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Partnership Tax Bulletin (January 1999)
International Tax Bulletin (January 1999)

IRS Proposes Foreign
Partnership Reporting Rules




By Brian Wainwright, a tax partner in the Palo Alto office of Pillsbury Winthrop Shaw Pittman LLP. If you have or can obtain the Acrobat Reader, or have an Acrobat 3.0-enabled web browser, you may wish to review the printed versions of our partnership bulletin containing this article, a 120K pdf file, or of our international bulletin containing this article, a 123K pdf file, or the Materials Available On-Line at the end of this article for links to the administrative material discussed herein. For a discussion of the legislative background to the proposed regulations, see our August 1997 International Tax Bulletin, particularly the section entitled Transfers to Foreign Entities.

This description of proposed regulations concerning information reporting with respect to foreign partnerships is part of the Pillsbury Winthrop Shaw Pittman LLP Tax Page, a World Wide Web demonstration project. Comments are welcome on the design or content of this material. However, this material is not intended and cannot be regarded as legal or tax advice.


The Taxpayer Relief Act of 1997 (P.L. 105-34, the "Act") revised the U.S. federal tax information reporting requirements relating to foreign partnerships. The Act clarified that a foreign partnership is generally not required to file a U.S. federal tax information return unless the foreign partnership has gross income either form U.S. sources or effectively connected with the conduct of a U.S. trade or business. Internal Revenue Code sections 6038, 6038B and 6046A, as revised by the Act, essentially shift the burden of U.S. tax reporting from foreign partnerships to their U.S. partners. On September 9, 1998, the Internal Revenue Service ("IRS") proposed regulations (Income Tax Regulations sections 1.6038-3, 1.6038B-2 and 1.6046A-1) implementing the revised reporting requirements imposed by the Act. In addition, in the October 9, 1998 Internal Revenue Bulletin, the IRS published drafts of revised Form 8865 and its instructions which will ultimately be used to comply with the revised reporting obligations.

General Definitions

For purposes of the revised reporting requirements, a person is deemed to be in control of a partnership (a "controlling partner") if the person owns, directly or indirectly, more than a 50-percent interest in the partnership.[fn. 1] A 50-percent interest in a partnership is an interest equal to 50 percent of the capital interest, 50 percent of the profits interest or an interest to which 50 percent of partnership losses or deductions are allocated.[fn. 2] A 10-percent interest in a partnership is an interest equal to 10 percent of the capital interest, 10 percent of the profits interest, or an interest to which 10 percent of partnership losses or deductions are allocated.[fn. 3] For purposes of these determinations, the constructive ownership rules of Internal Revenue Code section 267(c) (other than section 267(c)(3)) apply taking into account the fact that by their terms these rules deal with the constructive ownership of corporate stock not partnership interests;[fn. 4] the applicable constructive ownership rules generally provide for family and proportional entity attribution. Since reporting requirements for a particular taxable year depend on partners' interests for that year,[fn. 5] special income and loss allocations (e.g., minimum gain chargebacks, qualified income offsets and loss allocation limitation rules) can cause a particular partner's reporting obligations to change from year to year.

Reporting with Respect to Certain Foreign Partnerships

Controlling U.S. Partners

Every U.S. person who controls a foreign partnership is required under Internal Revenue Code section 6038 to file Form 8865 for that partnership.[fn. 6] The proposed regulations require a controlling partner to provide the following information:

  • The name, address and employer identification number, if any, of the foreign partnership,

  • The nature of the partnership's business and the principal place where conducted,

  • The date of organization and country under the laws of which the partnership was organized,

  • A balance sheet showing assets, liabilities and capital of the partnership as of the end of the partnership's annual accounting period,

  • A summary of the outstanding ownership interests in the partnership,

  • A summary showing the total amount of transactions between the partnership and the controlling partner and any other partnership or corporation controlled by that partner or by any U.S. person owning at the time of the transaction at least a 10-percent interest in the controlled partnership,

  • The amount of the foreign taxes of the partnership paid or accrued,

  • A statement of the partners' distributive share of income, gain, losses, deductions and credits and

  • A statement of income, gains, losses, deductions and credits allocated to each U.S. person holding at least a 10-percent interest in the foreign partnership.[fn. 7]

The draft Form 8865 and instructions make it clear that the statement of partners' distributive share is a classification of amounts allocated to all partners;[fn. 8] amounts allocated to specific partners are required only for 10-percent or greater U.S. partners.[fn. 9]

If there is more than one U.S. controlling partner for the same foreign partnership for the same annual accounting period, only one of the U.S. controlling partners need file Form 8865 as long as the Form 8865 actually filed contains all the information that would have been included had multiple Forms 8865 been filed; however, a U.S. partner in control by virtue of being allocated losses and deductions can be the filing partner only if no U.S. partner has a greater than 50 percent interest in capital or profits.[fn. 10] The U.S. controlling partners not filing Form 8865 must nonetheless include a statement (a "Substitute Statement") with their federal income tax returns:

  • indicating that the Form 8865 filing requirement has or will be satisfied,

  • identifying the person required to file Form 8865 and

  • identifying the IRS Service Center where the Form 8865 is required to be filed.[fn. 11]

10-Percent U.S. Partners

Each U.S. person holding a 10-percent or greater interest in a foreign partnership controlled by U.S. persons holding at least a 10-percent interest must also file Form 8865; however, no Form 8865 is required if there is a U.S. controlling partner of the foreign partnership.[fn. 12] The draft instructions to Form 8865 indicate that a 10-percent U.S. partner need provide only the following information:

  • The name, address and employer identification number, if any, of the foreign partnership,

  • The nature of the partnership's business and the principal place where conducted,

  • The date of organization and country under the laws of which the partnership was organized and

  • A summary showing the total amount of transactions between the partnership and the 10-percent U.S. partner and any other partnership or corporation controlled by that partner.

General Provisions

A separate Form 8865 is required for each controlled foreign partnership.[fn. 13] A U.S. controlling or 10-percent partner files Form 8865 with the partner's federal income tax return for the taxable year with or within which the annual accounting period of the foreign partnership covered by Form 8865 ends.[fn. 14] The draft instructions to Form 8865 require a copy of the form to filed with the Internal Revenue Service Center in Philadelphia. Form 8865 is to be completed in English with all amounts shown in U.S. dollars and an indication of any exchange rates used.[fn. 15] A U.S. person otherwise required to file Form 8865 need not file if:

  • The U.S. person does not directly own any interest in the foreign partnership,

  • The U.S. person is otherwise required to file solely by reason of the attribution rules,

  • The U.S. person from whom ownership is attributed files all the required information and

  • The excused U.S. person files a Substitute Statement.[fn. 16]

Penalties

Two sets of penalties apply to U.S. controlling and 10-percent partners failing properly to file Form 8865. First, a $10,000 penalty applies for each annual accounting period for each foreign partnership for which a failure occurs.[fn. 17] If the failure to file Form 8865 continues for more than 90 days after notice from the IRS to the U.S. person of the failure to file, an additional $10,000 penalty is imposed for each succeeding 30-day period (or portion thereof) during which the failure continues;[fn. 18] this additional penalty is limited to a maximum of $50,000 for any one annual accounting period for any one foreign partnership.[fn. 19]

Secondly, any U.S. controlling or 10-percent partner failing to file Form 8865 will suffer a 10 percent reduction in the amount which can be treated as foreign taxes paid or deemed paid for the partner's taxable year the return for which was required to include Form 8865; this penalty does not, however affect foreign tax credit carryovers to that taxable year arising from other years.[fn. 20] If the failure to file Form 8865 continues for more than 90 days after notice from the IRS to the U.S. person of the failure to file, there is an additional foreign tax reduction of 5 percent for each succeeding 3-month period (or portion thereof) during which the failure continues.[fn. 21] This additional foreign tax reduction is limited to the greater of $10,000 or the foreign partnership's income for the annual accounting period with respect to which the failure to file occurs.[fn. 22] In addition, the entire foreign tax reduction, including the initial 10 percent reduction, is decreased (but not below zero) by the amount of penalty under the first set of penalties imposed with respect to the same failure to file.[fn. 23]

Effective Dates

The Form 8865 filing requirements for controlling and 10-percent U.S. partners will apply to annual accounting periods of foreign partnerships beginning on or after the date final regulations are promulgated.[fn. 24] Thus, for calendar year foreign partnerships and U.S. partners the requirements can apply, at the earliest, to federal income tax returns for the year 2000.

Transfers to Foreign Partnerships

In General

A U.S. person making a transfer to a foreign partnership in a contribution described in Internal Revenue Code section 721 is required under Internal Revenue Code section 6038B to file Form 8865 with that person's federal income tax return for the taxable year which includes the date of transfer if:

  • The U.S. person holds immediately after the transfer directly or indirectly at least a 10-percent interest in the foreign partnership or

  • The value of the property transferred by the U.S. person or any related person to the foreign partnership or a related partnership within the 12-month period ending on the date of transfer exceeds $100,000.[fn. 25]

If the U.S. transferor is also required to file Form 8865 for the period during which the transfer occurs as a controlling or 10-percent partner, then the transfer is to reported on Form 8865 filed for the foreign partnership's annual accounting period, rather than for the transferor's taxable year.[fn. 26] As with the controlling and 10-percent partner rules, a transferor otherwise required to file Form 8865 by virtue of a transfer of property to a foreign partnership need not file the form if:

  • The U.S. person does not directly own any interest in the foreign partnership,

  • The U.S. person is otherwise required to file solely by reason of the attribution rules,

  • The U.S. person from whom ownership is attributed files all the required information and

  • The excused U.S. person files a Substitute Statement.[fn. 27]

The information required to be provided on Form 8865 includes:

  • The name, address and U.S. taxpayer identification number of the U.S. person filing the form,

  • The name, U.S. taxpayer identification number (if any) and address of the transferee foreign partnership and the type of entity and country under the laws of which the partnership was created or organized,

  • A general description of the transfer, including its date, and of any larger transaction of which the transfer forms a part,

  • The names and addresses of the other partners in the foreign partnership, unless the transfer is solely of cash and the transferor holds less than a 10-percent interest in the foreign partnership immediately after the transfer,

  • A description of the partnership interest received by the U.S. transferor, including a change in an existing interest,

  • A separate description of each item of contributed property which is either intangible property or appreciated property subject to the built-in gain allocation rules of Internal Revenue Code section 704(c) (except to the extent those allocation rules permit aggregation of separate properties) and

  • A description of other contributed property aggregated by the following categories: (i) inventory, (ii) other tangible property used in a trade or business, (iii) cash, (iv) stock, notes payable and receivable and other securities and (v) other property.[fn. 28]

If a U.S. person was required to report the contribution to a foreign partnership of appreciated property, the U.S. person, if still a partner, must report on another Form 8865 any disposition of that property by the foreign partnership.[fn. 29] The information to be reported on Form 8865 includes:

  • The date and manner of disposition,

  • The gain and depreciation recapture amount, if any, realized by the partnership and

  • Any such amounts allocated to the U.S. partner.[fn. 30]

If a foreign partnership disposes of the contributed built-in gain property in a nonrecognition transaction, receiving substitute basis property in exchange, the U.S. partner contributing the original property, if still a partner, must report on Form 8865 the disposition of the substitute basis property.[fn. 31]

Penalties

If a U.S. person fails to file an accurate and timely Form 8865 with respect to any transfer of property required to be reported, the U.S. person is subject to a penalty equal to 10 percent of the value of the transferred property (up to a maximum of $100,000 except for failures due to intentional disregard) and is required to recognize gain on the transfer (reduced by any subsequent gain recognized by the transferor with respect to the transferred property).[fn. 32]

Effective Dates

The reporting rules for contributions to foreign partnerships apply for transfers on or after January 1, 1998; however, for transfers occurring prior to the date the proposed regulations are finalized, Form 8865 will be considered timely if filed with the transferor's federal income tax return for the first taxable year beginning after that date.[fn. 33] For transfers after August 5, 1997 (the effective date of the relevant provisions of the Act) and before January 1, 1998, transferors can rely on either Notice 98-17[fn. 34] or the final regulations.[fn. 35]

Reports of "Reportable Events"

In General

If a "reportable event" occurs with respect to the interest of a U.S. person in a foreign partnership, the U.S. person is required under Internal Revenue Code section 6046A to file Form 8865 with the person's federal income tax return for the taxable year during which the reportable event occurs.[fn. 36] As with the filing requirements regarding contributions, if the U.S. person is also required to file as a controlling or 10-percent partner, then the Form 8865 is filed for the foreign partnership's annual accounting period, rather than the partner's taxable year.[fn. 37] In addition, if the reportable event occurs within 90 days of the end of the U.S. partner's taxable year, Form 8865 may be filed with the partner's federal income tax return for the succeeding taxable year.[fn. 38]

A "reportable event" means:

  • An acquisition by a U.S. person of at least a 10-percent interest in a foreign partnership,

  • A disposition by a U.S. person of at least a 10-percent interest in a foreign partnership or

  • A change in a U.S. persons proportionate interest in a foreign partnership equivalent to at least a 10-percent interest.[fn. 39]

However, no reporting is required under Internal Revenue Code section 6046A regarding the acquisition of an interest if the acquisition occurs as a result of a contribution of property required to be reported under Internal Revenue Code section 6038B.[fn. 40]

The information required to be reported on Form 8865 includes,

  • The name, address and U.S. taxpayer identification number of the U.S. person filing the return,

  • The name, address and U.S. taxpayer identification number, if any, of the foreign partnership,

  • The name of the country under the laws of which the partnership was organized and the date of formation,

  • For each reportable event, the date of the event, the type of event (acquisition, disposition or change in partnership interest) and the U.S. person's percentage interest before and after the event and

  • For an acquisition, disposition or change affecting the U.S. person's interest in partnership capital, profits, losses or deductions, the fair market value of the interest acquired, disposed of or changed.[fn. 41]

As with the controlling and 10-percent partner and contribution rules, a transferor otherwise required to file Form 8865 by virtue of an acquisition or disposition of or change in a foreign partnership interest need not file the form if:

  • The U.S. person does not directly own any interest in the foreign partnership,

  • The U.S. person is otherwise required to file solely by reason of the attribution rules,

  • The U.S. person from whom ownership is attributed files all the required information and

  • The excused U.S. person files a Substitute Statement.[fn. 42]

Effective Dates

The new reporting rules apply to reportable events occurring on or after January 1, 1998.[fn. 43] However, for reportable events occurring before the proposed regulations are finalized, Form 8865 may be filed with the U.S. person's federal income tax return for the taxable year following the taxable year during which the reportable event occurs.[fn. 44]

Materials Available On-Line

You can use the links below to download or view (with Acrobat Reader 3.0 or an Acrobat 3.0-enabled web browser) the listed administrative materials. Alternatively, those materials can be obtained via ftp in the /part directory at ftp.pillsburywinthrop.tax (file names and sizes are indicated in the list below).


Notes

  1. Prop.Income Tax Regs. § 1.6038-3(b)(1).[return to text]

  2. Prop.Income Tax Regs. § 1.6038-3(b)(2).[return to text]

  3. Prop.Income Tax Regs. § 1.6038-3(b)(3).[return to text]

  4. Prop.Income Tax Regs. § 1.6038-3(b)(4).[return to text]

  5. Prop.Income Tax Regs. § 1.6038-3(b)(5).[return to text]

  6. Prop.Income Tax Regs. § 1.6038-3(a)(1).[return to text]

  7. Prop.Income Tax Regs. § 1.6038-3(f).[return to text]

  8. Form 8865 (Oct. 10, 1998 draft), Schedules C-1, C-2.[return to text]

  9. Form 8865 (Oct. 10, 1998 draft), Schedules G-1, G-2.[return to text]

  10. Prop.Income Tax Regs. § 1.6038-3(c)(1).[return to text]

  11. Prop.Income Tax Regs. §§ 1.6038-3(c)(1), 1.6038-3(c)(3).[return to text]

  12. Prop.Income Tax Regs. § 1.6038-3(a)(2).[return to text]

  13. Prop.Income Tax Regs. § 1.6038-3(a)(3).[return to text]

  14. Prop.Income Tax Regs. §§ 1.6038-3(e), 1.6038-3(h).[return to text]

  15. Prop.Income Tax Regs. § 1.6038-3(g).[return to text]

  16. Prop.Income Tax Regs. §§ 1.6038-3(c)(1), 1.6038-3(c)(3).[return to text]

  17. Prop.Income Tax Regs. § 1.6038-3(j)(1)(i).[return to text]

  18. Prop.Income Tax Regs. § 1.6038-3(j)(1)(ii).[return to text]

  19. Prop.Income Tax Regs.§ 1.6038-3(j)(1)(iii).[return to text]

  20. Prop.Income Tax Regs. § 1.6038-3(j)(2)(i).[return to text]

  21. Prop.Income Tax Regs. § 1.6038-3(j)(2)(ii).[return to text]

  22. Prop.Income Tax Regs. § 1.6038-3(j)(2)(iii).[return to text]

  23. Prop.Income Tax Regs. § 1.6038-3(j)(2)(iv).[return to text]

  24. Prop.Income Tax Regs. § 1.6038-3(k).[return to text]

  25. Prop.Income Tax Regs. § 1.6038B-2(a)(1).[return to text]

  26. Prop.Income Tax Regs. § 1.6038B-2(a)(4).[return to text]

  27. Prop.Income Tax Regs. § 1.6038B-2(b).[return to text]

  28. Prop.Income Tax Regs. § 1.6038B-2(c).[return to text]

  29. Prop.Income Tax Regs. § 1.6038B-2(a)(2)(i).[return to text]

  30. Prop.Income Tax Regs. § 1.6038B-2(d).[return to text]

  31. Prop.Income Tax Regs. § 1.6038B-2(a)(2)(ii).[return to text]

  32. Prop.Income Tax Regs. § 1.6038B-2(h).[return to text]

  33. Prop.Income Tax Regs. § 1.6038B-2(j)(1).[return to text]

  34. 1998-11 I.R.B. 6.[return to text]

  35. Prop.Income Tax Regs. § 1.6038B-2(j)(2).[return to text]

  36. Prop.Income Tax Regs. §§ 1.6046A-1(a), 1.6046A-1(d).[return to text]

  37. Prop.Income Tax Regs. § 1.6046A-1(d)(2)(i).[return to text]

  38. Prop.Income Tax Regs. § 1.6046A-1(d)(2)(ii).[return to text]

  39. Prop.Income Tax Regs. § 1.6046A-1(b)(1)(i).[return to text]

  40. Prop.Income Tax Regs. § 1.6046A-1(b)(1)(ii).[return to text]

  41. Prop.Income Tax Regs. § 1.6046A-1(c).[return to text]

  42. Prop.Income Tax Regs. § 1.6046A-1(e).[return to text]

  43. Prop.Income Tax Regs. § 1.6046A-1(j)(1).[return to text]

  44. Prop.Income Tax Regs. § 1.6046A-1(j)(2).[return to text]


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