) was added to the Internal Revenue Code at 
the same time that section 6038 was amended to apply to CFPs. See 
Taxpayer Relief Act of 1997, Public Law 105-34, sections 1141-1142 (111 
Stat. 983) (1997). Therefore, rather than intending section 6031(e) to 
limit the amount of information required to be reported pursuant to 
section 6038, Congress intended the two provisions to work together to 
ensure that the IRS receives sufficient information about foreign 
partnerships.

C. Tiered Partnerships

    Commentators requested that section 6038 reporting apply only to 
first-tier CFPs, i.e., section 6038 reporting should only be required 
of U.S. persons with respect to foreign partnerships in which

[[Page 72548]]

they own a direct interest. However, section 6038(e)(3)(B) provides 
that rules similar to the rules of section 267(c) shall apply when 
determining whether a person owns a fifty-percent interest in a foreign 
partnership. Additionally, the statute does not require that a U.S. 
person own its interest in the CFP directly. Therefore, the final 
regulations require section 6038 reporting of United States persons 
whose ownership interests are entirely the result of constructive 
ownership from other persons.
    Nevertheless, certain exceptions and modifications to this rule may 
apply. Persons that do not own direct interests may qualify for a 
reduced reporting obligation pursuant to the exception for constructive 
owners in Sec. 1.6038-3(c)(2). Additionally, certain information 
required by the final section 6038 regulations must be submitted only 
if the partner owns a direct interest in the foreign partnership. For 
example, Sec. 1.6038-3(g)(1)(i) provides that the person reporting 
under section 6038 must provide a statement of the income, gain, 
losses, deductions and credits allocated to that person's direct 
interest in the partnership. Accordingly, if a person is reporting 
under section 6038 but owns no direct interest in the partnership, that 
person will not have to submit information under Sec. 1.6038-
3(g)(1)(i). Finally, the final regulations require attribution from 
nonresident alien family members only if the person to whom the 
interest is being attributed already owns a direct or indirect (under 
the rules of section 267(c)(1) or (5)) interest in the partnership. See 
Sec. 1.6038-3(b)(4).

D. Failure To Recognize That an Arrangement Is a Partnership or That a 
Partnership Is a Foreign Partnership

    Commentators expressed concern that taxpayers might fail to report 
under section 6038 because they failed to recognize that their 
arrangement constituted a partnership. Additionally, if no entity is 
formed under foreign law, but a partnership is determined to exist, it 
may be difficult to determine whether the partnership is foreign or 
domestic. Some commentators recommended that the IRS exclude 
partnerships not formed under a foreign law statute from the reporting 
requirements, subject to an anti-abuse rule. The final regulations do 
not adopt this recommendation and additional guidance on these issues 
is beyond the scope of this document. They do, however, provide that 
the section 6038 reporting requirements do not apply to any United 
States person with respect to a foreign partnership that has validly 
elected (or is deemed to have elected) to be excluded from the 
application of subchapter K. See Sec. 1.6038-3(e). Additionally, a 
taxpayer that does not comply with section 6038 because it mistakenly 
concluded that its arrangement was not a partnership, or that it was 
not a foreign partnership, may apply for a reasonable cause 
determination. See Sec. 1.6038-3(k)(4).

E. Section 6038 (CFPs) Effective Date

    Section 1.6038-3 is applicable to CFP tax years ending on or after 
December 31, 2000. United States persons are not required to report 
under section 6038 for CFP tax years ending before December 31, 2000.

F. Availability of Form 8865

    A United States person required to report information pursuant to 
section 6038 must do so by completing and filing Form 8865. A final 
version of Form 8865 will be released prior to January 1, 2000. 
Taxpayers will be able to download a copy of the form and its 
instructions from the IRS Internet website located at 
www.irs.ustreas.gov.

G. Clarification of Section 6501(c)(8)

    Section 6501(c)(8) provides that in the case of information 
required to be reported under section 6038, 6038A, 6038B, 6046, 6046A, 
or 6048, the time for assessment of any tax imposed by Title 26 with 
respect to any event or period to which such information relates shall 
not expire before the date that is three years after the date on which 
the Secretary is furnished the information required to be reported 
under such section. Taxpayers have expressed uncertainty about the 
application of this rule in the context of a failure to properly report 
information required under sections 6038, 6038B, or 6046A, with respect 
to an interest in a foreign corporation or a foreign partnership, as 
applicable. The IRS and Treasury wish to clarify that if a U.S. person 
fails to comply with sections 6038, 6038B, or 6046A, the extended 
statute of limitations provided by section 6501(c)(8) shall apply only 
to the tax consequences related to the information required to be 
reported under the relevant reporting section and not to all 
transactions within the U.S. person's tax year at issue. For example, 
if a U.S. person with a calendar tax year fails to comply with section 
6038 for a controlled foreign partnership's 2001 calendar tax year, 
section 6501(c)(8) will only extend the statute of limitations 
applicable to the U.S. person's 2001 tax year with respect to any tax 
consequences associated with the U.S. person's interest in the foreign 
partnership during the partnership's 2001 tax year.

H. Amendment to Final Section 6038 Foreign Corporation Regulations

    In order to reduce the burden that section 6038 imposes on 
taxpayers, this document also amends the final regulations under 
section 6038 applicable to shareholders of certain foreign 
corporations. The regulations provide that if a United States person 
does not own a direct or indirect interest in the foreign corporation, 
but is attributed an interest from a nonresident alien, the person is 
not required to report under section 6038. This amendment is effective 
for tax years of foreign corporations ending on or after December 29, 
1999.

I. Amendments to Final Section 6038B Regulations Applicable to 
Transfers of Property to Foreign Partnerships

    On February 5, 1999, the IRS published in the Federal Register 
final regulations under section 6038B relating to the information 
reporting requirements for certain contributions of property by United 
States persons to foreign partnerships. See 64 FR 5713. This document 
makes several amendments to those final regulations. Each amendment 
either reduces the burden that section 6038B imposes on taxpayers, or 
does not affect the burden imposed by section 6038B.
    First, the amount of information required to be submitted by a 
person reporting a transfer of property to a foreign partnership is 
reduced. Rather than submit the names and addresses of all the foreign 
partnership's partners, the person reporting the transfer (the 
transferor) must provide only the names and addresses of the United 
States partners that owned a ten-percent or greater direct interest in 
the foreign partnership during the transferor's tax year in which the 
reportable transfer occurred, and the names and addresses of any other 
United States or foreign persons that were direct partners in the 
partnership during that tax year and that were related to the 
transferor under section 6038B during that tax year. A person who 
transferred solely cash and who did not own a ten-percent or greater 
interest after the transfer is still not required to report the names 
and addresses of any of the foreign partnership's other partners. This 
amendment applies to tax years of U.S. persons required to report under 
section 6038B beginning on or after January 1, 2000.
    Second, this document changes the time for filing Form 8865 to 
report a transfer to a foreign partnership in

[[Page 72549]]

certain instances. Currently, Sec. 1.6038B-2(a)(5)(ii) provides that if 
a United States person required to report a transfer to a foreign 
partnership is also required to report pursuant to section 6038 for the 
period in which the transfer occurred, then the United States person 
must report the transfer on the Form 8865 completed for the 
partnership's tax year in which the transfer occurred. This document 
deletes the section 6038B/section 6038 overlap rule, so that a United 
States person must always report with its tax return for a particular 
tax year all of its section 6038B transfers that took place during that 
year, regardless of whether any of the transfers occurred during a 
period for which section 6038 reporting is also required. This 
amendment applies to tax years of U.S. persons required to report under 
section 6038B beginning on or after January 1, 2000.
    The following example illustrates this amendment. Assume the tax 
year of FPS, a foreign partnership, ends on Sept 30. US, a United 
States person and calendar year taxpayer, owns a sixty-percent interest 
in FPS and therefore is a controlling fifty-percent partner of FPS. 
Accordingly, US must report under section 6038 with respect to FPS. On 
October 15, 2001, US transfers property to FPS in a section 721 
transaction. US is required to report this transfer under section 6038B 
because US owns at least a ten-percent interest in the partnership 
immediately after the transfer. See Sec. 1.6038B-2(a)(1)(i). Under the 
existing section 6038B regulations, US is required to report the 
October 15, 2001 property transfer on the Form 8865 for FPS's tax year 
ending September 30, 2002, that will be filed with US's 2002 income tax 
return.
    Under the amendments to section 6038B contained in this document, 
US must attach to its 2001 income tax return a Form 8865 on which is 
reported the October 15, 2001 property transfer and information about 
FPS for FPS's tax year ending September 30, 2001. Assuming US is also a 
controlling fifty-percent partner during FPS's tax year ending 
September 30, 2002, when US files its 2002 income tax return, US must 
attach to that return Form 8865 on which is reported information about 
FPS for FPS's tax year ending September 30, 2002. US should not report 
the October 15, 2001, property transfer on the Form 8865 filed with 
US's 2002 income tax return.
    The third and final amendment to the section 6038B regulations 
provides an additional opportunity for United States persons to timely 
report certain transfers to foreign partnerships. Even if not reported 
in accordance with the rules provided in Sec. 1.6038B-2(a)(5) or (j)(1) 
or (2), a transfer to a foreign partnership that occurred before 
January 1, 2000, will nevertheless be considered timely reported if the 
transferor reports it on a Form 8865 attached to an amended tax return 
for the transferor's tax year in which the transfer occurred, provided 
such amended return is filed no later than September 15, 2000.
    Additionally, since issuing the section 6038B regulations in 
February 1999, certain tax-exempt organizations have contacted the IRS 
and Treasury to request that they be specifically excluded from the 
obligation under section 6038B to report their property transfers to 
foreign partnerships. The IRS and Treasury invite comments regarding 
the extent to which section 6038B reporting should be required of tax-
exempt organizations.

J. Amendment to Final Section 6038B Regulations Applicable to Transfers 
of Property to Foreign Corporations

    This document makes one amendment to the final section 6038B 
regulations governing the reporting requirements with respect to 
transfers to foreign corporations. The amendment reduces the burden 
that section 6038B imposes on taxpayers.
    Pursuant to Sec. 1.367(a)-3(c)(8), section 367(a) does not apply to 
a domestic corporation's transfer of its own stock or securities in 
connection with the performance of services, if the transfer is 
considered to be to a foreign corporation solely by reason of 
Sec. 1.83-6(d)(1). Section 1.83-6(d)(1) provides that if a shareholder 
of a corporation transfers property to an employee of such corporation 
in consideration of services performed for the corporation, the 
transaction is considered to be a contribution of such property to the 
capital of such corporation by the shareholder, and immediately 
thereafter a transfer of such property by the latter corporation to the 
employee.
    The final regulations under section 6038B do not contain an 
exception to the reporting requirements that corresponds to the rule in 
Sec. 1.367(a)-3(c)(8). Therefore, a transfer by a domestic corporation 
of its stock or securities to an employee of the domestic corporation's 
foreign subsidiary may be excluded from the application of section 
367(a), yet still reportable under section 6038B. This document 
provides that such a transfer is not required to be reported under 
section 6038B if the transfer is considered to be to a foreign 
corporation solely by reason of Sec. 1.83-6(d)(1) and the fair market 
value of the property transferred did not exceed $100,000. This 
amendment is effective as if it had been included in TD 8770 (63 FR 
33550), and therefore applies to transfers occurring on or after July 
20, 1998.

Special Analyses

    It has been determined that these final regulations are not a 
significant regulatory action as defined in Executive Order 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 final regulations. It is 
hereby certified that the collections of information contained in these 
final regulations will not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that the number of small entities that will be required to 
file the form is not substantial. 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 were submitted to the Chief Counsel for Advocacy of 
the Small Business Administration for comment on their impact on small 
business.
    Drafting information. The principal author of these regulations is 
Eliana Dolgoff, Office of the Associate Chief Counsel (International). 
However, other personnel from the IRS and the Treasury Department 
participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

    Par. 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.6038-2 also issued under 26 U.S.C. 6038.
    Section 1.6038-3 also issued under 26 U.S.C. 6038. * * *

    Par. 2. In Sec. 1.367(a)-3, paragraph (c)(8) is amended by adding a 
sentence

[[Page 72550]]

to the end of the paragraph to read as follows:


Sec. 1.367(a)-3  Treatment of transfers of stock or securities to 
foreign corporations.

* * * * *
    (c) * * *
    (8) * * * The transfer may still, however, be reportable under 
section 6038B. See Sec. 1.6038B-1(b)(2)(i)(A)(4) and (b)(2)(i)(B)(4).
* * * * *
    Par. 3. Section 1.6038-2 is amended as follows:
    1. A sentence is added to the end of paragraph (j)(2)(i)(C).
    2. Paragraph (l) is added.
    The revised and added provisions read as follows:


Sec. 1.6038-2  Information returns required of United States persons 
with respect to annual accounting periods of certain foreign 
corporations beginning after December 31, 1962.

* * * * *
    (j) * * *
    (2) * * *
    (i) * * *
    (C) * * * (For a rule regarding attribution from a nonresident 
alien, see paragraph (l) of this section).
* * * * *
    (l) Other persons excepted from filing. For tax years of foreign 
corporations ending on or after December 29, 1999, any person required 
to furnish information under this section with respect to a foreign 
corporation does not have to furnish that information if the following 
conditions are met--
    (1) Such person does not own a direct or indirect interest in the 
foreign corporation; and
    (2) Such person is required to furnish information solely by reason 
of attribution of stock ownership from a nonresident alien(s) under 
paragraph (c) of this section.
    Par. 4. Section 1.6038-3 is added to read as follows:


Sec. 1.6038-3  Information returns required of certain United States 
persons with respect to controlled foreign partnerships (CFPs).

    (a) Persons required to make return--(1) Controlling fifty-percent 
partners. The term controlling fifty-percent partner means a United 
States person that controlled (as defined in paragraph (b)(1) of this 
section) the foreign partnership at any time during the partnership's 
tax year (as defined in paragraph (b)(8) of this section). Except as 
provided in paragraph (c), (d), or (e) of this section, for each tax 
year of a foreign partnership during which the partnership has one or 
more controlling fifty-percent partners, each controlling fifty-percent 
partner must complete and file Form 8865, ``Return of U.S. Persons With 
Respect To Certain Foreign Partnerships,'' containing the information 
described in paragraph (g) of this section.
    (2) Controlling ten-percent partners. If at any point during a 
foreign partnership's tax year (as defined in paragraph (b)(8) of this 
section) a United States person owned a ten-percent or greater interest 
in the partnership while the partnership was controlled by United 
States persons owning ten-percent or greater interests, such United 
States person is a controlling ten-percent partner. See paragraph 
(b)(1) of this section for the definition of control. However, a United 
States person is not a controlling ten-percent partner with respect to 
a particular foreign partnership for a particular tax year of the 
foreign partnership if at any point during that year the partnership 
had a controlling fifty-percent partner, as defined in paragraph (a)(1) 
of this section. Except as provided in paragraph (c), (d), or (e) of 
this section, for each tax year of a partnership during which the 
partnership has controlling ten-percent partners, each controlling ten-
percent partner must complete and file Form 8865 containing the 
information described in paragraph (g)(1) of this section.
    (3) Separate returns for each partnership. A United States person 
required to report under this paragraph (a) must file a separate Form 
8865 for each foreign partnership with respect to which the person is a 
controlling fifty-percent partner or a controlling ten-percent partner.
    (b) Ownership determinations and definitions--(1) Control. Control 
of a foreign partnership is ownership of more than a fifty-percent 
interest in the partnership.
    (2) Fifty-percent interest. A fifty-percent interest in a 
partnership is an interest equal to fifty percent of the capital 
interest in such partnership, an interest equal to fifty percent of the 
profits interest in such partnership, or an interest to which fifty 
percent of the deductions or losses of such partnership are allocated.
    (3) Ten-percent interest. A ten-percent interest in a partnership 
is an interest equal to ten percent of the capital interest in such 
partnership, an interest equal to ten percent of the profits interest 
in such partnership, or an interest to which ten percent of the 
deductions or losses of such partnership are allocated.
    (4) Constructive ownership rules. For purposes of determining an 
interest in a partnership, the constructive ownership rules of section 
267(c) (other than section 267(c)(3)) apply, taking into account that 
such rules refer to corporations and not to partnerships. However, an 
interest will be attributed from a nonresident alien under the family 
attribution rules of section 267(c)(2) and (4) only if the person to 
whom the interest is attributed owns a direct or indirect (under the 
rules of 267(c)(1) or (5)) interest in the foreign partnership.
    (5) Determination of amount of interest. Whether a person owns a 
fifty-percent interest, or a ten-percent interest, as described in 
paragraphs (b)(2) and (3) of this section, is determined for each tax 
year of the foreign partnership by reference to the agreement of the 
partners relating to such interests during that tax year.
    (6) Definition of United States person. The term United States 
person is defined in section 7701(a)(30).
    (7) Definition of a foreign partnership. A foreign partnership is a 
partnership described in section 7701(a)(5).
    (8) Tax year of a foreign partnership. The tax year of a foreign 
partnership is determined under section 706.
    (9) Examples. The rules of paragraph (a) of this section and this 
paragraph (b) are illustrated by the following examples:

    Example 1. Sole U.S. partner does not own more than a fifty-
percent interest. No United States person owns any interest 
(directly or constructively) in FPS, a foreign partnership whose tax 
year under section 706 is the calendar year. On January 1, 2001, US, 
a United States person with the calendar year as its tax year, 
contributes property to FPS in exchange for a 40% interest in a 
section 721 transaction. No United States persons acquire directly 
or constructively any other interests in FPS during FPS's 2001 tax 
year. US is not a controlling fifty-percent partner during FPS's 
2001 tax year. US did not own during that tax year, either directly 
or constructively, more than a 50% interest in the partnership under 
paragraphs (b)(2) and (4) of this section. Also, US is not a 
controlling ten-percent partner; although US owned a 10% or greater 
interest, US persons owning at least 10% interests did not control 
FPS. Therefore, US does not have to file with its 2001 income tax 
return a Form 8865 with respect to FPS under section 6038. (But see 
section 6038B for the reporting obligations of US with respect to 
its transfer of property to FPS and section 6046A for the reporting 
obligation of US with respect to its acquisition of an interest in 
FPS. See also Sec. 1.6046A-1(e)(1) regarding the overlap between 
sections 6038B and 6046A).
    Example 2. Controlling ten-percent partners. Assume the same 
facts as in Example 1. In addition, on January 1, 2002, US1, a 
United States person unrelated to US and a calendar year taxpayer, 
purchases a 15% interest in FPS from a foreign partner of FPS. 
Neither US nor US1 is a controlling fifty-percent partner during 
FPS's 2002 tax

[[Page 72551]]

year because neither one owns more than a 50% percent interest in 
FPS during that year. However, US and US1 are controlling ten-
percent partners for that year because each owns at least a 10% 
interest (US owns a 40% interest and US1 owns a 15% interest) and 
together they control FPS because collectively they own more than a 
50% interest in FPS. As controlling ten-percent partners, under 
section 6038, each is required to file a Form 8865 with its 2002 
income tax return. (US1 must also report its acquisition of the 15% 
interest in FPS under section 6046A on its Form 8865 filed with its 
2002 income tax return.)
    Example 3. Constructive ownership rules. Assume the same facts 
as in Example 2. In addition, on January 1, 2003, US2, a United 
States person and the brother of US, purchases 50% of the stock of 
FC, a foreign corporation. FC owns a 20% interest in FPS. Thus, 
under sections 6038(e)(3) and 267(c)(1), US2 indirectly owns a 10% 
interest in FPS (10% is US2's proportionate share of FC's 20% 
interest in FPS), and under sections 6038(e)(3) and 267(c)(2), US2 
is attributed US's 40% interest. Additionally, US directly owns a 
40% interest in FPS and is attributed US2's 10% interest pursuant to 
section 6038(e)(3) and section 267(c)(2). Therefore, US2 is 
considered to own a 50% interest (10% indirectly and 40% from US) in 
FPS, and US is considered to own a 50% interest in FPS (40% directly 
and 10% from US2). FPS has no controlling fifty-percent partners, 
because neither US, US1, nor US2, owns a greater than 50% interest. 
However, US, US1, and US2 are each controlling ten-percent partners 
and each must file Form 8865 pursuant to section 6038 for FPS's 2003 
tax year ending December 31, 2003. Each must attach Form 8865 to its 
tax return for its 2003 tax year.
    Example 4. Controlling fifty-percent partners. Assume the same 
facts as in Example 3. In addition, on June 1, 2004, US acquires an 
additional 1% direct interest in FPS. US is now a controlling fifty-
percent partner of FPS, because US owns a 41% interest directly and 
a 10% interest constructively from US2. US2 is also a controlling 
fifty-percent partner, because US2 owns 10% indirectly and 41% 
constructively from US. Both US and US2 are required to file Form 
8865 containing all the information required to be submitted by 
controlling fifty-percent partners. (But see paragraph (c)(1) of 
this section, which contains filing exceptions when there are 
multiple controlling fifty-percent partners). US1 is no longer a 
controlling ten-percent partner because FPS now has at least one 
controlling fifty-percent partner, and US1 does not qualify as a 
controlling fifty-percent partner. Therefore, US1 is not required to 
file Form 8865 under section 6038.
    Example 5. Constructive ownership from a nonresident alien. US, 
a United States person, does not own directly or constructively an 
interest in FPS, a foreign partnership. The tax year of FPS is the 
calendar year. NRA, a nonresident alien, is the mother of US. In 
2002, NRA acquires a 55% interest in FPS. Because US owns neither a 
direct nor a constructive interest in FPS under sections 6038(e)(3) 
and 267(c)(1) or (5), NRA's interest is not attributed to US under 
sections 6038(e)(3) and 267(c)(2). If in 2003 NRA becomes a United 
States person, NRA's interest will be attributed to US. However, US 
is excused from filing Form 8865 if US satisfies the requirements of 
the constructive owners exception in paragraph (c)(2) of this 
section. In 2003, NRA is a controlling fifty-percent partner and 
must file a Form 8865 under section 6038 for FPS's 2003 tax year.

    (c) Exceptions when more than one United States person is required 
to file Form 8865 pursuant to section 6038--(1) Multiple controlling 
fifty-percent partners--(i) In general. If, with respect to the same 
foreign partnership for the same tax year, more than one United States 
person is a controlling fifty-percent partner, then in lieu of each 
controlling fifty-percent partner filing a separate Form 8865, only one 
Form 8865 from one of the controlling fifty-percent partners is 
required, provided all of the requirements of paragraph (c)(1)(ii) of 
this section are satisfied. A person that is a controlling fifty-
percent partner solely because of an interest to which deductions or 
losses are allocated may file the single return only if there is no 
United States person that is a controlling fifty-percent partner by 
reason of an interest in capital or profits.
    (ii) Requirements--(A) The person undertaking the filing obligation 
must file Form 8865 with that person's income tax return in the manner 
provided by Form 8865 and the accompanying instructions. The return 
must contain all of the information that would have been required to be 
reported by this section if each controlling fifty-percent partner had 
filed its own Form 8865.
    (B) Any controlling fifty-percent partner not filing Form 8865 must 
file with its income tax return a statement titled ``Controlled Foreign 
Partnership Reporting'' containing the following information--
    (1) A statement that the person qualified as a controlling fifty-
percent partner, but is not submitting Form 8865 pursuant to the 
multiple controlling fifty-percent partners exception;
    (2) The name, address, and taxpayer identification number (if any) 
of the foreign partnership of which the person qualified as a 
controlling fifty-percent partner;
    (3) A representation that the filing requirement has been or will 
be satisfied;
    (4) The name and address of the person filing the single return;
    (5) The Internal Revenue Service Center where the single return is 
required to be filed; and
    (6) Any additional information that Form 8865 and the accompanying 
instructions require.
    (iii) Penalties. If the requirements listed in paragraph (c)(1)(ii) 
of this section are not satisfied, a United States person that did not 
file a Form 8865 pursuant to this paragraph will be subject to the 
penalties in paragraph (k) of this section, unless the reasonable cause 
provision in paragraph (k)(4) of this section is satisfied.
    (2) Certain constructive owners excepted from furnishing 
information--(i) In general. A United States person that does not own a 
direct interest in the foreign partnership and that is required to file 
Form 8865 under this section solely by reason of constructive ownership 
from a United States person(s) pursuant to paragraph (b)(4) of this 
section (an indirect partner) is not required to file Form 8865 if all 
of the requirements listed in paragraph (c)(2)(ii) of this section are 
met.
    (ii) Requirements--(A) The United States person(s) whose interest 
the indirect partner constructively owns reports all the information 
such person(s) is required to submit under this section, unless such 
person also is required to file solely by reason of constructive 
ownership from a United States person(s) pursuant to paragraph (b)(4) 
of this section, or another person reports the information pursuant to 
paragraph (c)(1) of this section.
    (B) The indirect partner files with its income tax return a 
statement titled ``Controlled Foreign Partnership Reporting'' 
containing the following information--
    (1) A representation that the indirect partner was required to file 
Form 8865, but is not doing so pursuant to the constructive owners 
exception;
    (2) The names and addresses of the United States persons whose 
interests the indirect partner constructively owns;
    (3) The name and address of the foreign partnership with respect to 
which the indirect partner would have had to have filed Form 8865 but 
for this exception; and
    (4) Any additional information that Form 8865 and the accompanying 
instructions require.
    (iii) Penalties. A United States person that pursuant to this 
paragraph (c)(2) does not file a return will be subject to the 
penalties in paragraph (k) of this section if the requirements listed 
in paragraph (c)(2)(ii) of this section are not satisfied, unless such 
failure is due to reasonable cause, as defined in paragraph (k)(4) of 
this section.
    (iv) Overlap with multiple controlling fifty-percent partners 
exception--(A) If a

[[Page 72552]]

United States person qualifies for both the exception in paragraph 
(c)(1) of this section and the exception in this paragraph (c)(2), such 
person may only utilize the multiple controlling fifty-percent partners 
exception in paragraph (c)(1) of this section to avoid filing Form 
8865.
    (B) Example. The following example illustrates the operation of 
this paragraph (c)(2)(iv):

    Example. US is a U.S. citizen. US owns 100% of the stock of DC, 
a domestic corporation. DC owns a 60% direct interest in FPS, a 
foreign partnership. DC and US are the only U.S. persons that own 
interests directly or constructively in FPS. DC owns directly a 
greater than 50% interest in FPS. US constructively owns DC's 
interest pursuant to sections 6038(e)(3) and 267(c)(1). Therefore, 
both DC and US are controlling fifty-percent partners. US qualifies 
for both the exception in paragraph (c)(1) of this section (multiple 
controlling fifty-percent partners) and the exception in paragraph 
(c)(2) of this section (constructive owner exception). US may only 
utilize the paragraph (c)(1) exception to avoid its filing 
obligation. Accordingly, DC may file a single Form 8865 on behalf of 
US and itself. However, that form must contain all the information 
that would have been submitted had DC and US each submitted a 
separate Form 8865.

    (3) Members of an affiliated group of corporations filing a 
consolidated return. If one or more members of an affiliated group of 
corporations filing a consolidated return are required under section 
6038 to file a Form 8865 for a particular foreign partnership, the 
common parent corporation may file one Form 8865 on behalf of all of 
the members of the group required to report under section 6038. Except 
with respect to group members who also qualify under the exception in 
paragraph (c)(2) of this section, the Form 8865 must contain all the 
information that would have been required to be submitted if each group 
member were required to file its own Form 8865.
    (d) Exception for certain trusts. Trusts relating to state and 
local government employee retirement plans are not required to report 
under this section, unless the instructions to Form 8865 provide 
otherwise.
    (e) Reporting under this section not required with respect to 
partnerships excluded from the application of subchapter K. 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) 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), or such 
partnership is 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).
    (f) Period covered by return. The information required under this 
section must be furnished for the tax year of the foreign partnership 
ending with or within the United States person's tax year. See section 
706 for rules regarding tax years of partnerships.
    (g) Contents of return--(1) Information required to be submitted by 
controlling fifty-percent partners and controlling ten-percent 
partners. All controlling fifty-percent partners and all controlling 
ten-percent partners must submit the following information on Form 8865 
in the form and manner and to the extent prescribed by Form 8865 and 
its instructions--
    (i) A statement of the income, gain, losses, deductions and credits 
allocated to the direct interest in the partnership of the person 
reporting under section 6038;
    (ii) A list of all partnerships (foreign or domestic) in which the 
foreign partnership owned a direct interest, or owned a constructive 
interest of ten percent of more under the rules of section 267(c)(1) or 
(5), during the partnership's tax year for which the Form 8865 is being 
filed;
    (iii) Information about all foreign entities that were disregarded 
as entities separate from their owner under Secs. 301.7701-2 and 
301.7701-3 that were owned by the foreign partnership during the 
partnership's tax year for which the Form 8865 is being filed;
    (iv) A summary of the transactions that took place during the 
partnership's tax year between the partnership and the person filing 
the return, between the partnership and any other partnership of which 
the person filing the return is a controlling fifty-percent partner, 
and between the partnership and any corporation controlled (under 
section 6038(e)(2) and the regulations thereunder) by the person filing 
the return; and
    (v) Any other information that Form 8865 or its accompanying 
instructions require to be submitted.
    (2) Additional information required to be submitted by controlling 
fifty-percent partners. In addition to the information required 
pursuant to paragraph (g)(1) of this section, controlling fifty-percent 
partners must also submit the following information in the form and 
manner and to the extent required by Form 8865 and its instructions--
    (i) A list of the names, addresses and tax identification numbers 
(if any) of each United States person that owned a direct interest of 
ten percent or more in the partnership during the partnership's tax 
year, and of each United States and foreign person whose interests in 
the partnership the controlling fifty-percent partner constructively 
owned under paragraph (b)(4) of this section during the partnership's 
tax year;
    (ii) A list of transactions between the partnership and any United 
States person owning at the time of the transaction at least a 10-
percent direct interest (as defined in paragraph (b)(3) of this 
section) in the foreign partnership;
    (iii) A statement of the aggregate of the partners' distributive 
shares of items of income, gain, losses, deductions and credits;
    (iv) A statement of income, gain, losses, deductions and credits 
allocated to each United States person holding a direct interest in the 
foreign partnership of ten percent or more; and
    (v) Any other information Form 8865 or its accompanying 
instructions require controlling fifty-percent partners to submit.
    (h) Method of reporting. Except as otherwise provided on Form 8865 
or the accompanying instructions, all amounts required to be furnished 
on Form 8865 must be expressed in United States dollars. All statements 
required on or with Form 8865 pursuant to this section must be in 
English.
    (i) Time and place for filing return--(1) In general. Form 8865 
must be filed with the United States person's income tax return on or 
before the due date (including extensions) of that return. If the 
United States person is not required to file an income tax return for 
its tax year with which or within which the foreign partnership's tax 
year ends, but is required to file an information return for that year 
(for example, Form 1065, ``U.S. Partnership Return of Income,'' or Form 
990, ``Return of Organization Exempt from Income Tax''), the Form 8865 
must be filed with the United States person's information return filed 
on or before the due date (including extensions) of that return.
    (2) Duplicate return. If required by the instructions to Form 8865, 
a duplicate Form 8865 (including attachments and schedules) must also 
be filed.
    (j) Overlap with section 6031--(1) In general. A partner may be 
required to file Form 8865 under this section and the foreign 
partnership in which it is a partner may also be required to file a 
Form 1065 under section 6031(e) for the same partnership tax year. 
However, if a foreign partnership completes and files Form 1065, the 
United States partner must use a copy of the relevant

[[Page 72553]]

parts of Form 1065 to fulfill certain of its filing obligations under 
section 6038. Specifically, instead of completing the Form 8865 
schedules that the person would otherwise be required to complete as a 
controlling fifty-percent or a controlling ten-percent partner, the 
person must instead attach to its Form 8865 copies of the relevant 
schedules from Form 1065 that the instructions to Form 8865 state are 
considered equivalent to schedules on Form 8865. Should a schedule on 
Form 8865 ask for information that is not required to be reported on 
the equivalent Form 1065 schedule, the partner is not required to 
report that information on its Form 8865 if a copy of the completed 
equivalent Form 1065 schedule is attached to its Form 8865. A person 
attaching copies of schedules from Form 1065 to its Form 8865 must 
still complete the parts of Form 8865 that the person is required to 
complete as a controlling fifty-percent partner, or a controlling ten-
percent partner, and for which there is no equivalent Form 1065 
schedule (for example, the first page of Form 8865).
    (2) Example. The following example illustrates the application of 
this paragraph (j):

    Example. US, a United States citizen, owns a 55% interest in 
FPS, a foreign partnership and calendar year taxpayer. Because US 
owns more than a 50% interest in FPS, US is a controlling fifty-
percent partner of FPS and must file a Form 8865 with respect to 
FPS. During 2001, FPS earns gross income that is effectively 
connected with the conduct of a trade or business within the United 
States. Therefore, pursuant to section 6031(e)(2)(B), FPS must file 
Form 1065 for its 2001 tax year. If FPS completes and files Form 
1065, US must use copies of the relevant schedules from Form 1065 to 
complete US's Form 8865 for FPS's 2001 tax year. If FPS instead had 
a September 30 tax year pursuant to section 706, then US must attach 
to its Form 1040 for US's 2001 tax year a Form 8865 completed with 
respect to FPS's tax year ending September 30, 2001. If FPS filed a 
Form 1065 for its tax year ending September 30, 2001, then US must 
use that Form 1065 to fulfill in part its reporting obligations 
under section 6038 by attaching the relevant schedules from the Form 
1065 to US's Form 8865.

    (k) Failure to comply with reporting requirement--(1) In general. 
Any United States person required to file Form 8865 under Section 6038 
and this section that fails to comply (as defined in paragraph (k)(2) 
of this section) with the reporting requirements of this section, will 
be subject to the penalties described in paragraph (k)(3) of this 
section.
    (2) Failure to comply. A failure to comply is separately determined 
for each foreign partnership for which a United States person has a 
section 6038 reporting obligation. A failure to comply with the 
requirements of section 6038 includes the following--
    (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; or
    (ii) The provision of false or inaccurate information in purported 
compliance with the requirements of this section.
    (3) Penalties. A United States person that fails to comply (as 
defined in paragraph (k)(2) of this section) with the reporting 
requirements of this section must pay the following penalties, subject 
to the reasonable cause exception in paragraph (k)(4) of this section:
    (i) Dollar amount penalty--(A) $10,000 penalty. A penalty of 
$10,000 shall be imposed for each tax year of each foreign partnership 
with respect to which a failure to comply occurs.
    (B) Increase in penalty. If a failure to comply with the applicable 
reporting requirements of section 6038 and this section continues for 
more than 90 days after the date on which the Commissioner or the 
Commissioner's delegate mails notice of the failure to the United 
States person required to file Form 8865, the person must pay an 
additional penalty of $10,000 for each 30-day period (or fraction 
thereof) during which the failure continues after the 90-day period has 
expired.
    (C) Limitation. The additional penalty imposed on any United States 
person by section 6038(b)(2) and paragraph (k)(3)(i)(B) of this section 
is limited to a maximum of $50,000 for each partnership for each tax 
year with respect to which the failure occurs.
    (ii) Penalty of reducing foreign tax credit--(A) Effect on foreign 
tax credit. Failure to comply with the reporting requirements of 
section 6038 and this section may cause a reduction of foreign tax 
credits under section 901 (taxes of foreign countries and of 
possessions of the United States). In applying section 901 to a United 
States person for any tax year with or within which its foreign 
partnership's tax year ended, the amount of taxes paid (and deemed paid 
under sections 902 and 960) by the United States person will be reduced 
by 10 percent if the person fails to comply. However, no tax deemed 
paid under section 904(c) will be reduced under the provisions of this 
paragraph (k)(3)(ii).
    (B) Reduction for continued failure. If a failure to comply with 
the reporting requirements of section 6038 and this section continues 
for more than 90 days after the date on which the Commissioner or the 
Commissioner's delegate mails notice of the failure to the person 
required to file Form 8865, then the amount of the reduction in 
paragraph (k)(3)(ii)(A) of this section will be 10 percent, plus an 
additional 5 percent for each 3-month period (or fraction thereof) 
during which the failure continues after the 90-day period has expired.
    (C) Limitation on reduction. The amount of the reduction under 
paragraphs (k)(3)(ii)(A) and (B) of this section for each failure to 
furnish information required under this section will not exceed the 
greater of $10,000, or the gross income of the foreign partnership for 
its tax year with respect to which the failure occurred.
    (D) Offset for dollar amount penalty imposed. The total amount of 
the reduction which, but for this paragraph (k)(3)(ii)(D), may be made 
under this paragraph (k)(3)(ii) with respect to any separate failure, 
may not exceed the maximum amount of the reductions that may be 
imposed, reduced (but not below zero) by the dollar amount penalty 
imposed by paragraph (k)(3)(i) of this section with respect to the 
failure.
    (4) Reasonable cause limitation. The time prescribed for filing a 
complete Form 8865, and the beginning of the 90-day period after the 
Commissioner or the Commissioner's delegate mails notice under 
paragraphs (k)(3)(i)(B) and (ii)(B) of this section, will be treated as 
being not earlier than the last day on which reasonable cause existed 
for failure to furnish the information. The United States person may 
show reasonable cause by providing a written statement to the 
Commissioner's delegate having jurisdiction over the person's return to 
which the Form 8865 should have been attached, setting forth the 
reasons for the failure to comply. Whether a failure to comply was due 
to reasonable cause will be determined by the Commissioner, or the 
Commissioner's delegate, under all the facts and circumstances.
    (5) Statute of limitations. For exceptions to the limitations on 
assessment in the event of a failure to provide information under 
section 6038, see section 6501(c)(8).
    (l) Effective date. This section applies to tax years of a foreign 
partnership ending on or after December 31, 2000.
    Par. 5. Section 1.6038B-1 is amended as follows:
    1. The heading is revised.
    2. The first three sentences of paragraph (b)(1)(i) are removed and 
four sentences are added in their place.
    3. Paragraph (b)(2)(i)(A)(4) is added.
    4. Paragraph (b)(2)(i)(B)(3) is revised.
    5. Paragraph (b)(2)(i)(B)(4) is added.
    6. Paragraph (g) is revised.

[[Page 72554]]

    The added and revised provisions read as follows:


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

* * * * *
    (b) * * * (1) * * * (i) Reporting procedure. Except for stock or 
securities qualifying under the special reporting rule of paragraph 
(b)(2) of this section, and certain exchanges described in section 354 
(listed below), any U.S. person that makes a transfer described in 
section 6038B(a)(1)(A), 367(d) or (e), 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.'' For special rules regarding cash transfers 
made in tax years beginning after February 5, 1999, see paragraphs 
(b)(3) and (g) of this section.
    For purposes of determining a U.S. transferor that is subject to 
section 6038B, the rules of Sec. 1.367(a)-1T(c) and Sec. 1.367(a)-3(d) 
shall apply with respect to a transfer described in section 367(a), and 
the rules of Sec. 1.367(a)-1T(c) shall apply with respect to a transfer 
described in section 367(d). Additionally, if in an exchange described 
in section 354, a U.S. person exchanges stock of a foreign corporation 
in a reorganization described in section 368(a)(1)(E), or a U.S. person 
exchanges stock of a domestic or foreign corporation for stock of a 
foreign corporation pursuant to an asset reorganization described in 
section 368(a)(1)(C), (D), or (F), that is not treated as an indirect 
stock transfer under section 367(a), then the U.S. person exchanging 
stock is not required to report under section 6038B. * * *
* * * * *
    (2) * * *
    (i) * * *
    (A) * * *
    (4) The transfer is considered to be to a foreign corporation 
solely by reason of Sec. 1.83-6(d)(1) and the fair market value of the 
property transferred did not exceed $100,000; or
    (B) * * *
    (3) The transferor properly reported the income from the transfer 
on its timely-filed (including extensions) Federal income tax return 
for the taxable year that includes the date of the transfer; or
    (4) The transfer is considered to be to a foreign corporation 
solely by reason of Sec. 1.83-6(d)(1) and the fair market value of the 
property transferred did not exceed $100,000.
* * * * *
    (g) This section applies to transfers occurring on or after July 
20, 1998, except for transfers of cash made in tax years beginning on 
or before February 5, 1999, which are not required to be reported under 
section 6038B, and except for paragraph (e) of this section, which 
applies to transfers that are subject to Secs. 1.367(e)-1(f) and 
1.367(e)-2(e). See Sec. 1.6038B-1T for transfers occurring prior to 
July 20, 1998. See also Sec. 1.6038B-1T(e) in effect prior to August 9, 
1999 (as contained in 26 CFR part 1 revised April 1, 1999), for 
transfers described in section 367(e) that are not subject to 
Secs. 1.367(e)-1(f) and 1.367(e)-2(e).
    Par. 6. Section 1.6038B-2 is amended as follows:
    1. Paragraph (a)(5) is revised.
    2. Paragraph (c)(4) is revised.
    3. Paragraph (c)(6) is amended by removing the period at the end 
and adding ``; and'' in its place.
    4. Paragraph (j)(1) introductory text is amended by revising the 
first sentence.
    5. Paragraph (j)(3) is added.
    The revised and added provisions read as follows:


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

    (a) * * *
    (5) Time for filing Form 8865. The Form 8865 on which a transfer is 
reported must be attached to the transferor's timely filed (including 
extensions) income tax return for the tax year that includes the date 
of the transfer. If the person required to report under this section is 
not required to file an income tax return for its tax year during which 
the transfer occurred, but is required to file an information return 
for that year (for example, Form 1065, ``U.S. Partnership Return of 
Income,'' or Form 990, ``Return of Organization Exempt from Income 
Tax''), the person should attach the Form 8865 to its information 
return.
* * * * *
    (c) * * *
    (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 ten-percent interest in the transferee foreign 
partnership immediately after the transfer. However, for tax years of 
U.S. persons beginning on or after January 1, 2000, the person 
reporting pursuant to section 6038B (the transferor) must provide the 
names and addresses of each United States person that owned a ten-
percent or greater direct interest in the foreign partnership during 
the transferor's tax year in which the transfer occurred, and the names 
and addresses of any other United States or foreign persons that were 
direct partners in the foreign partnership during that tax year and 
that were related to the transferor during that tax year. See paragraph 
(i)(4) of this section for the definition of a related person;
* * * * *
    (j) * * * (1) In general. Except as otherwise provided in this 
section, this section applies to transfers made on or after January 1, 
1998. * * *
* * * * *
    (3) Special rule for transfers made before January 1, 2000. Even if 
not reported in accordance with the rules provided in paragraph (a)(5) 
of this section, or paragraph (j) (1) or (2) of this section, a 
transfer that occurred before January 1, 2000 will nevertheless be 
considered timely reported if the transferor reports it on a Form 8865 
attached to an amended tax return for the transferor's tax year in 
which the transfer occurred, provided such amended return is filed no 
later than September 15, 2000.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 7. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par. 8. In Sec. 1.602.101, paragraph (b) is amended by revising the 
entries for Sec. 1.6038-2, Sec. 1.6038(B)-1, and Sec. 1.6038B-2 and 
adding an entry in numerical order to the table to read as follows:


Sec. 602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
------------------------------------------------------------------------
 
                  *        *        *        *        *
1.6038-2................................................       1545-1617
 
                  *        *        *        *        *
1.6038-3................................................       1545-1617
 
                  *        *        *        *        *
1.6038B-1...............................................       1545-1617
 
                  *        *        *        *        *
1.6038B-2...............................................       1545-1617
 
                  *        *        *        *        *
------------------------------------------------------------------------

    Approved: December 9, 1999.
Robert Wenzel,
Deputy Commissioner of Internal Revenue.
Jonathan Talisman,
Acting Assistant Secretary of the Treasury.
[FR Doc. 99-32695 Filed 12-27-99; 8:45 am]
BILLING CODE 4830-01-U