[Federal Register Volume 71, Number 119 (Wednesday, June 21, 2006)]
[Rules and Regulations]
[Pages 35524-35527]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-9612]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9268]
RIN 1545-BF49


Information Returns Required With Respect to Certain Foreign 
Corporations and Certain Foreign-Owned Domestic Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations that 
provide guidance under sections 6038 and 6038A of the Internal Revenue 
Code. The final regulations under Sec.  1.6038-2 are revised to remove 
and replace obsolete references to a form and IRS offices. The 
temporary regulations clarify the information required to be furnished 
regarding certain related party transactions of certain foreign 
corporations and certain foreign-owned domestic corporations. The 
temporary regulations also increase the amount of certain penalties, 
and make certain other changes, to reflect the statutory changes made 
by the Taxpayer Relief Act of 1997 (TRA '97). The text of the temporary 
regulations also serves as the text of the proposed regulations set 
forth in this issue of the Federal Register.

DATES: Effective Date: These final and temporary regulations are 
effective June 21, 2006.
    Applicability Date: Changes to Sec.  1.6038-2 are applicable June 
21, 2006. Sections 1.6038-2T(f)(11), (12), and 1.6038A-2T(b)(8) apply 
with respect to information for annual accounting periods beginning on 
or after June 21, 2006. Section 1.6038-2T(k) applies June 21, 2006.

FOR FURTHER INFORMATION CONTACT: Kate Y. Hwa (202) 622-3840 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    These temporary regulations are being issued without prior notice 
and public procedure pursuant to the Administrative Procedure Act (5 
U.S.C. 553). For this reason, the collection of information contained 
in these regulations has been reviewed and pending receipt and 
evaluation of public comments, approved by the Office of Management and 
Budget under control number 1545-2020. Responses to this collection 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 the collection of 
information displays a valid control number assigned by the Office of 
Management and Budget.
    For further information concerning this collection of information, 
and where to submit comments on the collection of information and the 
accuracy of the estimated burden, and suggestions for reducing this 
burden, please refer to the preamble to the cross-referencing notice of 
proposed rulemaking published in the Proposed Rules section of this 
issue of the Federal Register.
    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

    Section 6038 of the Internal Revenue Code (Code) requires a U.S. 
person to furnish, with respect to any foreign business entity which 
such person controls, certain information as prescribed by the 
Secretary. More specifically, section 6038(a)(1)(D) provides that the 
information to be furnished includes information relating to 
transactions between the foreign business entity and (i) such U.S. 
person, (ii) any corporation or partnership controlled by such U.S. 
person, and (iii) any U.S. person owning at the time the transaction 
takes place a 10 percent or greater interest in the foreign business 
entity.
    Section 6038A requires certain foreign-owned domestic corporations 
to furnish certain information prescribed by the Secretary. In 
particular, section 6038A(a) requires a 25 percent foreign-owned 
domestic corporation to furnish information with respect to certain 
transactions between such corporation and certain related parties.

Explanation of Provisions

    The final regulations are revised to remove and correct obsolete 
references to a form and IRS offices. The temporary regulations conform 
the current final regulations to specific statutory changes and make 
other minor clarifications to those final regulations.
    Section 1.6038-2 provides that each U.S. person, with respect to 
each foreign corporation such person controls, must furnish the 
required information on a Form 5471, ``Information Return of U.S. 
Persons with Respect to Certain Foreign Corporations'', (or, in the 
case of taxable years that ended before December 31, 1982, on a Form 
2952, ``Information Return with Respect to Foreign Controlled 
Corporations''). Section 1.6038-2(f) sets forth the information that 
must be provided on the applicable form. The information that must be 
reported includes a summary showing the total amount of each of the 
types of transactions of the corporation specified in Sec.  1.6038-
2(f)(11). In some cases, Sec.  1.6038-2(f)(11) requires reporting of 
sales and purchases of items. See Sec.  1.6038-2(f)(11)(i) (stock in 
trade) and (iii) (certain intangibles). In other cases, it requires 
reporting only of purchases. See Sec.  1.6038-2(f)(11)(ii) (tangible 
property other than stock in trade). The temporary regulations modify 
the rules of the final regulations to include the reporting of sales 
and purchases, instead of just purchases, of tangible property. The 
temporary regulations also modify the current rules to include the 
reporting of premiums paid, instead of just premiums received, for 
insurance or reinsurance. This consistent treatment of sales and 
purchases, and premiums paid and received, more fully implements the 
purpose of section 6038. It also conforms the rules in Sec.  1.6038-2 
to analogous reporting rules. See Sec.  1.6038A-2(b)(3)(ii) (reporting 
requirements for foreign-owned domestic corporations).
    It has come to the IRS' attention that some foreign corporations 
that use an accrual method of accounting may not be properly reporting 
the transactions described in Sec.  1.6038-2(f)(11). Accordingly, Sec.  
1.6038-2T(f)(12) modifies the rules of the final

[[Page 35525]]

regulations to clarify that foreign corporations that use an accrual 
method of accounting must report the summary of the total amount of the 
transactions described in Sec.  1.6038-2T(f)(11) on an accrual basis. 
To maintain conformity, Sec.  1.6038A-2(b)(8), which provides a similar 
rule for foreign-owned domestic corporations, has been similarly 
clarified.
    Section 6038(b)(1), as amended by the TRA `97, provides for a 
$10,000 penalty for failure to furnish the required information within 
the time prescribed under section 6038(a)(2). Section 6038(b)(2), as 
amended by the TRA `97, also provides for additional $10,000 penalties 
(not to exceed a total of $50,000) when there is a continuing failure 
to furnish the required information. Section 1.6038-2(k)(1) sets forth 
the dollar amounts of the penalty for failure to furnish the 
information required under section 6038. To conform to the statutory 
change made by the TRA `97, Sec.  1.6038-2(k)(1) has been amended to 
reflect the increased penalty amounts.
    Section 6038(c)(4)(B) and Sec.  1.6038-2(k)(3) provide a reasonable 
cause exception for failure to furnish the information required under 
section 6038. Some questions have arisen regarding how one determines, 
after reasonable cause has been established, the time prescribed for 
furnishing the information under Sec.  1.6038-2(i) (time and place for 
filing return) and the 90-day period described in Sec.  1.6038-
2(k)(1)(ii) (increase in penalty for continued failure after 
notification) and Sec.  1.6038-2(k)(2)(iv)(A) (reduction of foreign tax 
credit for continued failure after notice). Two examples have been 
added in Sec.  1.6038-2T(k)(5) to illustrate the determination, after 
reasonable cause has been established under Sec.  1.6038-2(k)(3)(i), of 
the time for filing the Form 5471, and the beginning of the 90-day 
period.
    The temporary regulations also modify the rules of the final 
regulations to include transactions between the foreign corporation and 
controlled partnerships, implementing a change made by section 1142 of 
the TRA `97.
    Section 1.6038-2 of the regulations has been updated to remove 
references to obsolete Form 2952 and to reflect that the Director of 
Field Operations has replaced the district director and the Field 
Director has replaced the director of the service center.

Special Analyses

    It has been determined that this Treasury decision is 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 regulations. For the 
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6), 
refer to the Special Analyses section of the preamble to the cross-
reference notice of proposed ruling making published in the Proposed 
Rules section in this issue of the Federal Register. Pursuant to 
section 7805(f) of the Code, these final and temporary regulations will 
be 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 Kate Y. Hwa, Office of 
the Associate Chief Counsel (International). However, other personnel 
from the IRS and 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

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read, in 
part, as follows:

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


Sec.  1.6038-2  [Amended]

0
Par. 2. Section 1.6038-2 is amended as follows:
0
1. Paragraph (f) introductory text is amended by removing the language 
``Form 2952 or'' in the first sentence.
0
2. Paragraph (f)(11) and (k)(1) are revised.
0
3. Paragraph (f)(12) and (m) are added.
0
4. Paragraph (i) is amended by removing the language ``Form 2952 or'' 
in the first sentence, the second sentence, and the last sentence.
0
5. Paragraph (i) is also amended by removing the language ``District 
directors and directors of service centers'' and adding the language 
``Directors of Field Operations and Field Directors'' in its place in 
the second sentence.
0
6. Paragraph (k)(2)(iv) is amended by removing the language ``district 
director'' and adding the language ``Director of Field Operations'' in 
its place in the first sentence.
0
7. Paragraph (k)(3)(i) is amended by removing the language ``district 
director'' and adding the language ``Director of Field Operations'' in 
its place in the first sentence.
    The revisions and additions 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.

* * * * *
    (f) * * *
    (11) [Reserved]. For further guidance, see Sec.  1.6038-2T(f)(11).
    (12) [Reserved]. For further guidance, see Sec.  1.6038-2T(f)(12).
* * * * *
    (k) * * *
    (1) [Reserved]. For further guidance, see Sec.  1.6038-2T(k)(1).
* * * * *
    (m) [Reserved]. For further guidance, see Sec.  1.6038-2T(m)
* * * * *

0
Par. 3 Section 1.6038-2T is amended by revising paragraphs (e) through 
(m) to read as follows:


Sec.  1.6038-2T  Information returns required of United States persons 
with respect to annual accounting periods of certain foreign 
corporations (temporary).

* * * * *
    (e) through (f)(10) [Reserved]. For further guidance, see Sec.  
1.6038-2(e) through (f)(10).
    (f)(11) Transactions with certain related parties. (i) A summary 
showing the total amount of each of the following types of transactions 
of the corporation, which took place during the annual accounting 
period, with the person required to file this return, any other 
corporation or partnership controlled by that person, or any United 
States person owning at the time of the transaction 10 percent or more 
in value of any class of stock outstanding of the foreign corporation, 
or of any corporation controlling that foreign corporation--
    (A) Sales and purchases of stock in trade;
    (B) Sales and purchases of tangible property other than stock in 
trade;
    (C) Sales and purchases of patents, inventions, models, or designs 
(whether or not patented), copyrights, trademarks, secret formulas or 
processes, or any other similar property rights;
    (D) Compensation paid and compensation received for the rendition 
of technical, managerial, engineering, construction, scientific, or 
like services;

[[Page 35526]]

    (E) Commissions paid and commissions received;
    (F) Rents and royalties paid and rents and royalties received;
    (G) Amounts loaned and amounts borrowed (except open accounts 
resulting from sales and purchases reported under other items listed in 
this paragraph (f)(11) that arise and are collected in full in the 
ordinary course of business);
    (H) Dividends paid and dividends received;
    (I) Interest paid and interest received; and
    (J) Premiums paid and premiums received for insurance or 
reinsurance.
    (ii) Special rule for banks. For purposes of this paragraph 
(f)(11), if the United States person is a bank, as defined in section 
581, or is controlled within the meaning of section 368(c) by a bank, 
the term transactions shall not, as to a corporation with respect to 
which a return is filed, include banking transactions entered into on 
behalf of customers; in any event, however, deposits in accounts 
between a foreign corporation, controlled (within the meaning of 
paragraph (b) of this section) by a United States person, and a person 
described in this paragraph (f)(11) and withdrawals from such accounts 
shall be summarized by reporting end-of-month balances.
    (12) Accrued payments and receipts. For purposes of the required 
summary under paragraph (f)(11) of this section, a corporation that 
uses an accrual method of accounting shall use accrued payments and 
accrued receipts for purposes of computing the total amount of each of 
the types of transactions listed.
    (g) through (j)(3) [Reserved]. For further guidance, see Sec.  
1.6038-2(g) through (j)(3).
    (k) Failure to furnish information--(1) Dollar amount penalty--(i) 
In general. If any person required to file Form 5471 under section 6038 
and this section fails to furnish any information described in 
paragraphs (f) and (g) of this section within the time prescribed by 
paragraph (i) of this section, such person shall pay a penalty of 
$10,000 for each annual accounting period of each foreign corporation 
with respect to which such failure occurs.
    (ii) Increase in penalty for continued failure after notification. 
If a failure described in paragraph (k)(1)(i) of this section continues 
for more than 90 days after the date on which the Director of Field 
Operations mails notice of such failure to the person required to file 
Form 5471, such person shall pay a penalty of $10,000, in addition to 
the penalty imposed by section 6038(b)(1) and paragraph (k)(1)(i) of 
this section, for each 30-day period (or a fraction of) during which 
such failure continues after such 90-day period has expired. The 
additional penalty imposed by section 6038(b)(2) and this paragraph 
(k)(1)(ii) shall be limited to a maximum of $50,000 for each failure.
    (k)(2) through (k)(4) [Reserved]. For further guidance, see Sec.  
1.6038-2(k)(2) through (k)(4).
    (k)(5) Illustrations. [Reserved]. For further guidance, see Sec.  
1.6038-2(k)(5).

    Example 1 and 2. [Reserved]. For further guidance, see Sec.  
1.6038-2(k)(5) Examples 1 and 2.
    Example 3. A, a U.S. person, owns 100 percent of the stock of 
FC. On April 15, 2008, A timely filed its 2007 income tax return but 
did not file Form 5471 with respect to FC's 2007 annual accounting 
period. On June 1, 2008, the Director of Field Operations mailed a 
notice to A of A's failure to file Form 5471 for 2007 with respect 
to FC. On August 1, 2008, A submits a written statement asserting 
facts for reasonable cause for failure to file the 2007 Form 5471 
for FC. Based on A's statement and discussions with A, the Director 
of Field Operations agrees that A had reasonable cause for failure 
to file FC's 2007 Form 5471 and determined that it is reasonable for 
A to file FC's 2007 Form 5471 by September 15, 2008. The time 
prescribed for furnishing information under paragraph (i) of this 
section is September 15, 2008, and the 90-day period described under 
paragraphs (k)(1)(ii) and (k)(2)(iv)(A) of this section begins on 
that same date. Thus, if A files a completed Form 5471 by September 
15, 2008, A is not subject to the penalties under paragraphs (k)(1) 
and (k)(2) of this section. If A does not file a completed Form 5471 
by December 14, 2008, in addition to the penalties under paragraphs 
(k)(1) and (k)(2) of this section, A will also be subject to the 
penalties for continued failure under paragraphs (k)(1)(ii) and 
(k)(2)(iv)(A) of this section.
    Example 4. The facts are the same as in Example 3 except A 
submits the written statement to the Director before a notice of 
failure to furnish information is mailed to A. The notice is mailed 
to A on September 7, 2008. Under these facts, the time prescribed 
for furnishing information under paragraph (i) of this section is 
September 15, 2008, and the 90-day period after mailing of notice of 
failure under paragraphs (k)(1)(ii) and (k)(2)(iv)(A) of this 
section begins on that same date.

    (l) through (l)(2) [Reserved]. For further guidance, see Sec.  
1.6038-(2)(l) through (l)(2).
    (m) Effective dates. (1) Except as otherwise provided, this section 
applies with respect to information for annual accounting periods 
beginning on or after June 21, 2006. Paragraph (d) of this section 
applies to taxable years ending after October 22, 2004. Paragraphs 
(k)(1) and (k)(5), Examples 3 and 4, of this section apply June 21, 
2006.
    (2) The applicability of paragraphs (f)(11), (f)(12), (k)(1), and 
(k)(5), Examples 3 and 4, of this section will expire on or before June 
22, 2009.
0
Par. 4. Section 1.6038A-2 is amended by revising paragraph (b)(8) to 
read as follows:


Sec.  1.6038A-2  Requirement of return.

* * * * *
    (b) * * *
    (8) [Reserved]. For further guidance, see Sec.  1.6038A-2T(b)(8).
* * * * *
0
Par. 5. Section 1.6038A-2T is amended by adding paragraphs (b)(8) and 
(h) to read as follows:


Sec.  1.6038A-2T  Requirement of return (temporary).

* * * * *
    (b)(8) Accrued payments and receipts. For purposes of this section, 
a reporting corporation that uses an accrual method of accounting shall 
use accrued payments and accrued receipts for purposes of computing the 
total amount of each of the types of transactions listed in this 
section.
* * * * *
    (h) Effective date. (1) Except as otherwise provided, for effective 
dates for this section for certain reporting corporations, see Sec.  
1.6038A-1(n). Paragraph (b)(8) of this section applies with respect to 
information for annual accounting periods beginning on or after June 
21, 2006.
    (2) The applicability of paragraph (b)(8) of this section will 
expire on or before June 22, 2009.

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

0
Par. 6. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

0
Par. 7. Section 602.101(b) is amended by adding an entry to the table 
in numerical order to read as follows:


Sec.  602.101  OMB Control numbers.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                                            Current OMB
   CFR part or section where identified and described       control No.
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                                * * * * *
1.6038-2................................................       1545-2020
 
                                * * * * *
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[[Page 35527]]

Mark E. Matthews,
Deputy Commissioner for Services and Enforcement.
    Approved: June 13, 2006.
Eric Solomon,
Acting Deputy Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E6-9612 Filed 6-20-06; 8:45 am]
BILLING CODE 4830-01-P