TD 9796 Treatment of Certain Domestic Entities

Federal Register, Volume 81 Issue 239 (Tuesday, December 13, 2016)

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[Federal Register Volume 81, Number 239 (Tuesday, December 13, 2016)]
[Rules and Regulations]
[Pages 89849-89852]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-29641]
----------------------------------------------------------------------DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 301
[TD 9796]
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: Final regulations.
----------------------------------------------------------------------SUMMARY: This document contains final regulations that 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.
DATES: Effective date: These regulations are effective December 13,
2016.
Applicability date: For dates of applicability, see Sec. Sec.
1.6038A-1(n)(1) and (2) and 301.7701-2(e)(9).
FOR FURTHER INFORMATION CONTACT: Ronald M. Gootzeit, (202) 317-6937
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in these final regulations
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 these final regulations is in
Sec. Sec. 1.6038A-2 and 1.6038A-3. This information will enhance the
United States' compliance with international standards of transparency
and exchange of information for tax purposes and will strengthen the
enforcement of U.S. tax laws. The likely respondents are foreign-owned
domestic entities that are disregarded as separate from their owners.

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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 and Explanation of Provisions
On May 10, 2016, the Department of the Treasury (Treasury
Department) and the Internal Revenue Service (IRS) published in the
Federal Register a notice of proposed rulemaking (REG-127199-15; 81 FR
28784) under sections 6038A and 7701 (the proposed regulations). The
proposed regulations 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 foreignowned domestic corporations under section 6038A of the Internal Revenue
Code. The proposed regulations would have applied to taxable years of
the entities described in Sec. 301.7701-2(c)(2)(vi) ending on or after
the date that is 12 months after the date of publication of the
Treasury decision adopting the proposed rules as final regulations in
the Federal Register.
In addition to generally soliciting comments on all aspects of the
proposed rules, the preamble to the proposed regulations specifically
requested comments on possible alternative methods for reporting a
domestic disregarded entity's transactions in cases in which the
foreign owner of the domestic disregarded entity 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.
No written comments on the proposed regulations were received, and
no public hearing was requested or held. However, these final
regulations reflect a limited number of changes by the Treasury
Department and the IRS to the proposed regulations.
First, it was and remains the intent of the Treasury Department and
the IRS that the generally applicable exceptions to the requirements of
section 6038A should not apply to a domestic disregarded entity that is
wholly owned by a foreign person. Accordingly, the proposed regulations
provided that the exceptions to the record maintenance requirements in
Sec. 1.6038A-1(h) and (i)
[[Page 89850]]
for small corporations and de minimis transactions would not apply to
these entities. The proposed regulations did not address the additional
exception provided in Sec. 1.6038A-2(e)(3), under which a reporting
corporation is not required to file 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 a related foreign corporation
when a U.S. person that controls the related foreign corporation files
a Form 5471, Information Return of U.S. Persons With Respect to Certain
Foreign Corporations, containing required information with respect to
reportable transactions between the reporting corporation and the
related foreign corporation for the taxable year. Similarly, the
proposed regulations did not address the additional exception provided
in Sec. 1.6038A-2(e)(4), under which a reporting corporation is not
required to file Form 5472 with respect to a related foreign

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corporation that qualifies as a foreign sales corporation for a taxable
year for which the foreign sales corporation files Form 1120-FSC, U.S.
Income Tax Return of a Foreign Sales Corporation. Upon final
consideration of the proposed regulations, the Treasury Department and
the IRS have concluded that, consistent with the scope and intent of
the proposed regulations, the reporting requirements of the proposed
regulations should apply without regard to the exceptions generally
applicable under Sec. 1.6038A-2(e)(3) and (4). The exceptions in Sec.
1.6038A-2(e)(3) and (4) are revised accordingly in the final
regulations.
Second, to facilitate entities' compliance with the requirements of
section 6038A, including the obligation of reporting corporations to
file Form 5472, the final regulations provide that these entities have
the same taxable year as their foreign owner if the foreign owner has a
U.S. return filing obligation. If the foreign owner has no U.S. return
filing obligation, then for ease of tax administration, the final
regulations provide that the taxable year of these entities is the
calendar year unless otherwise provided in forms, instructions, or
published guidance.
Third, the Treasury Department and the IRS have concluded that for
ease of administration, these regulations should apply to taxable years
of entities beginning on or after January 1, 2017, and ending on or
after December 13, 2017. The proposed regulations would have applied to
taxable years ending on or after the date that is 12 months after the
date of publication of the final regulations in the Federal Register,
without regard to the date on which the taxable year began. This
Treasury decision adopts the proposed regulations as so amended and
with other minor clarifications for readability.
Special Analyses
Certain IRS regulations, including these, are exempt from the
requirements of Executive Order 12866, as supplemented and reaffirmed
by Executive Order 13563. Therefore, a regulatory assessment is not
required. Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter
6), it is hereby certified that these regulations 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), the
proposed regulations were submitted to the Chief Counsel for Advocacy
of the Small Business Administration for comment on their impact on
small entities.
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.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.

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26 CFR Part 301
Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
Accordingly, 26 CFR parts 1 and 301 are 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-0 is amended by adding an entry for Sec.
1.6038A-2(b)(9) to read as follows:
Sec.

1.6038A-0

Table of contents.

* * * * *
Sec.

1.6038A-2

* * * *
(b)
(9)
* * * *

Requirement of return.

*
* * *
Examples.
*

0
Par. 3. Section 1.6038A-1 is amended as follows:
0
1. Add a sentence at the end of paragraph (c)(1).
0
2. Revise the first sentence of paragraph (h).
0
3. Revsie the first sentence of paragraph (i)(1).
0
4. Add a sentence at the end of paragraph (n)(1).
0
5. Add a sentence at the end of paragraph (n)(2).
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. 301.77013(b)(1)(ii) of this chapter as disregarded as an entity separate from

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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) * * * A reporting corporation (other than an entity that is a
reporting corporation as a result of being treated as a corporation
under 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) * * *
(1) * * * A reporting corporation (other than an entity that is a
reporting corporation as a result of being treated as a corporation
under 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
[[Page 89851]]
consideration, 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) * * * However, Sec. 1.6038A-1 as it applies to entities that
are reporting corporations as a result of being treated as a
corporation under Sec. 301.7701-2(c)(2)(vi) of this chapter applies to
taxable years of such reporting corporations beginning after December
31, 2016, and ending on or after December 13, 2017.
(2) * * * Section 1.6038A-2 as it applies to entities that are
reporting corporations as a result of being treated as a corporation
under Sec. 301.7701-2(c)(2)(vi) of this chapter applies to taxable
years of such reporting corporations beginning after December 31, 2016,
and ending on or after December 13, 2017.
* * * * *
0
Par. 4. Section 1.6038A-2 is amended as follows:
0
1. Revise the second sentence of paragraph (a)(2).
0
2. Revise paragraph (b)(3)(vii).
0
3. Remove the word ``and'' at the end of paragraph (b)(3)(ix).
0
4. Remove the undesignated paragraph following paragraph (b)(3)(x).
0
5. Remove the period at the end of paragraph (b)(3)(x) and add ``;
and'' in its place.
0
6. Add paragraphs (b)(3)(xi) and (b)(9).
0
7. Add a sentence at the end of paragraph (d).
0
8. Revise the first sentence of paragraph (e)(3).
0
9. Revise paragraph (e)(4).
The additions and revisions read as follows:

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Sec.

1.6038A-2

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Requirements of return.

(a) * * *
(2) * * * However, if neither party to the transaction is a United
States person as defined in section 7701(a)(30) (which, for purposes of
section 6038A, includes an entity that is a reporting corporation as a
result of being treated as a corporation under Sec. 301.77012(c)(2)(vi) of this chapter) and the transaction-* * * * *
(b) * * *
(3) * * *
(vii) Amounts loaned and borrowed (except open accounts resulting
from sales and purchases reported under other items listed in this
paragraph (b)(3) that arise and are collected in full in the ordinary
course of business), to be reported as monthly averages or outstanding
balances at the beginning and end of the taxable year, as the form
shall prescribe;
* * * * *
(xi) With respect to an entity that is a reporting corporation as a
result of being treated as a corporation under Sec. 301.77012(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 following examples illustrate the application of
paragraph (b)(3) of this section:
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. 301.77013(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

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this section, each of the transactions in years 1 through 4
involving Z is a reportable transaction with respect to Z.
Similarly, W's contribution to Y and Y's contribution to Z 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
contribution to Z in Year 1, X's funds transfer to Z in year 2, and
the distribution to X in year 4 are reportable transactions with
respect to X. 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 years 1, 2, and 4 in 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 a reporting corporation
as a result of being treated as a corporation under Sec. 301.77012(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.
(e) * * *
(3) * * * A reporting corporation (other than an entity that is a
reporting corporation as a result of being treated as a corporation
under Sec. 301.7701-2(c)(2)(vi) of this chapter) is not required to
make a return of information on Form 5472 with respect to a related
foreign corporation for a taxable year for which a U.S. person that
controls the foreign related corporation makes a return of information
on Form 5471 that is required under section 6038 and this section, if
that return contains information required under Sec. 1.6038-2(f)(11)
with respect to the reportable transactions between the reporting
corporation and the related corporation for that taxable year.* * *
(4) Transactions with a foreign sales corporation. A reporting
corporation (other than an entity that is a reporting corporation as a
result of being treated as a corporation under Sec. 301.77012(c)(2)(vi) of this chapter) is not required to make a return of
information on Form 5472 with respect to a related corporation that
qualifies as a foreign sales corporation for a taxable year for which
the foreign sales corporation files Form 1120-FSC.
* * * * *
PART 301--PROCEDURE AND ADMINISTRATION
0
Par. 5. The authority citation for part 301 continues to read in part
as follows:
Authority:

26 U.S.C. 7805 * * *

0
Par. 6. 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

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[[Page 89852]]
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 an entity 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 other
entities disregarded as entities separate from their owners or through
one or more 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
paragraph (c)(2)(vi)(B)(1) of this section, an entity disregarded as an
entity separate from its owner is an entity described in paragraph
(c)(2)(i) of this section.
(3) Grantor trust. For purposes of paragraph (c)(2)(vi)(B)(1) of
this section, 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.
(C) Taxable year. The taxable year of an entity classified as a
corporation for section 6038A purposes pursuant to paragraph
(c)(2)(vi)(A) of this section is-(1) The same as the taxable year of the foreign person described in
paragraph (c)(2)(vi)(A)(2) of this section, if that foreign person has
a U.S. income tax or information return filing obligation for its
taxable year; or
(2) The calendar year, if paragraph (c)(2)(vi)(C)(1) of this
section does not apply, unless otherwise provided in forms,
instructions, or published guidance.
* * * * *
(e) * * *
(9) Reporting required under section 6038A. Paragraph (c)(2)(vi) of
this section applies to taxable years of entities beginning after
December 31, 2016, and ending on or after December 13, 2017.
John Dalrymple,
Deputy Commissioner for Services and Enforcement.
Approved: November 15, 2016.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2016-29641 Filed 12-12-16; 8:45 am]
BILLING CODE 4830-01-P

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