Alexandre M. Denault & Jonathan E. Gopman – Treasury Department Extends Form 5472 Filing Requirements to Foreign-Owned Domestic Disregarded Entities

Treasury Department Extends Form 5472 Filing Requirements to Foreign-Owned Domestic Disregarded Entities

By: Alexandre M. Denault & Jonathan E. Gopman

On May 10, 2016, Treasury issued proposed regulations (the “Proposed Regulations“) which enable the Internal Revenue Service (the “Service“) to collect certain information about domestic disregarded entities with a single foreign owner. The purpose of the Proposed Regulations is to collect information to be used in the exchange of information with foreign countries under tax treaties, taxpayer information exchange agreements and other inter-governmental agreements, and also to be used  to better enforce the tax laws of the United States. The information collected under this new initiative will be used to help prevent money laundering, tax evasion, and other illicit financial activities.

Under the current law a domestic disregarded entity with a single foreign owner often has no obligation to report any information to the United States government about itself or its foreign owner. The Treasury Department was concerned that these types of disregarded entities could be used surreptitiously by foreign persons in connection with illegal activities or for purposes of tax evasion. Thus, Treasury Secretary Jacob J. Lew views this issue as an example of a gap in the tax law that allows “bad actors to deliberately use U.S. companies to hide money laundering, tax evasion, and other illicit financial activities.”[1]

A disregarded entity is a term used to describe a company with a single owner that is not regarded as a separate entity from its owner for United States federal tax purposes. In other words, a disregarded entity is generally nonexistent from a substantive United States federal tax perspective. For example, a single-member limited liability company formed under the law of Florida is classified by default as a disregarded entity.[2]

Partly in response to international pressure, one of Treasury’s recent priorities has shifted to the creation of a more transparent tax and financial system in the United States. It views greater transparency in tax administration as necessary to strengthen its ability to counter money laundering, tax evasion and other illicit activities. With this objective Treasury issued the Proposed Regulations which enable the Service to collect certain information about domestic disregarded entities with a single foreign owner. The United States intends to exchange this information with foreign countries under tax treaties, taxpayer information exchange agreements and other inter-governmental agreements, and also use it to better enforce the tax laws of the United States.

At present, § 6038A of the Internal Revenue Code (the “Code“) requires a domestic corporation which is at least twenty-five percent (25%) foreign-owned to furnish certain information to the Service with regard to reportable transactions.[3] The regulations extend this obligation to a foreign corporation that is twenty-five percent (25%) foreign-owned and engaged in trade or business within the United States.[4] The reportable information includes the name, principal place of business, nature of business, and country of organization or residency of each foreign person which is a related party with respect to the corporation and had a reportable transaction with the corporation during its taxable year.[5] Information about reportable transactions must also be included in the report to the Service. A related party includes a shareholder who owns twenty-five percent (25%) or more of the voting power or value of the corporation.[6] Reportable transactions include transactions between the corporation and its twenty-five percent (25%) foreign shareholder such as sales of certain types of property, payments of commissions and loans.[7]

The information required to be reported under § 6038A of the Code must be furnished to the Service annually 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).[8] The corporation is also required to maintain books and records that are sufficient to establish the accuracy of the information.[9] A monetary penalty of ten thousand dollars ($10,000) may be assessed on any corporation that fails to file Form 5472 when due or that fails to maintain the required books and records.[10] Criminal penalties may also apply for failure to submit the required information or for filing false or fraudulent information.[11]

The Proposed Regulations extend the information reporting obligations under § 6038A of the Code to domestic disregarded entities with a single foreign owner by treating such entities as domestic corporations for this limited purpose.[12] The Proposed Regulations also expand the category of reportable transactions that apply to these domestic disregarded entities to include “any sale, assignment, lease, license, loan, advance, contribution, or any other transfer of any interest in or a right to use any property (whether tangible or intangible, real or personal) or money, however such transaction is effected, and whether or not the terms of such transaction are formally documented.”[13] Thus, a foreign person’s contributions to, and distributions from, a domestic disregarded entity are reportable transactions.[14] Under the Proposed Regulations, a domestic disregarded entity with a single foreign owner that has a reportable transaction would be required to apply for and obtain an Employer Identification Number (“EIN“) for purposes of satisfying its reporting obligations on Form 5472.

By requiring domestic disregarded entities to obtain an EIN and file Form 5472, Treasury wants to deter abuses from the use of these types of entities and collect more information about the owners and related transactions which it can use for law enforcement purposes.

The Proposed Regulations apply to taxable years of domestic disregarded entities ending on or after the date that is twelve (12) months after the date of publication of the Treasury decision adopting the rules as final regulations in the Federal Register.[15]

Alexandre M. Denault is a tax attorney in the Tax Practice Group at Akerman LLP. He focuses his practice on domestic and international tax planning matters, including inbound and outbound business and real estate tax planning for large corporations, joint ventures and ultra-high-net-worth private clients.  Mr. Denault is a frequent speaker and author, and currently serves as the President of the Greater Miami Tax Institute in Miami, Florida. Mr. Denault graduated from the University of Florida Levin College of Law, cum laude, with a J.D., and from New York University with an LL.M. in Taxation.

Jonathan E. Gopman is chair of the trusts and estates practice at Akerman LLP, a fellow of the American College of Tax Counsel and a member of the American Bar Association and the ABA’s Section of Real Property, Trust and Estate Law. He is co-chair of the Asset Protection Planning Committee of the RPTE Section of the ABA (for the 2015-2016 bar year). He is a fellow of the American Bar Foundation and an adjunct professor of taxation at Ave Maria Law School in Naples, Florida where he also serves on the school’s curriculum planning committee and served as the chair of the steering committee for the school’s inaugural Estate Planning Day Conference held April 28, 2014. He continues to serve as a member of the steering committee for this conference. Jonathan is a commentator on asset protection planning matters for Leimberg Information Services, Inc., a member of the legal advisory board of Commonwealth Trust Company in Wilmington, Delaware, and a member of STEP. He is AV rated by Martindale Hubbell. Jonathan is the co-author of the revised version of the BNA Tax Management Portfolio on Estate Tax Payments and Liabilities. He has been interviewed for, and quoted in, numerous articles in well-known publications such as the New York Times, Bloomberg Magazine, Forbes Magazine, Wealth Manager Magazine and the Elite Traveler. In 2009, 2010, 2011, 2012, 2013, 2014 and 2015 Jonathan was selected for inclusion in The Best Lawyers in America® in the specialty of trusts and estates, he was selected as a Florida Super Lawyer for 2010, 2011, 2012, 2013, 2014, 2015 and 2016 and he was included in the Florida Trend Legal Elite for 2010 and 2011. In the December 2005 and 2007 issues of Worth Magazine Jonathan was recognized as one of the top one hundred estate planning attorneys in the country. Jonathan is considered one of the leading experts in the world on asset protection planning. Jonathan is the originator of the idea for the statutory tenancy by the entireties trust (commonly referred to as a “STET,” a termed he coined) that is set forth in § 3574(f) of Title 12 of Chapter 35 of the Delaware Statutes. This statute was enacted into law in Delaware in July of 2010 and became effective on August 1, 2010. A substantially similar version of the statute in Delaware enabling the creation of a STET was passed in Nevis by the Nevis Island Assembly on May 27, 2015. Jonathan was the primary draftsperson of that statute for the government of Nevis. Jonathan’s articles, commentaries and presentations have also served as the impetus for changes to the trust laws of several states. In calendar years 2011 through 2015, Jonathan assisted the government of Nevis in revising its trust laws set forth in the Nevis International Exempt Trust Ordinance by rewriting a significant portion of the Ordinance. This legislation was enacted on May 27, 2015 by the Nevis Island Assembly.

[1] Letter to House Speaker Paul D. Ryan dated May 5, 2016.

[2] Treas. Reg. 301.7701-3.

[3] Code section 6038A.

[4] Treas. Reg. 1.6038A-1(c)(1).

[5] For these purposes, a foreign person is generally any person who is not a United States person as defined in section 7701(a)(30) of the Code. Treas. Reg. 1.6038A-1(f).

[6] Treas. Reg. 1.6038A-1(c)(3).

[7] Treas. Reg. 1.6038A-2(b).

[8] Treas. Reg. 1.6038A-2(a).

[9] Treas. Reg. 1.6038A-3.

[10] Treas. Reg. 1.6038A-4(a).

[11] Treas. Reg. 1.6038A-4(e).

[12] Prop. Reg. 301.7701-2(c)(2)(vi); Prop. Reg. 1.6038A-1(c)(1).

[13] Prop. Reg. 1.6038A-2(b)(3)(xi).

[14] Prop. Reg. 1.6038A-2(b)(9).

[15] Prop. Reg. 1.6038A-2(n)(2).

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