Supporting Statement-1545-0026 - Final Rule-MS

SUPPORTING STATEMENT

Internal Revenue Service

Return by a U.S. Transferor of Property to a Foreign Corporation

Form 926

OMB Control Number 1545-0026

1. CIRCUMSTANCES NECESSITATING COLLECTION OF INFORMATION

Internal Revenue Code (IRC) 6038B, notice of certain transfers to foreign persons; state a foreign corporation, or a foreign partnership in a contribution, or makes a distribution to a person who is not a United States person, shall furnish to the Secretary, at such time and in such manner as the Secretary shall by regulations prescribed.

Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation; is used to report certain transfers by individuals, partnerships, corporations, or estate or trust of tangible or intangible property to a foreign corporation.

This request is being submitted to include final regulations (TD 9994), that terminate the continued application of certain tax provisions arising from a previous transfer of intangible property to a foreign corporation when the intangible property is repatriated to certain United States persons. The final regulations affect certain United States persons that previously transferred intangible property to a foreign corporation. Changes made by TD 9994 will result in an estimated burden increase of 1,601 hours.

2. USE OF DATA

IRS uses Form 926 to determine property that is transferred to a foreign corporation, partnership or a person that is not a United States person to compute the foreign tax credit.

3. USE OF IMPROVED INFORMATION TECHNOLOGY TO REDUCE BURDEN

Electronic filing of Form 926 is currently available.

4. EFFORTS TO IDENTIFY DUPLICATION

The information obtained through this collection is unique and is not already available for use or adaptation from another source.

5. METHODS TO MINIMIZE BURDEN ON SMALL BUSINESSES OR OTHER SMALL ENTITIES

The IRS proactively works with both internal and external stakeholders to minimize the burden on small businesses, while maintaining tax compliance. The Agency also seeks input regarding the burden estimates from the public via notices and tax product instructions. This form can be filed electronically, which further reduces any burden to small businesses.

6. CONSEQUENCES OF LESS FREQUENT COLLECTION ON FEDERAL PROGRAMS OR POLICY ACTIVITIES

A less frequent collection will not enable the IRS to meet its mission by verifying the foreign tax credits are being computed properly and in accordance with Internal Revenue Code § 6038B and will hinder the IRS from meeting its mission.

7. SPECIAL CIRCUMSTANCES REQUIRING DATA COLLECTION TO BE INCONSISTENT WITH GUIDELINES IN 5 CFR 1320.5(d)(2)

There are no special circumstances requiring data collection to be inconsistent with Guidelines in 5 CFR 1320.5(d)(2).

8. CONSULTATION WITH INDIVIDUALS OUTSIDE OF THE AGENCY ON AVAILABILITY OF DATA, FREQUENCY OF COLLECTION, CLARITY OF INSTRUCTIONS AND FORMS, AND DATA ELEMENTS

Periodic meetings are held between IRS personnel and representatives of the American Bar Association, the National Society of Public Accountants, the American Institute of Certified Public Accountants, and other professional groups to discuss tax law and tax forms. During these meetings, there is an opportunity for those attending to make comments regarding Form 926.

On May 3, 2023, the Department of the Treasury (“Treasury Department”) and the IRS published a notice of proposed rulemaking (REG-124064-19) in the Federal Register (88 FR 27819) under section 367 of the Code (“the proposed regulations”). The proposed regulations were intended to address simple, common fact patterns involving repatriations of intangible property by terminating the continued application of section 367(d) when a transferee foreign corporation repatriates intangible property subject to section 367(d) to a qualified domestic person when certain reporting requirements are satisfied. The proposed regulations also included a rule coordinating the application of section 367(d) and the provisions in §1.904-4(f)(2)(vi)(D) that apply the principles of section 367(d) to determine the appropriate amount of gross income attributable to a foreign branch. A “repatriation”, unless otherwise noted, denotes a subsequent transfer of intangible property to the U.S. transferor or a U.S. person related to the U.S. transferor.

Three commenters submitted comments on the proposed regulations, which are available at www.regulations.gov or upon request. No public hearing on the proposed regulations was requested or held. The comments also made various requests for future guidance, which the Treasury Department and the IRS will consider as part of a potential future rulemaking addressing, among other things, general issues under section 367(d).

One commenter suggested that the Treasury Department and the IRS modify the definition of qualified domestic person to include certain partnerships; namely, partnerships in which all of the partners in the partnership would themselves be qualified domestic persons, or partnerships that made the original outbound transfer of the intangible property subject to section 367(d) when there is substantial continuity of ownership of that partnership during the period beginning on the date of the initial section 367(d) transfer and ending on the date of the repatriation of the intangible property.

As part of the modification, the commenter also described various approaches for addressing the concerns identified in the proposed regulations regarding, for example, the potential for post-repatriation changes to partnership allocations or liquidation rights to frustrate the purposes of the proposed regulations if a partnership, or a partner in the partnership, were permitted as a qualified domestic person in certain cases.

Specifically, the commenter suggested that the final regulations, in adopting the modification, could limit its application by requiring a specific period after the repatriation during which the ownership or interests in the partnership could not change. Additionally, the commenter suggested that, to provide flexibility while protecting against the concerns outlined in the proposed regulations, the final regulations could allow the Commissioner to exercise discretion at a taxpayer’s request to determine that a post-distribution change in the ownership of the partnership, or in the economic rights of the partners with respect to the intangible property, would not taint the partnership’s status as a qualified domestic person.

Finally, the commenter also described more general, long-standing issues under section 367(d) related to the treatment of partnerships within the section 367(d) regime, and ultimately suggested that resolution of those issues should not impede finalizing the proposed regulations.

Another commenter also described general, long-standing issues under section 367(d) related to the treatment of partnerships without making explicit recommendations. These issues were identified in the proposed regulations. For example, the commenter pointed to §§1.367(a)-1T(c)(3)(i) and 1.367(d)-1T(a), which apply an aggregate approach upon an initial outbound transfer.

The Treasury Department and the IRS do not adopt these comments in the final regulations; therefore, the final regulations adopt the definition of qualified domestic person from the proposed regulations without change. The issues identified by the commenters, along with potential solutions to those issues, were acknowledged in the preamble to the proposed regulations, and the Treasury Department and the IRS continue to believe that the approach outlined in the proposed regulations strikes the appropriate balance between implementing the purposes and scope of the proposed regulations and concerns regarding administrability and compliance.

One commenter suggested that the final regulations allow S corporations as qualified corporations. The comment noted that the shareholders of an S corporation must generally be U.S. individuals subject to U.S. taxation, which ensures that income attributable to intangible property held by an S corporation would be subject to U.S. taxation (though the commenter noted that the limitation is not absolute, as certain plans described in section 401(a) may be shareholders of an S corporation).

The Treasury Department and the IRS do not adopt this comment in the final regulations; therefore, the final regulations adopt the definition of qualified domestic person from the proposed regulations without change.

A principle for the definition of qualified domestic person is that termination of the continued application of section 367(d) should occur only when all the income produced by the intangible property, as well as gain recognized on a disposition of the intangible property, will be subject to current tax in the United States. In the case of an S corporation, that result is not guaranteed. For example, even in the case where an S corporation does not have an ESOP as a shareholder as of the time it receives intangible property, the ownership structure could change, potentially eroding the extent to which the intangible property produces income that is subject to current tax in the United States.

One commenter described how existing uncertainty regarding the treatment of adjusted basis of intangible property subject to section 367(d) may be implicated when that intangible property is repatriated. The commenter noted that any solution would necessarily represent a broad solution to existing section 367(d) issues, instead of one limited to the proposed regulations, so the commenter recommended the Treasury Department and the IRS address this issue in future rulemaking.

The Treasury Department and the IRS agree with the commenter that any resolution of general issues regarding adjusted basis under section 367(d) is beyond the scope of this rulemaking. Proposed §1.367(d)-1(f)(4)(iv) is therefore finalized without change.

One commenter suggested that the proposed regulations were unclear as to whether the allowable deduction described in proposed §§1.367(d)-1(c)(2)(ii) and (e)(2)(ii) was limited to the listed provisions (§§1.882-4(b)(1), 1.954-1(c), and 1.960-1(c) and (d)) or whether such deduction was more generally available (for example, as a deduction under section 162). The commenter posited that the latter approach was more appropriate and requested that the final regulations clarify that the allowable deduction may be allowed as a deduction under section 162. In support, the commenter described how, in the case of certain transfers of intangible property to a U.S. person that is not a qualified domestic person, “excessive U.S. taxation” could result if the allowable deduction were limited to the listed provisions, which are provisions relevant to determinations with respect to foreign corporations.

The Treasury Department and the IRS do not adopt this comment. The proposed regulations terminated the continued application of section 367(d) upon certain, rather than all, subsequent transfers of intangible property to a U.S. person (that is, upon a repatriation to a qualified domestic person if certain reporting requirements are met).

One commenter suggested changes to the proposed regulations to accommodate repatriations preceded by certain transfers of intangible property subject to section 367(d) between related foreign corporations. To illustrate this suggestion, the commenter posited an example pursuant to which a repatriation was first preceded by a distribution under section 311 of the intangible property (the “first section 311 distribution”) from one CFC (the “original TFC”) to another CFC (the “successor TFC).

Essentially, the example posited in the comment highlights that it may be possible to recognize income under both sections 951A and 367(d) with respect to the same property in some fact patterns where separate transactions occur in separate foreign corporations, notwithstanding that that result would not occur in cases where the property is not transferred among multiple foreign corporations. Coordinating potential disparities between income recognition under 367(d) as compared to other generally applicable provisions of the Code, and potential disparities in tax basis for purposes of section 367(d) as compared to adjusted basis for other purposes, is beyond the scope of this rulemaking. The request for additional guidance addressing multiple related transfers is, therefore, not adopted.

One commenter requested clarifications of the reporting and relief provisions. First, the commenter requested that the final regulations clarify whether relief for a failure to comply is, in relevant part, also conditioned on the U.S. transferor timely filing one or more amended returns for the taxable year in which the subsequent transfer occurred and succeeding years, and, if the U.S. transferor is under examination when an amended return is filed, providing a copy of the amended return(s) to the IRS personnel conducting the examination. The relief for a failure to comply is conditioned upon the requirements listed in the previous sentence (if applicable). The Treasury Department and the IRS adopt this comment by making a change to the format of §1.367(d)-1(f)(5) to clarify this requirement.

The commenter also requested that the Treasury Department and the IRS consider prescribing in the future a particular form for filing the required information under proposed §1.367(d)-1(f)(5). The Treasury Department and the IRS will consider this comment as part of future improvements to reporting with respect to section 367(d) generally.

Finally, the commenter also suggested clarifications or modifications to the requirements in proposed §1.367(d)-1(f)(5) that a U.S. transferor “promptly” address its failure to file and to the way the U.S. transferor provides the remedial information (that is, to the Director of Field Operations, Cross Border Activities Practice Area of Large Business & International, or any successor to that role). The comment suggested that “promptly” does not provide sufficient guidance to taxpayers (the comment requested a prescribed period) and the comment asserted that it is unusual for regulations to require a taxpayer to provide information directly to a specified official within the IRS. The Treasury Department and the IRS do not adopt these suggestions. The Treasury Department and the IRS believe that “promptly” requiring the U.S. transferor to address its failure to comply, rather than providing a specific period, allows flexibility so that the relief may apply as appropriate to a taxpayer’s particular facts and circumstances.

One commenter requested, in relevant part, that the final regulations clarify that TFC’s earnings and profits and gross income arising by reason of the repatriation are reduced by the amount of gain recognized by USP under proposed §1.367(d)-1(f)(4)(i)(A) ($50x). The Treasury and the IRS adopt the comment by clarifying in the facts of the example that, under §1.367(d)-1(f)(2)(i), TFC will reduce its earnings and profits and gross income by $50x, the amount arising by reason of the repatriation and the amount of gain recognized by USP under §1.367(d)-1(f)(4)(i)(A).

One commenter requested that the Treasury Department and the IRS finalize the provisions of the proposed regulations without finalizing proposed §1.904-4(f)(2)(vi)(D)(4). The commenter suggested that such an approach could allow for further consideration of ways to simplify the application of section 367(d) principles in §1.904-4(f)(2)(vi)(D). The commenter suggested that instead of finalizing proposed §1.904 -4(f)(2)(vi)(D)(4), that provision could be adopted as a temporary regulation, or alternatively, this preamble could state that, until the implementation of final regulations addressing this issue, the Treasury Department and the IRS intend that rules related to section 367(d), and subsequent transfer will not apply for purposes of section 904(d).

A broader reconsideration of the application of section 367(d) principles in §1.904-4(f)(2)(vi)(D) is beyond the scope of these final regulations. While a broader reconsideration may be considered in future guidance, the Treasury Department and the IRS believe it is necessary to finalize proposed §1.904-4(f)(2)(vi)(D)(4) to ensure the proper application of the broader foreign branch income rules under §1.904-4(f)(2)(vi)(D) as the rules currently stand. Accordingly, the Treasury Department and the IRS do not adopt this comment and proposed §1.904-4(f)(2)(vi)(D) is finalized without change.

9. EXPLANATION OF DECISION TO PROVIDE ANY PAYMENT OR GIFT TO RESPONDENTS

No payment or gift has been provided to any respondents.

10. ASSURANCE OF CONFIDENTIALITY OF RESPONSES

Generally, tax returns and tax return information are confidential as required by 26 USC 6103.

11. JUSTIFICATION OF SENSITIVE QUESTIONS

A privacy impact assessment (PIA) has been conducted for information collected under this request as part of the “Business Master File (BMF)” system and a Privacy Act System of Records notice (SORN) has been issued for this system under IRS 24.046-Customer Account Data Engine Business Master File. The Internal Revenue Service PIAs can be found at http://www.irs.gov/uac/Privacy-Impact-Assessments-PIA.

Title 26 USC 6109 requires inclusion of identifying numbers in returns, statements, or other documents for securing proper identification of persons required to make such returns, statements, or documents and is the authority for social security numbers (SSNs) in IRS systems.

12. ESTIMATED BURDEN OF INFORMATION COLLECTION

Use Form 926 to report certain transfers of tangible or intangible property to a foreign corporation, as required by section 6038B. Business filing estimates are being reported under 1545-0123 and individual estimates are under 1545-0074. The following data represents the estate and trust filers of Form 926.

Authority	Description	# of Respondents	# Responses per Respondent	Annual Responses	Hours per Response	Total Burden
1.6038B-1	Form 926 - Return by a U.S. Transferor of Property to a Foreign Corporation	667	1	667	42.89	28,608
1.6038B-1(d)(2)(iv)*	TD 9994				2.40	1,601
	Totals			667	45.29	30,209

* The regulation is a subset of the form burden. It is not increasing the number of respondents/responses but is estimated to increase the time per response for the form.

The following are related regulations which impose no additional burden. Please continue to assign OMB number 1545-0026 to these regulations.

1.367(a)-1T -2T	1.367(a)-3	1.6038B-1(d)(2)(iv)
1.367(a)-3(c)	1.367(a)-6T
1.367(a)-8	1.367(b)-1(c)
1.367(d)-1T	1.6038B-1T

13. ESTIMATED TOTAL ANNUAL COST BURDEN TO RESPONDENTS

To ensure more accuracy and consistency across its information collections, IRS is currently in the process of revising the methodology it uses to estimate burden and costs. Once this methodology is complete, IRS will update this information collection to reflect a more precise estimate of burden and costs.

14. ESTIMATED ANNUALIZED COST TO THE FEDERAL GOVERNMENT

The Federal government cost estimate is based on a model that considers the following three cost factors for each information product: aggregate labor costs for development, including annualized startup expenses, operating and maintenance expenses, and distribution of the product that collects the information.

The government computes cost using a multi-step process. First, the government creates a weighted factor for the level of effort to create each information collection product based on variables such as complexity, number of pages, type of product and frequency of revision. Second, the total costs associated with developing the product such as labor cost, and operating expenses associated with the downstream impact such as support functions, are added together to obtain the aggregated total cost. Then, the aggregated total cost and factor are multiplied together to obtain the aggregated cost per product. Lastly, the aggregated cost per product is added to the cost of shipping and printing each product to IRS offices, National Distribution Center, libraries, and other outlets. The result is the Government cost estimate per product.

The government cost estimate for this collection is summarized in the table below.

Product	Aggregate Cost per Product (factor applied)		Printing and Distribution		Government Cost Estimate per Product
Form 926	$ 20,487		--		$ 20,487
Form 926 Instructions	$ 8,049		--		$ 8,049
Grand Total	$ 28,536		--		$ 28,536

15. REASONS FOR CHANGE IN BURDEN

The burden changes are due to the requirement to provide specific information concerning a subsequent transfer of intangible property as described in §1.367(d)-1(f)(4)(i).

	Requested	Program Change Due to New Statute	Program Change Due to Agency Discretion	Change Due to Adjustment in Agency Estimate	Change Due to Potential Violation of the PRA	Previously Approved
Annual Number of Responses	667	0	0	0	0	667
Annual Time Burden (Hr)	30,209	0	1,601	0	0	28,608

This submission is being made to revise a currently approved collection.

16. PLANS FOR TABULATION, STATISTICAL ANALYSIS AND PUBLICATION

There are no plans for tabulation, statistical analysis, and publication.

17. REASONS WHY DISPLAYING THE OMB EXPIRATION DATE IS INAPPROPRIATE

We believe that displaying the OMB expiration date is inappropriate because it would cause confusion by leading taxpayers to believe that the form sunsets as of the expiration date. Taxpayers may not be aware that the IRS intends to request renewal of the OMB approval and obtain a new expiration date before the old one expires.

18. EXCEPTIONS TO THE CERTIFICATION STATEMENT

There are no exceptions to the certification statement for this collection.

Note: The following paragraph applies to all the collections of information in this submission:

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 OMB control number. Books or records relating to a collection of information must be retained if 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.

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