[Federal Register Volume 76, Number 243 (Monday, December 19, 2011)]
[Proposed Rules]
[Pages 78594-78599]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-32254]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-130302-10]
RIN 1545-BJ69


Reporting of Specified Foreign Financial Assets

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking by cross-reference to temporary 
regulations.

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SUMMARY: In the Rules and Regulations section of this issue of the 
Federal Register, the Internal Revenue Service is issuing temporary 
regulations relating to the requirement that individuals attach a 
statement to their income tax return to provide required information 
regarding foreign financial assets in which they have an interest. The 
text of the temporary regulations also serves as the text of these 
proposed regulations. This notice of proposed rulemaking also includes 
a proposed regulation setting forth requirements for certain domestic 
entities to report foreign financial assets in the same manner as an 
individual.

DATES: Written or electronic comments and requests for a public hearing 
must be received by March 19, 2012. Comments on the collection of 
information should be received by February 17, 2012.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-130302-10), Room 
5205, Internal Revenue Service, PO Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
130302-10), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC., or sent electronically, via the Federal 
eRulemaking Portal at http://www.regulations.gov (IRS REG-130302-10).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Joseph S. Henderson, (202) 622-3880; concerning submission of comments 
and/or requests for a hearing, Richard.A. [email protected], 
(202) 622-7180 (not a toll-free numbers).

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, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, SE:W:CAR:MP:T:T:SP, 
Washington, DC 20224. Comments on the collection of information should 
be received by February 17, 2012. Comments are specifically requested 
concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information;
    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 capital or start-up costs and costs of operation, 
maintenance and purchase of service to provide information.
    The collection of information in these proposed regulations is in 
Sec. Sec.  1.6038D-2 and 1.6038D-4. The collection of information is 
mandatory with respect to a specified person that has an interest in 
specified foreign financial assets and the value of those assets is 
more than the applicable reporting threshold. The respondents are U.S. 
citizens, U.S. residents, certain nonresidents and, to the extent 
provided in future regulations, certain domestic entities. The 
collection of information is satisfied by filing Form 8938, ``Statement 
of Specified Foreign Financial Assets,'' OMB No. 1545-2195, with the 
respondent's income tax return.
    Estimated total annual reporting burden: 378,000 hours.
    Estimated annual burden per respondent: 1 hour and 5 minutes.

[[Page 78595]]

    Estimated number of respondents: 350,000.
    Estimated annual frequency of responses: once.
    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

    Section 6038D was enacted by section 511 of the Hiring Incentives 
to Restore Employment (HIRE) Act, Public Law 111-147 (124 Stat. 71). 
Section 6038D(a) requires an individual who holds any interest in a 
specified foreign financial asset during the taxable year to attach a 
statement to that individual's return of tax imposed by subtitle A of 
the Internal Revenue Code (Code) to report the information identified 
in section 6038D(c), if the aggregate value of the specified foreign 
financial assets in which the individual holds an interest exceeds 
$50,000 for the taxable year, or such higher dollar amount as the 
Secretary may prescribe.
    Section 6038D(f) provides that, to the extent provided by the 
Secretary in regulations or other guidance, section 6038D shall apply 
to any domestic entity which is formed of availed of for purposes of 
holding, directly or indirectly, specified foreign financial assets, in 
the same manner as if the entity were an individual.
    Temporary regulations in the Rules and Regulations section of this 
issue of the Federal Register contain amendments to the Income Tax 
Regulations (26 CFR part 1) providing guidance to individuals required 
to report specified foreign financial assets with their annual return 
pursuant to section 6038D of the Code. The text of those regulations 
also serves as the text of the regulations contained in this document 
that are proposed by cross-reference to the temporary regulations, that 
is Sec. Sec.  1.6038D-0 through 1.6038D-5, Sec.  1.6038D-7, and Sec.  
1.6038D-8. The preamble to the temporary regulations explains the 
amendments added by the temporary regulations.
    This document also contains a proposed amendment to the Income Tax 
Regulations (26 CFR part 1) that sets out the conditions under which a 
domestic entity will be considered a ``specified domestic entity.'' A 
domestic entity that is a specified domestic entity pursuant to Prop. 
Reg. Sec.  1.6038D-6 is required to report specified foreign financial 
assets in which it holds an interest.

Explanation of Provisions

1. Application of Section 6038D to Domestic Entities

    Under the proposed regulations, domestic entities that are subject 
to the reporting requirements of section 6038D are designated as 
specified domestic entities and include certain domestic corporations, 
domestic partnerships, and trusts described in section 7701(a)(30)(E), 
generally referred to as domestic trusts for purposes of this 
explanation. Specified domestic entities do not include domestic 
estates.
A. Domestic Corporations and Partnerships
    For a domestic corporation or partnership to be considered a 
specified domestic entity, it must satisfy three conditions. First, the 
domestic corporation or domestic partnership must have an interest in 
specified foreign financial assets (other than assets excepted from 
reporting as provided in Sec.  1.6038D-7T) with an aggregate value 
exceeding the reporting threshold in Sec.  1.6038D-2T(a)(1). Second, it 
must be closely held by a specified individual (as defined in Sec.  
1.6038D-1T(a)(2)). A domestic corporation is closely held if a 
specified individual owns at least 80 percent of the corporation's 
stock (by vote or value) on the last day of the corporation's taxable 
year. A domestic partnership is closely held if a specified individual 
owns at least 80 percent of the capital or profits interest in the 
partnership on the last day of its taxable year. Direct, indirect, and 
constructive ownership rules apply in determining whether the 
corporation or partnership is closely held for this purpose.
    Finally, a domestic corporation or partnership must also meet 
either of the following two conditions:
    (A) At least 50 percent of the corporation's or partnership's gross 
income for the taxable year is passive income or at least 50 percent of 
the assets held by the corporation or partnership at any time during 
the taxable year are assets that produce or are held for the production 
of passive income; or
    (B) At least 10 percent of the corporation's or partnership's gross 
income for the taxable year is passive income or at least 10 percent of 
the assets held by the corporation or partnership at any time during 
the taxable year are assets that produce or are held for the production 
of passive income, and the corporation or partnership is formed or 
availed of by a specified individual with a principal purpose of 
avoiding the reporting obligations under section 6038D. The 
determination of whether a corporation or partnership is formed or 
availed of with a principal purpose of avoiding reporting under section 
6038D takes into account all facts and circumstances.
    Two different aggregation rules apply for purposes of determining 
whether a domestic corporation or domestic partnership is a specified 
domestic entity. First, in determining whether a domestic corporation 
or domestic partnership meets the reporting thresholds in Sec.  
1.6038D-2T(a)(1), domestic corporations and domestic partnerships that 
are closely held by the same specified individual are treated as a 
single entity. Second, for purposes of determining whether a 
corporation or partnership meets the passive income or asset test, 
domestic corporations and domestic partnerships that are closely held 
by the same individual and that are connected through stock or 
partnership interest ownership with a common parent corporation or 
partnership are treated as a single entity.
    The determination of whether a corporation or partnership is a 
specified domestic entity is made annually for each taxable year of 
such corporation or partnership.
B. Domestic Trusts
    A domestic trust is considered a specified domestic entity if it 
has an interest in specified foreign financial assets (other than 
assets excepted from reporting as provided in Sec.  1.6038D-7T) with an 
aggregate value exceeding the reporting threshold in Sec.  1.6038D-
2T(a)(1) and one or more specified persons as current beneficiaries. 
For purposes of section 6038D, a current beneficiary is any person who, 
during the taxable year, is entitled to, or at the discretion of any 
person may receive, a distribution from the principal or income of the 
trust (determined without regard to any power of appointment to the 
extent that such power remains unexercised at the end of the taxable 
year). As discussed in section 2 of this explanation, certain domestic 
trusts are not specified domestic entities.
    The determination of whether a domestic trust is a specified 
domestic entity is made annually for each taxable year of such trust.

2. Excepted Specified Domestic Entities

    A domestic entity is not considered to be a specified domestic 
entity if it is

[[Page 78596]]

described in section 1473(3) and the regulations as excepted from the 
definition of the term ``specified United States person''. This 
exception does not apply to any trust that is exempt from tax under 
section 664(c).
    A domestic trust is not considered a specified domestic entity if 
the trustee or executor is a bank, financial institution, or domestic 
corporation that is subject to certain examination, oversight or 
registration requirements, has supervisory authority over or fiduciary 
obligations with regard to the trust's specified foreign financial 
assets, and files income tax returns and information returns on behalf 
of the trust. In addition, a domestic trust or any portion of the trust 
that is treated as owned by one or more specified persons under 
sections 671 through 679 and the regulations issued under those 
sections is not considered to be a specified domestic entity.

Proposed Effective Date

    Section 1.6083D-6 is proposed to apply to taxable years beginning 
after December 31, 2011.

Special Analyses

    It has been determined that this notice of proposed rulemaking 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.
    It is hereby certified that the collection of information in this 
notice of proposed rulemaking will not have a significant economic 
impact on a substantial number of small entities within the meaning of 
section 601(6) of the Regulatory Flexibility Act (5 U.S.C. chapter 6). 
Small entities generally hold specified foreign financial assets (that 
is, financial accounts, stocks, securities, financial instruments, 
contracts, or interests in foreign entities) for use in their trade or 
business and therefore generally would not have a filing requirement. 
The burden is further reduced because small entities that do hold 
specified foreign financial assets generally will be excepted from 
reporting such assets under these proposed rules if the assets are 
reported on one or more of the following forms: Form 3520, ``Annual 
Return To Report Transactions With Foreign Trusts and Receipt of 
Certain Foreign Gifts``; Form 3520-A, ``Annual Information Return of 
Foreign Trust With a U.S. Owner''; Form 5471, ``Information Return of 
U.S. Persons With Respect To Certain Foreign Corporations''; Form 8621, 
``Return by a Shareholder of a Passive Foreign Investment Company or a 
Qualified Electing Fund''; Form 8865, ``Return of U.S. Persons With 
Respect to Certain Foreign Partnerships''; or Form 8891, ``U.S. 
Information Return for Beneficiaries of Certain Canadian Registered 
Retirement Plans.'' Therefore, a Regulatory Flexibility Analysis under 
the Regulatory Flexibility Act is not required. Pursuant to section 
7805(f) of the Code, this regulation has been submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small businesses. The Internal Revenue Service invites 
the public to comment on this certification.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are submitted timely to the 
IRS. The Department of the Treasury and the Internal Revenue Service 
request comments on all aspects of the proposed regulations. All 
comments will be available for public inspection and copying. A public 
hearing will be scheduled if requested in writing by any person that 
timely submits written comments. If a public hearing is scheduled, 
notice of the date, time, and place for the public hearing will be 
published in the Federal Register.

Drafting Information

    The principal author of these proposed regulations is Joseph S. 
Henderson, Office of Associate Chief Counsel (International). However, 
other personnel from the Internal Revenue Service and the Department of 
the Treasury 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 
entries in numerical order to read in part as follows:

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

    Section 1.6038D-1 also issued under 26 U.S.C. 6038D
    Section 1.6038D-2 also issued under 26 U.S.C. 6038D
    Section 1.6038D-3 also issued under 26 U.S.C. 6038D
    Section 1.6038D-4 also issued under 26 U.S.C. 6038D
    Section 1.6038D-5 also issued under 26 U.S.C. 6038D
    Section 1.6038D-6 also issued under 26 U.S.C. 6038D
    Section 1.6038D-7 also issued under 26 U.S.C. 6038D
    Section 1.6038D-8 also issued under 26 U.S.C. 6038D* * *

    Par. 2. Section 1.6038D-0 is added to read as follows:


Sec.  1.6038D-0  Outline of regulation provisions.

    The text of proposed Sec.  1.6038D-0 is the same as the text of 
Sec.  1.6038D-0T published elsewhere in this issue of the Federal 
Register.
    Par. 3. Section 1.6038D-1 is added to read as follows:


Sec.  1.6038D-1  Reporting with respect to specified foreign financial 
assets, definition of terms.

    The text of proposed Sec.  1.6038D-1 is the same as the text of 
paragraphs (a) and (b) in Sec.  1.6038D-1T published elsewhere in this 
issue of the Federal Register.
    Par. 4 Section 1.6038D-2 is added to read as follows:


Sec.  1.6038D-2  Requirement to report specified foreign financial 
assets.

    The text of proposed Sec.  1.6038D-2 is the same as the text of 
paragraphs (a) through (e) in Sec.  1.6038D-2T published elsewhere in 
this issue of the Federal Register.
    Par. 5 Section 1.6038D-3 is added to read as follows:


Sec.  1.6038D-3  Specified foreign financial assets.

    The text of proposed Sec.  1.6038D-3 is the same as the text of 
paragraphs (a) through (e) in Sec.  1.6038D-3T published elsewhere in 
this issue of the Federal Register.
    Par. 6. Section 1.6038D-4 is added to read as follows:


Sec.  1.6038D-4  Information required to be reported.

    The text of proposed Sec.  1.6038D-4 is the same as the text of 
paragraphs (a) and (b) in Sec.  1.6038D-4T published elsewhere in this 
issue of the Federal Register.
    Par. 7. Section 1.6038D-5 is added to read as follows:


Sec.  1.6038D-5  Valuation guidelines.

    The text of proposed Sec.  1.6038D-5 is the same as the text of 
paragraphs (a) through (g) in Sec.  1.6038D-5T published

[[Page 78597]]

elsewhere in this issue of the Federal Register.
    Par. 8. Section 1.6038D-6 is added to read as follows:


Sec.  1.6038D-6  Specified domestic entities.

    (a) Specified domestic entity. A specified domestic entity is a 
domestic corporation, a domestic partnership, or a trust described in 
section 7701(a)(30)(E), if such corporation, partnership, or trust is 
formed or availed of for purposes of holding, directly or indirectly, 
specified foreign financial assets. Whether a domestic corporation, a 
domestic partnership, or a trust described in section 7701(a)(30)(E) is 
a specified domestic entity is determined annually.
    (b) Corporations and partnerships--(1) Formed or availed of. Except 
as otherwise provided in paragraph (d) of this section, a domestic 
corporation or a domestic partnership is formed or availed of for 
purposes of holding, directly or indirectly, specified foreign 
financial assets if and only if--
    (i) The corporation or partnership has an interest in specified 
foreign financial assets (other than assets excepted from reporting as 
provided in Sec.  1.6038D-7T) with an aggregate value exceeding the 
reporting threshold in Sec.  1.6038D-2T(a)(1);
    (ii) The corporation or partnership is closely held by a specified 
individual as determined under paragraph (b)(3) of this section; and
    (iii) One of the following two conditions is satisfied:
    (A) At least 50 percent of the corporation's or partnership's gross 
income for the taxable year is passive income or at least 50 percent of 
the assets held by the corporation or partnership at any time during 
the taxable year are assets that produce or are held for the production 
of passive income; or
    (B)(1) At least 10 percent of the corporation's or partnership's 
gross income for the taxable year is passive income or at least 10 
percent of the assets held by the corporation or partnership at any 
time during the taxable year are assets that produce or are held for 
the production of passive income, and
    (2) The corporation or partnership is formed or availed of by the 
specified individual identified in paragraphs (b)(1)(ii) and (b)(3) of 
this section with a principal purpose of avoiding the reporting 
obligations under section 6038D. For purposes of determining whether a 
corporation or partnership is formed or availed of with a principal 
purpose of avoiding reporting under section 6038D, all facts and 
circumstances are taken into account.
    (2) Passive income. For purposes of paragraph (b) of this section, 
passive income means the portion of gross income that consists of--
    (i) Dividends;
    (ii) Interest;
    (iii) Rents and royalties, other than rents and royalties derived 
in the active conduct of a trade or business conducted by employees of 
the corporation or partnership;
    (iv) Annuities;
    (v) The excess of gains over losses from the sale or exchange of 
property that gives rise to passive income described in paragraphs 
(b)(2)(i) through (iv) of this section;
    (vi) The excess of gains over losses from transactions (including 
futures, forward, and similar transactions) in any commodity, but not 
including any commodity hedging transaction described in section 
954(c)(5)(A) determined by treating the corporation or partnership as a 
controlled foreign corporation;
    (vii) The excess of foreign currency gains over foreign currency 
losses (as defined in section 988(b)) attributable to any section 988 
transaction; and
    (viii) Net income from notional principal contracts.
    (3) Closely held--(i) Domestic corporation. A domestic corporation 
is closely held by a specified individual for purposes of paragraph 
(b)(1)(ii) of this section if at least 80 percent of the total combined 
voting power of all classes of stock of the corporation entitled to 
vote, or at least 80 percent of the total value of the stock of the 
corporation, is owned, directly, indirectly, or constructively, by one 
specified individual on the last day of the corporation's taxable year.
    (ii) Domestic partnership. A partnership is closely held by a 
specified individual for purposes of paragraph (b)(1)(ii) of this 
section if at least 80 percent of the capital or profits interest in 
the partnership is held, directly, indirectly, or constructively, by 
one specified individual on the last day of the partnership's taxable 
year.
    (iii) Constructive ownership. For purposes of paragraphs (b)(1)(ii) 
and (b)(3) of this section, section 267(c) and (e)(3) apply for the 
purpose of determining the interest of a specified individual in a 
corporation or partnership, except that section 267(c)(4) is applied as 
if the family of an individual includes the spouses of the individual's 
family members.
    (iv) Example. The following example illustrates the application of 
paragraph (b)(3) of this section:

    Example. (1) Facts. DC1 is a domestic corporation the total 
value of the stock of which is owned 60% by A, a specified 
individual, 30% by B, a member of A's family for purposes of section 
267(c)(2) who is not a specified individual, and 10% by FC1, a 
foreign corporation. DC1 owns 90% of the total value of the stock of 
DC2, a domestic corporation. FC2, a foreign corporation, owns 10% of 
DC2. Neither A nor B owns, directly, indirectly, or constructively, 
any stock in FC1 or FC2.
    (2) Ownership determination. DC2 is closely held by A within the 
meaning of paragraphs (b)(1)(ii) and (b)(3) of this section because 
A, a specified person, owns more than 80% of its total value. A is 
considered to own 81% of the total value of DC2 by application of 
the rules of section 267(c) and this section.

    (4) Treatment of related corporations and partnerships--(i) 
Determination of reporting threshold. For purposes of applying 
paragraph (b)(1)(i) of this section and determining whether a domestic 
corporation or domestic partnership satisfies the reporting threshold 
in Sec.  1.6038D-2T(a)(1), all domestic corporations and domestic 
partnerships that have an interest in any specified foreign financial 
asset and are closely held by the same specified individual as 
determined under paragraphs (b)(1)(ii) and (b)(3) of this section are 
treated as a single entity, and each such related corporation or 
partnership will be treated as owning the specified foreign financial 
assets held by all such related corporations or partnerships.
    (ii) Determination of passive income and asset thresholds. For 
purposes of applying the passive income and asset thresholds of 
paragraph (b)(1)(iii) of this section, all domestic corporations and 
domestic partnerships that are closely held by the same specified 
individual as determined under paragraphs (b)(1)(ii) and (b)(3) of this 
section and that are connected through stock or partnership interest 
ownership with a common parent corporation or partnership (as 
determined under this paragraph (b)(4)(ii)) are treated as a single 
entity. A domestic corporation or a domestic partnership is considered 
connected through stock or partnership interest ownership with a common 
parent corporation or partnership if stock representing at least 80 
percent of the voting power or value of each such corporation, or 
partnership interests representing at least 80 percent of the profits 
interests or capital interests of the partnership, in each case other 
than stock of or partnership interests in the common parent, is owned 
by one or more of the other connected corporations, connected 
partnerships, or the common parent. For purposes of

[[Page 78598]]

applying paragraph (b)(1)(iii) of this section, each member of a 
closely held and connected group as determined under this paragraph 
(b)(4)(ii) is treated as owning the combined assets and receiving the 
combined income of all members of that group. For purposes of the 
preceding sentence, any contract, equity, or debt existing between 
members of such a group, as well as any items arising under or from 
such contract, equity, or debt relevant to the determination of the 
passive income percentage under paragraph (b) of this section, are 
eliminated.
    (5) Examples. The following examples illustrate the application of 
the rules of paragraph (b) of this section:

    Example 1. (1) Facts. L is a specified individual. In Year X, L 
wholly owns DC1, a domestic corporation, and also owns a 90% capital 
interest in DP, a domestic partnership. DC1 owns 80% of the sole 
class of stock of DC2, a domestic corporation. DC1 has no assets 
other than its interest in DC2. DC2's only assets are assets that 
produce passive income, with a maximum value in Year X of $40,000 on 
October 12. DC2's assets are comprised in relevant part on October 
12, Year X, of $15,000 of specified foreign financial assets. DP's 
only assets are assets that produce passive income and that are 
specified foreign financial assets with a maximum value of $90,000 
on October 12, Year X and have a value of $20,000 on December 31, 
Year X. DC1 and DC2 do not file a consolidated annual return.
    (2) Determination of reporting threshold. DC1, DC2, and DP are 
closely held by L for purposes of applying paragraph (b)(1)(ii) and 
(b)(3) of this section. Under Sec.  1.6038D-3T, DC2 and DP each has 
an interest in specified foreign financial assets; DC1 does not have 
an interest in specified foreign financial assets. For purposes of 
applying paragraph (b)(1)(i) of this section and Sec.  1.6038D-
2T(a)(1)--
    (i) DC1. DC1 is not treated as a single entity with DC2 and DP 
under paragraph (b)(4)(i) of this section. As a result, DC1 does not 
satisfy the reporting threshold of paragraph (b)(1)(i) of this 
section; and
    (ii) DC2 and DP. DC2 and DP are treated as a single entity under 
paragraph (b)(4)(i) of this section. Therefore, for purposes of 
applying the reporting threshold of Sec.  1.6038D-2T(a)(1), DC2 is 
considered as owning in addition to its own assets the assets of DP, 
and DP is considered as owning in addition to its own assets the 
assets of DC2. As a result, DC2 and DP each satisfies the reporting 
threshold of Sec.  1.6038D-2T(a)(1), because the value of the 
specified foreign financial assets each is considered as owning 
under paragraph (b)(4)(i) of this section exceeds $100,000 on 
October 12, Year X.
    (3) Determination of passive income or passive asset 
percentage--(i) DC1 and DC2. DC1 and DC2 are treated as members of a 
closely held and connected group of entities under paragraph 
(b)(4)(ii) of this section, because DC1 and DC2 are closely held by 
L, and DC2 is connected with DC1 though DC1's ownership of stock of 
DC2 representing at least 80% of the voting power or value of DC2. 
As a result, DC1 and DC2 are considered a single entity for purposes 
of applying paragraph (b)(1)(iii) of this paragraph, and each of DC1 
and DC2 is considered as owning the combined assets, and receiving 
the combined income, of both DC1 and DC2 (under paragraph (b)(4)(ii) 
of this section). Therefore, DC1 and DC2 each satisfies the passive 
asset threshold of paragraph (b)(1)(iii)(A) of this section.
    (ii) DP. DP is not treated as a member of the DC1 and DC2 
closely held and connected group of entities because DC1 and DP are 
not owned by a common parent corporation or partnership. Therefore, 
whether the passive income or passive asset threshold of paragraph 
(b)(1)(iii) of this section is met with respect to DP is determined 
solely by reference to DP's separately earned passive income and 
separately held passive assets. DP has only passive assets on 
October 12, Year X, and, therefore, satisfies paragraph 
(b)(1)(iii)(A) of this section.
    (4) Reporting requirements--(i) DC1. DC1 is not a specified 
domestic entity for Year X, and is not required to file Form 8938, 
because DC1 does not satisfy the reporting threshold of paragraph 
(b)(1)(i) of this section and Sec.  1.6038D-2T(a)(1).
    (ii) DC2 and DP. DC2 and DP are specified domestic entities for 
Year X, because they each meet the conditions of paragraph (b)(1) of 
this section: Each is closely held by L, a specified individual; 
each has an interest in specified foreign financial assets with an 
aggregate value exceeding the reporting threshold of Sec.  1.6038D-
2T(a)(1); and each satisfies the passive asset threshold. DC2 and DP 
must each file Form 8938 for Year X to report their respective 
specified foreign financial assets and disclose their maximum values 
as provided in Sec.  1.6038D-4T.

    Example 2. (1) Facts. The facts are the same as in Example 1, 
except that DC2 also has assets and income from a trade or business. 
The income from such business is not passive income and constitutes 
60% of the gross income generated by DC2 in Year X. The assets 
attributable to such trade or business constitute at least 60% of 
the value of DC2's assets at all times during Year X. Assume that 
neither DC1 nor DC2 is formed or availed of by L with a principal 
purpose of avoiding the reporting obligations under section 6038D.
    (2) Determination of reporting threshold. DC1, DC2, and DP are 
closely held by L for purposes of applying paragraph (b)(1)(ii) and 
(b)(3) of this section. Under Sec.  1.6038D-3T, DC2 and DP each has 
an interest in specified foreign financial assets; DC1 does not have 
an interest in specified foreign financial assets. For purposes of 
applying paragraph (b)(1)(i) of this section and Sec.  1.6038D-
2T(a)(1)--
    (i) DC1. DC1 is not treated as a single entity with DC2 and DP 
under paragraph (b)(4)(i) of this section. As a result, DC1 does not 
satisfy the reporting threshold of paragraph (b)(1)(i) of this 
section; and
    (ii) DC2 and DP. DC2 and DP are treated as a single entity under 
paragraph (b)(4)(i) of this section. Therefore, for purposes of 
applying the reporting threshold of Sec.  1.6038D-2T(a)(1), DC2 is 
considered as owning in addition to its own assets the assets of DP, 
and DP is considered as owning in addition to its own assets the 
assets of DC2. As a result, DC2 and DP each satisfies the reporting 
threshold of Sec.  1.6038D-2T(a)(1) because the value of the 
specified foreign financial assets each is considered as owning 
under paragraph (b)(4)(i) of this section exceeds $100,000 on 
October 12, Year X.
    (3) Determination of passive income or passive asset 
percentage--(i) DC1 and DC2. DC1 and DC2 are treated as members of a 
closely held and connected group of entities under paragraph 
(b)(4)(ii) of this section, because DC1 and DC2 are closely held by 
L, and DC2 is connected with DC1 though DC1's ownership of stock of 
DC2 representing at least 80% of the voting power or value of DC2. 
As a result, DC1 and DC2 are considered a single entity for purposes 
of applying paragraph (b)(1)(iii) of this paragraph, and each of DC1 
and DC2 is considered as owning the combined assets, and receiving 
the combined income, of both DC1 and DC2 (as determined under 
paragraph (b)(4)(ii) of this section). DC1 and DC2 do not have 
sufficient passive income or passive assets to satisfy the 
thresholds of paragraph (b)(1)(iii)(A) of this section. In addition, 
because neither DC1 nor DC2 is formed or availed of by L with a 
principal purpose of avoiding the reporting obligations under 
section 6038D, neither DC1 nor DC2 meets the conditions described in 
paragraph (b)(1)(iii)(B) of this section.
    (ii) DP. DP is not treated as a member of the DC1 and DC2 
closely held and connected group of entities, because DC1 and DP are 
not owned by a common parent corporation or partnership. Therefore, 
whether the passive income or asset threshold of paragraph 
(b)(1)(iii) of this section is met with respect to DP is determined 
solely by reference to DP's separately earned passive income and 
separately held passive assets. DP has only passive assets that are 
specified foreign financial assets on October 12, Year X, and 
satisfies paragraph (b)(1)(iii)(A) of this section.
    (4) Reporting requirements--(i) DC1. DC1 is not a specified 
domestic entity for Year X, and is not required to file Form 8938, 
because DC1 does not satisfy the reporting threshold of paragraph 
(b)(1)(i) of this section and Sec.  1.6038D-2T(a)(1).
    (ii) DC2. DC2 is not a specified domestic entity for Year X, and 
is not required to file Form 8938, because DC2 does not satisfy the 
passive income or passive asset threshold of paragraph 
(b)(1)(iii)(A) of this section and is not formed or availed of with 
a principal purpose of avoiding the reporting obligations under 
section 6038D.
    (iii) DP. DP is a specified domestic entity for Year X because 
DP meets the conditions of paragraph (b)(1) of this section: DP is 
closely held by L, a specified individual; DP has an interest in 
specified foreign financial assets with an aggregate value exceeding 
the reporting threshold of Sec.  1.6038D-2T(a)(1); and DP satisfies 
the passive asset threshold of paragraph (b)(1)(iii)(A) of this 
section. DP must file Form 8938 for Year X to report its specified 
foreign financial assets and disclose their maximum value as 
provided in Sec.  1.6038D-4T.

    (c) Domestic trusts. Except as provided in paragraph (d) of this

[[Page 78599]]

section, a trust described in section 7701(a)(30)(E) is a specified 
domestic entity that is formed or availed of for purposes of holding, 
directly or indirectly, specified foreign financial assets if and only 
if the trust--
    (1) Has an interest in specified foreign financial assets (other 
than assets excepted from reporting as provided in Sec.  1.6038D-7T) 
with an aggregate value exceeding the reporting threshold in Sec.  
1.6038D-2T(a)(1), and
    (2) Has one or more specified persons as a current beneficiary. For 
purposes of this paragraph (c)(2), the term current beneficiary means, 
with respect to the taxable year, any person who at any time during 
such taxable year is entitled to, or at the discretion of any person 
may receive, a distribution from the principal or income of the trust 
(determined without regard to any power of appointment to the extent 
that such power remains unexercised at the end of the taxable year).
    (d) Excepted domestic entities. An entity is not considered to be a 
specified domestic entity if the entity is--
    (1) Certain persons described in section 1473(3). An entity, except 
for a trust that is exempt from tax under section 664(c), that is 
excepted from the definition of the term ``specified United States 
person'' under section 1473(3) and the regulations issued under that 
section;
    (2) Certain domestic trusts. A trust described in section 
7701(a)(30)(E) provided that the trustee of the trust--
    (i) Has supervisory authority over or fiduciary obligations with 
regard to the specified foreign financial assets held by the trust;
    (ii) Timely files (including any applicable extensions) annual 
returns and information returns on behalf of the trust; and
    (iii) Is --
    (A) A bank that is examined by the Office of the Comptroller of the 
Currency, the Board of Governors of the Federal Reserve System, the 
Federal Deposit Insurance Corporation, the Office of Thrift 
Supervision, or the National Credit Union Association;
    (B) A financial institution that is registered with and regulated 
or examined by the Securities and Exchange Commission; or
    (C) A domestic corporation described in section 1473(3)(A) or (B), 
and the regulations issued under that section.
    (3) Domestic trusts owned by one or more specified persons. A trust 
described in section 7701(a)(30)(E) to the extent such trust or any 
portion thereof is treated as owned by one or more specified persons 
under sections 671 through 679 and the regulations issued under those 
sections.
    (e) Effective/applicability dates. This section applies to taxable 
years beginning after December 31, 2011.
    Par. 9. Section 1.6038D-7 is added to read as follows:


Sec.  1.6038D-7  Exceptions from the reporting of certain assets under 
Section 6038D.

    The text of proposed Sec.  1.6038D-7 is the same as the text of 
paragraphs (a) through (d) in Sec.  1.6038D-7T published elsewhere in 
this issue of the Federal Register.
    Par. 10. Section 1.6038D-8 is added to read as follows:


Sec.  1.6038D-8  Penalties for failure to disclose.

    The text of proposed Sec.  1.6038D-8 is the same as the text of 
paragraphs (a) through (g) in Sec.  1.6038D-8T published elsewhere in 
this issue of the Federal Register.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2011-32254 Filed 12-14-11; 4:15 pm]
BILLING CODE 4830-01-P