[Federal Register Volume 81, Number 90 (Tuesday, May 10, 2016)]
[Proposed Rules]
[Pages 28784-28788]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-10852]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
[REG-127199-15]
RIN 1545-BM94
Treatment of Certain Domestic Entities Disregarded as Separate
From Their Owners as Corporations for Purposes of Section 6038A
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations that would treat a
domestic disregarded entity wholly owned by a foreign person as a
domestic corporation separate from its owner for the limited purposes
of the reporting, record maintenance and associated compliance
requirements that apply to 25 percent foreign-owned domestic
corporations under section 6038A of the Internal Revenue Code. These
changes are intended to provide the IRS with improved access to
information that it needs to satisfy its obligations under U.S. tax
treaties, tax information exchange agreements and similar international
agreements, as well as to strengthen the enforcement of U.S. tax laws.
DATES: Written or electronic comments and requests for a public hearing
must be received by August 8, 2016.
ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-127199-15), Room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered between the
hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-127199-15), 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-127199-15).
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Ronald M. Gootzeit, (202) 317-6937; concerning submissions of comments
and/or requests for a hearing, Regina Johnson, (202) 317-6901 (not
toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been previously 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 number 1545-1191. The estimated
average annual recordkeeping burden per recordkeeper is 10 hours. The
estimated reporting burden is being reported under Form 5472 (OMB #
1545-0123).
The collection of information in this proposed regulation is in
sections 1.6038A-1 through 1.6038A-3 and 1.6038A-5. This information is
required in order to provide the IRS with improved access to
information that it needs to satisfy its obligations under U.S. tax
treaties, tax information exchange agreements, and similar
international agreements, as well as to strengthen the enforcement of
U.S. tax laws. The likely respondents are foreign-owned domestic
entities that are disregarded as separate from their owners.
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
Sections 301.7701-1 through 301.7701-3 (``the entity classification
regulations'') classify a business entity with two or more members as
either a
[[Page 28785]]
corporation or a partnership, and a business entity with a single owner
as either a corporation or an entity disregarded as separate from its
owner (``disregarded entity''). Certain domestic business entities,
such as limited liability companies (``LLCs''), are classified by
default as partnerships (if they have more than one member) or as
disregarded entities (if they have only one owner) but are eligible to
elect for federal tax purposes to be classified as corporations. Under
special rules, an entity that is otherwise disregarded is not
disregarded for certain excise and employment tax purposes. Section
301.7701-2(c)(2)(iv) and (v).
Some disregarded entities are not obligated to file a return or
obtain an employer identification number (``EIN''). In the absence of a
return filing obligation (and associated record maintenance
requirements) or the identification of a responsible party as required
in applying for an EIN, it is difficult for the United States to carry
out the obligations it has undertaken in its tax treaties, tax
information exchange agreements and similar international agreements to
provide other jurisdictions with relevant information on U.S. entities
with owners that are tax resident in the partner jurisdiction or
otherwise have a tax nexus with respect to the partner jurisdiction.
Section 6001 of the Internal Revenue Code (``Code'') provides that
every person liable for any tax imposed by the Code, or for the
collection thereof, shall keep such records, render such statements,
make such returns and comply with such rules and regulations as the
Secretary may from time to time prescribe, and that whenever in the
judgment of the Secretary it is necessary, he may require any person,
by notice served upon such person or by regulations, to make such
returns, render such statements, or keep such records, as the Secretary
deems sufficient to show whether or not such person is liable for tax.
Thus, the Treasury Department and the IRS have broad authority under
section 6001 of the Code to promulgate regulations to require the
keeping of records and the reporting of information by persons who may
be liable for any tax. The Code also requires many categories of
persons to file returns, even if no tax is owed in a particular year.
For example, all corporations organized in the United States must file
annual income tax returns, which may include schedules requiring the
identification of owners exceeding specified ownership thresholds.
Moreover, foreign corporations engaged in a trade or business in the
United States (``U.S. trade or business'') must file annual income tax
returns. Section 6012(a)(2); section 1.6012-2. Domestic partnerships
must file information returns with schedules identifying each partner.
Section 6031; section 1.6031(a)-1. In addition, domestic corporations
that are at least 25% foreign-owned are subject to specific information
reporting and record maintenance requirements. Section 6038A.
All entities, including disregarded entities, must have an EIN to
file a required return. Section 6109(a)(1); see section 301.6109-
1(a)(1)(ii)(C) and (b). An entity must also have an EIN in order to
elect to change its classification. An entity that accepts its default
classification and is not required to file a return need not obtain an
EIN. Because a domestic single-member LLC is classified as a
disregarded entity by default rather than by election and has no
separate federal tax return filing requirements, there is typically no
federal tax requirement for it to obtain an EIN. Other applicable
federal or state laws may require an entity to obtain an EIN. For
example, pursuant to federal law, financial institutions in the United
States generally require an entity to have an EIN to open an account.
See 31 CFR 1020.220(a)(1)(i)(A)(4).
An entity obtains an EIN by filing Form SS-4, Application for
Employer Identification Number, in which the entity must identify a
responsible party. The instructions to Form SS-4 define ``responsible
party'' for an entity (including a disregarded entity) that is not
traded on a public exchange or registered with the Securities and
Exchange Commission as ``the individual who has a level of control
over, or entitlement to, the funds or assets in the entity that, as a
practical matter, enables the individual, directly or indirectly, to
control, manage, or direct the entity and the disposition of its funds
and assets.'' The entity must also report any subsequent change in the
responsible party. See section 301.6109-1(d)(2)(ii).
When an entity, such as an LLC, is classified as a corporation or a
partnership for tax purposes, general ownership and accounting
information is available to the IRS through the return filing and EIN
application requirements. However, a disregarded entity is not subject
to a separate income or information return filing requirement. Its
owner is treated as owning directly the entity's assets and
liabilities, and the information available with respect to the
disregarded entity depends on the owner's own return filings, if any
are required. For a disregarded entity that is formed in the United
States and wholly owned by a foreign corporation, foreign partnership,
or nonresident alien individual, generally no U.S. income or
information return must be filed if neither the disregarded entity nor
its owner received any U.S. source income or was engaged in a U.S.
trade or business during the taxable year. Moreover, if a disregarded
entity only receives certain types of U.S. source income, such as
portfolio interest or U.S. source income that is fully withheld upon at
source, its owner may not have a U.S. return filing requirement. Even
in cases when the disregarded entity has an EIN, as well as in cases
when income earned through a disregarded entity must be reported on its
owner's return (for example, income from a U.S. trade or business), it
may be difficult to associate the income with the disregarded entity
based solely on the owner's return.
Although ownership and accounting information is generally
available under the reporting requirements established by the U.S.
federal tax system with respect to many types of domestic entities, the
absence of specific return filing and associated recordkeeping
requirements for foreign-owned, single-member domestic entities hinders
law enforcement efforts and compliance with international standards of
transparency and cooperation in the area of tax information exchange.
These difficulties have been noted in reviews of the U.S. legal system
by international organizations, including the Financial Action Task
Force and the Global Forum on Transparency and Exchange of Information
for Tax Purposes, which is affiliated with the Organisation for
Economic Co-operation and Development. The lack of ready access to
information on ownership of, and transactions involving, these entities
also makes it difficult for the IRS to ascertain whether the entity or
its owner is liable for any federal tax.
In general, section 6038A imposes reporting and recordkeeping
requirements (together with certain procedural compliance requirements)
on domestic corporations that are 25-percent foreign-owned. They are
required to file an annual return on Form 5472, Information Return of a
25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in
a U.S. Trade or Business (Under Sections 6038A and 6038C of the
Internal Revenue Code), with respect to each related party with which
the reporting corporation has had any ``reportable transactions.'' See
section 1.6038A-2. These corporations must keep the permanent books of
account or records as required by section 6001 that are
[[Page 28786]]
sufficient to establish the accuracy of the federal income tax return
of the corporation, including information, documents, or records to the
extent they may be relevant to determine the correct U.S. tax treatment
of transactions with related parties. See section 1.6038A-3.
Explanation of Provisions
These proposed regulations would amend section 301.7701-2(c) to
treat a domestic disregarded entity that is wholly owned by one foreign
person as a domestic corporation separate from its owner for the
limited purposes of the reporting and record maintenance requirements
(including the associated procedural compliance requirements) under
section 6038A. As with the existing special rules with respect to
employment and excise taxes, these proposed regulations would not alter
the framework of the existing entity classification regulations,
including the treatment of certain entities as disregarded. These
regulations are intended to provide the IRS with improved access to
information that it needs to satisfy its obligations under U.S. tax
treaties, tax information exchange agreements and similar international
agreements, as well as to strengthen the enforcement of U.S. tax laws.
Because the proposed regulations would treat the affected domestic
entities as foreign-owned domestic corporations for the specific
purposes of section 6038A under the proposed regulations, and because
such entities are foreign-owned, they would be reporting corporations
within the meaning of section 6038A. Consequently, they would be
required to file the Form 5472 information return with respect to
reportable transactions between the entity and its foreign owner or
other foreign related parties (transactions that would have been
regarded under general U.S. tax principles if the entity had been, in
fact, a corporation for U.S. tax purposes) and would also be required
to maintain records sufficient to establish the accuracy of the
information return and the correct U.S. tax treatment of such
transactions. In addition, because these entities would have a filing
obligation, they would be required to obtain an EIN by filing a Form
SS-4 that includes responsible party information.
To ensure that such entities are required to report all
transactions with foreign related parties, these regulations would
specify as an additional reportable category of transaction for these
purposes any transaction within the meaning of section 1.482-1(i)(7)
(with such entities being treated as separate taxpayers for the purpose
of identifying transactions and being subject to requirements under
section 6038A) to the extent not already covered by another reportable
category. The term ``transaction'' is defined in section 1.482-1(i)(7)
to include any sale, assignment, lease, license, loan, advance,
contribution, or other transfer of any interest in or a right to use
any property or money, as well as the performance of any services for
the benefit of, or on behalf of, another taxpayer. For example, under
these proposed regulations, contributions and distributions would be
considered reportable transactions with respect to such entities.
Accordingly, a transaction between such an entity and its foreign owner
(or another disregarded entity of the same owner) would be considered a
reportable transaction for purposes of the section 6038A reporting and
record maintenance requirements, even though, because it involves a
disregarded entity, it generally would not be considered a transaction
for other purposes, such as making an adjustment under section 482. The
penalty provisions associated with failure to file the Form 5472 and
failure to maintain records would apply to these entities as well.
The proposed regulations would also provide that the exceptions to
the record maintenance requirements in section 1.6038A-1(h) and (i) for
small corporations and de minimis transactions will not apply to these
entities.
Consistent with the changes contemplated by these proposed
regulations, the IRS is also considering modifications to corporate,
partnership, and other tax or information returns (or their
instructions) to require the filer of these returns to identify all the
foreign and domestic disregarded entities it owns.
The proposed regulations would impose a filing obligation on a
foreign-owned disregarded entity for reportable transactions it engages
in even if its foreign owner already has an obligation to report the
income resulting from those transactions--for example, transactions
resulting in income effectively connected with the conduct of a U.S.
trade or business. The Treasury Department and the IRS request comments
on possible alternative methods for reporting the disregarded entity's
transactions in such cases.
Proposed Effective/Applicability Date
The regulations are proposed to be applicable for taxable years
ending on or after the date that is 12 months after the date these
regulations are published as final regulations in the Federal Register.
Special Analyses
Certain IRS regulations, including this one, are exempt from the
requirements of Executive Order 12866, as supplemented and reaffirmed
by Executive Order 13563. Therefore, a regulatory assessment is not
required. It has also been determined that section 553(b) and (d) of
the Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to
these regulations. Pursuant to the Regulatory Flexibility Act (5 U.S.C.
chapter 6), it is hereby certified that this regulation will not have a
significant economic impact on a substantial number of small entities.
Accordingly, a regulatory flexibility analysis is not required. This
certification is based on the fact that these regulations will
primarily affect a small number of foreign-owned domestic entities that
do not themselves otherwise have a U.S. return filing requirement, and
that the requirement to file a return for these entities will not
impose a significant burden on them. Pursuant to section 7805(f), this
notice of proposed rulemaking has been submitted to the Chief Counsel
for Advocacy of the Small Business Administration for comment on its
impact on small entities.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in this preamble under the Addresses heading.
The Treasury Department and the IRS request comments on aspects of the
proposed rules for which additional guidance is desired. All comments
will be available at www.regulations.gov or upon request. A public
hearing will be scheduled if requested in writing by any person that
timely submits written comments. If a public hearing is scheduled, then
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 regulations is Ronald M. Gootzeit,
Office of Associate Chief Counsel (International). However, other
personnel from the Treasury Department and the IRS participated in
their development.
[[Page 28787]]
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR parts 1 and part 301 are proposed to be amended
as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by revising
the entries for Sec. Sec. 1.6038A-1 and 1.6038A-2 to read in part as
follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.6038A-1 also issued under 26 U.S.C. 6001.
Section 1.6038A-2 also issued under 26 U.S.C. 6001.
* * * * *
0
Par. 2. Section 1.6038A-1 is amended as follows:
0
1. Paragraph (c)(1) is amended by adding a sentence at the end of the
paragraph.
0
2. The first sentence of paragraph (h) is revised.
0
3. The first sentence of paragraph (i)(1) is revised.
0
4. Paragraph (n)(1) is amended by adding a sentence at the end of the
paragraph.
0
5. Paragraph (n)(2) is amended by adding a sentence at the end of the
paragraph.
The additions and revisions read as follows:
Sec. 1.6038A-1 General requirements and definitions.
* * * * *
(c) * * *
(1) * * * A domestic business entity that is wholly owned by one
foreign person and that is otherwise classified under Sec. 301.7701-
3(b)(1)(ii) of this chapter as disregarded as an entity separate from
its owner is treated as an entity separate from its owner and
classified as a domestic corporation for purposes of section 6038A. See
Sec. 301.7701-2(c)(2)(vi) of this chapter.
* * * * *
(h) Small corporation exception. A reporting corporation (other
than an entity that is treated as a reporting corporation by reason of
Sec. 301.7701-2(c)(2)(vi) of this chapter) that has less than
$10,000,000 in U.S. gross receipts for a taxable year is not subject to
Sec. Sec. 1.6038A-3 and 1.6038A-5 for that taxable year.* * *
(i) Safe harbor for reporting corporations with related party
transactions of de minimis value--(1) In general. A reporting
corporation (other than an entity that is treated as a reporting
corporation by reason of Sec. 301.7701-2(c)(2)(vi) of this chapter) is
not subject to Sec. Sec. 1.6038A-3 and 1.6038A-5 for any taxable year
in which the aggregate value of all gross payments it makes to and
receives from foreign related parties with respect to related party
transactions (including monetary, nonmonetary consideration, and the
value of transactions involving less than full consideration) is not
more than $5,000,000 and is less than 10 percent of its U.S. gross
income.* * *
* * * * *
(n) * * *
(1) * * * The last sentence of paragraph (c)(1) of this section
(relating to certain domestic business entities), the parenthetical
language in paragraph (h) of this section (relating to entities that
are treated as reporting corporations by reason of Sec. 301.7701-
2(c)(2)(vi) of this chapter), and the parenthetical language in
paragraph (i)(1) of this section (relating to entities that are treated
as reporting corporations by reason Sec. 301.7701-2(c)(2)(vi) of this
chapter) apply to taxable years of such entities ending on or after the
date that is 12 months after the date of publication of the Treasury
decision adopting these rules as final regulations in the Federal
Register.
(2) * * * Paragraphs (b)(3)(xi) and (b)(9) of this section and the
last sentence of paragraph (d) of Sec. 1.6038A-2 apply to taxable
years of the entities described in Sec. 301.7701-2(c)(2)(vi) of this
chapter ending on or after the date that is 12 months after the date of
publication of the Treasury decision adopting these rules as final
regulations in the Federal Register.
* * * * *
0
Par. 3. Section 1.6038A-2 is amended as follows:
0
1. In paragraph (b)(3)(ix), remove the word ``and''.
0
2. In paragraph (b)(3)(x), remove the period at the end of the
paragraph and add ``; and'' in its place.
0
3. Add paragraph (b)(3)(xi).
0
4. Add paragraph (b)(9).
0
5. Add a sentence at the end of paragraph (d).
The additions and revisions read as follows:
Sec. 1.6038A-2 Requirements of return.
* * * * *
(b) * * *
(3) * * *
(xi) With respect to an entity that is treated as a reporting
corporation by reason of Sec. 301.7701-2(c)(2)(vi) of this chapter,
any other transaction as defined by Sec. 1.482-1(i)(7), such as
amounts paid or received in connection with the formation, dissolution,
acquisition and disposition of the entity, including contributions to
and distributions from the entity.
* * * * *
(9) Examples. The application of paragraph (b)(3) of this section
may be illustrated by the following examples:
Example 1. (i) In year 1, W, a foreign corporation, forms and
contributes assets to X, a domestic limited liability company that
does not elect to be treated as a corporation under Sec. 301.7701-
3(c) of this chapter. In year 2, W contributes funds to X. In year
3, X makes a payment to W. In year 4, X, in liquidation, distributes
its assets to W.
(ii) In accordance with Sec. 301.7701-3(b)(1)(ii) of this
chapter, X is disregarded as an entity separate from W. In
accordance with Sec. 301.7701-2(c)(2)(vi) of this chapter, X is
treated as an entity separate from W and classified as a domestic
corporation for purposes of section 6038A. In accordance with
paragraphs (a)(2) and (b)(3) of this section, each of the
transactions in years 1 through 4 is a reportable transaction with
respect to X. Therefore, X has a section 6038A reporting and record
maintenance requirement for each of those years.
Example 2. (i) The facts are the same as in Example 1 of this
paragraph (b)(9) except that in year 1 W also forms and contributes
assets to Y, another domestic limited liability company that does
not elect to be treated as a corporation under Sec. 301.7701-3(c)
of this chapter. In year 1, X and Y form and contribute assets to Z,
another domestic limited liability company that does not elect to be
treated as a corporation under Sec. 301.7701-3(c) of this chapter.
In year 2, X transfers funds to Z. In year 3, Z makes a payment to
Y. In year 4, Z distributes its assets to X and Y in liquidation.
(ii) In accordance with Sec. 301.7701-3(b)(1)(ii) of this
chapter, Y and Z are disregarded as entities separate from each
other, W, and X. In accordance with Sec. 301.7701-2(c)(2)(vi) of
this chapter, Y, Z and X are treated as entities separate from each
other and W, and are classified as domestic corporations for
purposes of section 6038A. In accordance with paragraph (b)(3) of
this section, each of the transactions in years 1 through 4
involving Z is a reportable transaction with respect to Z.
Similarly, the contribution to Y in year 1, the payment to Y in year
3, and the distribution to Y in year 4 are reportable transactions
with respect to Y. Moreover, X's funds transfer to Z in year 2 is a
reportable transaction. Therefore, Z has a section 6038A reporting
and record maintenance requirement for years 1 through 4, Y has a
section 6038A reporting and record maintenance requirement for years
1, 3 and 4, and X has a section 6038A reporting and record
maintenance requirement in year 2 in
[[Page 28788]]
addition to its section 6038A reporting and record maintenance
described in Example 1 of this paragraph (b)(9).
(d) * * * In the case of an entity that is treated as a reporting
corporation by reason of Sec. 301.7701-2(c)(2)(vi) of this chapter,
Form 5472 must be filed at such time and in such manner as the
Commissioner may prescribe in forms or instructions.
* * * * *
PART 301--PROCEDURE AND ADMINISTRATION
0
Par. 4. The authority citation for part 301 continues in part to read
as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 5. Section 301.7701-2 is amended by revising the last sentence of
paragraph (a) and adding paragraphs (c)(2)(vi) and (e)(9) to read as
follows:
Sec. 301.7701-2 Business entities; definitions.
(a) * * * But see paragraphs (c)(2)(iii) through (vi) of this
section for special rules that apply to an eligible entity that is
otherwise disregarded as an entity separate from its owner.
* * * * *
(c) * * *
(2) * * *
(vi) Special rule for reporting under section 6038A--(A) In
general. An entity that is disregarded as separate from its owner for
any purpose under this section is treated as an entity separate from
its owner and classified as a corporation for purposes of section 6038A
if--
(1) The entity is a domestic entity; and
(2) One foreign person has direct or indirect sole ownership of the
entity.
(B) Definitions--(1) Indirect sole ownership. For purposes of
paragraph (c)(2)(vi)(A)(2) of this section, indirect sole ownership
means ownership by one person entirely through one or more entities
disregarded as separate from their owners or through grantor trusts,
regardless of whether any such disregarded entity or grantor trust is
domestic or foreign.
(2) Entity disregarded as separate from its owner. For purposes of
this paragraph (c)(2)(vi)(B), an entity disregarded as separate from
its owner is an entity described in paragraph (c)(2)(i) of this
section, without regard to the exceptions provided in paragraphs
(c)(2)(ii) though (vi) of this section.
(3) Grantor trust. For purposes of this paragraph (c)(2)(vi)(B), a
grantor trust is any portion of a trust that is treated as owned by the
grantor or another person under subpart E of subchapter J of chapter 1
of the Code.
* * * * *
(e) * * *
(9) Reporting required under section 6038A. Paragraph (c)(2)(vi) of
this section applies to taxable years ending on or after the date that
is 12 months after the date of publication of the Treasury decision
adopting these rules as final regulations in the Federal Register.
John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2016-10852 Filed 5-6-16; 8:45 am]
BILLING CODE 4830-01-P