[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]


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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.

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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.
    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 foreign-
owned 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 
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.

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   Requirement of return.

* * * * *
    (b) * * *
    (9) 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.  301.7701-
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) * * * 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:


Sec.  1.6038A-2  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.  301.7701-
2(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.  301.7701-
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 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.  301.7701-
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, 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.  301.7701-
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.
    (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.  301.7701-
2(c)(2)(vi) of this chapter) is not required to make a return of 
information on Form 5472 with respect to a related 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

[[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