Untangling the Constructive Ownership Rules for Foreign Entity Information Returns

Transcription

1 Checkpoint Contents Federal Library Federal Editorial Materials WG&L Journals Journal of Taxation (WG&L) Journal of Taxation 2012 Volume 117, Number 03, September 2012 Articles Untangling the Constructive Ownership Rules for Foreign Entity Information Returns, Journal of Taxation, Sep 2012 INTERNATIONAL Untangling the Constructive Ownership Rules for Foreign Entity Information Returns Author: By Daniel Martinez DANIEL MARTINEZ is an associate with Holland & Knight LLP's International and Cross Border Transactions Group in Miami, and focuses his practice on international and domestic tax planning for companies and individuals. The views in this article are the author's and should not be attributed to Holland & Knight LLP. Copyright 2012, Daniel Martinez. An often overlooked aspect of the foreign information reporting rules is the obligation to file the required forms that arises due to constructive ownership. The different constructive ownership rules in the Code are further differentiated for purposes of foreign information reporting, and the multiple permutations and exceptions should be clearly understood. U.S. persons 1 with ownership interests in foreign corporations or partnerships are subject to special reporting rules. In addition to filing U.S. tax returns, U.S. persons are required to file information returns used by the IRS to collect information about cross-border activities of U.S. and foreign persons. This article will focus on two information reporting forms Form 5471, "Information Return of U.S. Persons With Respect to Certain Foreign Corporations," which is used to collect information about foreign corporations with U.S. owners, and Form 8865, "Return of U.S. Persons With Respect to Certain Foreign Partnerships," which is used to collect information about foreign partnerships with U.S. owners. Properly complying with U.S. information return requirements has become much more important recently because the Service has put a much greater emphasis on ensuring international tax compliance. The penalties for failing to file Forms 5471 and 8865 were increased in 1997 to a minimum of $10,000 for each reporting period of each foreign corporation or partnership. Also, whereas previously the IRS was imposing these penalties very selectively, beginning with 2008 the Service started automatically imposing penalties for late-filed Forms 5471 and Furthermore, the FATCA (Foreign Account Tax Compliance Act) provisions of the Hiring Incentives to Restore Employment (HIRE) Act 2 increased potential information reporting penalties. FATCA increased the accuracy-related penalty for understatement of income related to foreign financial assets that were not disclosed on Forms 5471, 8865, or certain other forms, from 20% to 40% of the understated amount. Additionally, FATCA indefinitely extends the general three-year statute of limitations if certain information returns, including Forms 5471 and 8865, are not filed. Beginning in 2012, the Service modified Forms 5471 and 8865 to start requiring the taxpayers to assign a Unique Reference Identification (URI) number to each foreign entity. The purpose of this new URI number is to simplify the IRS audit process and to make it easier for the Service to compare information returns that span multiple years in order to identify inconsistent reporting. U.S. persons required to file Form 5471 are divided into four separate categories, 3 with different information and schedules required

2 from different categories: "Category 2" applies to a U.S. citizen or resident who is an officer or director of a foreign corporation. "Category 3" applies to U.S. persons who acquire or dispose of shares of a foreign corporation, or who become U.S. persons while owning the shares of a foreign corporation. "Category 4" applies to U.S. persons who are in control (or deemed to be in control) of a foreign corporation. "Category 5" applies to a "U.S. shareholder" (a defined term) who owns shares of a controlled foreign corporation (CFC; another defined term). Form 8865 also has four categories of persons who are required to file it: "Category 1" applies to a U.S. person who is in control of a foreign partnership. "Category 2" applies to a U.S. person who owns at least a 10% interest in a foreign partnership that is controlled by U.S. persons each owning at least a 10% interest in the foreign partnership. "Category 3" applies to U.S. persons who contribute property to a foreign partnership. "Category 4" applies to acquisitions, dispositions, or changes in proportionate interest that cause a 10% increase or a 10% decrease in the partnership interest. U.S. persons are facing significant difficulties in trying to comply with the information reporting requirements. The information reporting forms have grown over time and require extensive financial information that is not always available to the persons required to file the forms. Additionally, the IRS applies a very complicated set of constructive and indirect ownership rules to determine who is required to file information reporting forms. 4 Three separate sets of constructive and indirect ownership rules apply for purposes of Form 5471, and another set of rules applies for purposes of Form FORM 5471, CATEGORIES 2 AND 3 The Category 2 filing requirement applies to a U.S. citizen or resident 5 who is an officer or director of a corporation in which a U.S. person has acquired at least 10% of stock, by vote or value, 6 or an additional 10% or more, by vote or value, of the outstanding stock of the foreign corporation. 7 In addition, the flush language of Section 6046(a)(1) requires filing by U.S. officers or directors in foreign captive insurance companies that have U.S. shareholders. The Regulations have not been amended to reflect this requirement, however, and the instructions to Form 5471 do not currently contain this requirement. Form 5471 Category 3 reporting requirements apply to three classifications of shareholders of foreign corporations. Section 6046(a) (1)(B) imposes reporting requirements on a U.S. person who (1) acquires outstanding stock of a foreign corporation, which, when added to any stock owned by such person on the date of the acquisition, meets the 10% stock ownership requirement, or (2) acquires outstanding stock of a foreign corporation which, without regard to stock already owned on the date of the acquisition, meets the 10% ownership requirement. 8 The second classification is found in Section 6046(a)(1)(C), which imposes information reporting for U.S. shareholders of certain captive foreign insurance companies. Finally, Section 6046(a)(1)(D) requires reporting by a person who becomes a U.S. person while meeting the 10% stock ownership requirement with respect to the foreign corporation. Reg (c)(1)(ii)(c) and the instructions to Form 5471 also require information reporting by a U.S. person who, having previously acquired sufficient stock to meet the 10% ownership requirement, disposes of sufficient stock in the foreign corporation to reduce his or her ownership interest to less than 10%. Although taxpayers can argue that the requirement to report dispositions of stock is invalid because it is outside of the scope of the statute, 9 the most prudent and practical approach is to follow the Regulations and the instructions to Form 5471 and report the disposition of stock. 10 Constructive and Indirect Ownership Rules Certain specific constructive ownership rules apply under Section 6046(c) and Reg (i) only for purposes of determining the ownership of foreign corporations for Form 5471 Category 2 and Category 3 filers. Attribution from family members. A U.S. person is considered to own shares owned by certain family members. For this purpose, a person's family includes the spouse, siblings (whether by the whole or half blood), ancestors, and lineal descendants. Shares

3 owned constructively by a family member are not considered as actually owned for purposes of again applying the family constructive ownership rules. But shares owned constructively through a foreign entity (as described below) will be treated as actually owned for purposes of applying these family constructive ownership rules. Attribution from entities, trusts, or estates. Stock owned directly or indirectly by or for a foreign corporation or a foreign partnership is considered as being owned proportionately by its shareholders or partners. This look-through rule applies only to foreign entities, and shares owned by U.S. entities should not be considered as being owned by the shareholders of the U.S. entities. There is no attribution for purposes of Categories 2 and 3 from nongrantor trusts or estates. Attribution to entities, trusts, or estates. There is no attribution to entities, trusts, or estates from their owners or beneficiaries under the rules of Section 6046 for Form 5471 Category 2 and Category 3 filers. Attribution through options. As a general rule, for purposes of Categories 2 and 3 owning an option to purchase shares is not treated as ownership of the shares themselves, although if the terms of the option make it very likely to be exercised, the IRS could argue that the substance should control and the owner of the option should be treated as the owner of the shares. 11 Exceptions From Filing Requirements If any person is required to file a return under Category 3, and if such item of information is filed by another person having an equal or greater stock interest, the first person may satisfy the filing requirement by filing a statement with his return indicating that the obligation has been satisfied and identifying the return in which such item of information was included. 12 A Category 3 filer is not required to file Form 5471 with respect to a foreign corporation if (1) the person has no direct interest in the foreign corporation and is within Category 3 solely because of constructive ownership from another U.S. person and (2) that other U.S. person files a Form 5471 that includes all information required of the Category 3 person. 13 As a practical matter, this exception appears to apply only to a person who becomes a U.S. person while meeting the 10% ownership threshold. Persons who had to file under Category 3 because of an acquisition would be ineligible for this exception because they would have a direct interest and would not be within Category 3 solely because of the constructive ownership rules. Although the Regulations have not been updated to reflect the addition of reporting for shareholders of foreign captive insurance companies under Section 6046(a)(1)(C), this exception probably does not apply to shareholders of such foreign insurance companies. 14 Officers and directors who have a requirement to file under Category 2 with respect to persons described in the paragraph above (persons without a direct interest) also are exempted. 15 This exemption appears to be of limited use because, according to the Regulations and the instructions to Form 5471, officers and directors only have filing obligations with respect to people who are acquiring a direct interest in the corporation. 16 Finally, a Category 2 filer does not need to file with respect to an acquisition of stock of a foreign corporation if (1) as a result of such acquisition of stock of such foreign corporation, a U.S. person files under Category 3, and (2) immediately after such acquisition of stock, three or fewer U.S. persons own 95% or more in value of the outstanding stock of such foreign corporation. 17 The usefulness of this exception is limited by the fact that the Category 2 filer is only exempted from reporting if a Category 3 filer properly files its Form Many Category 2 filers probably would choose to file Form 5471 anyway to protect against the risk of penalties if one of the Category 3 filers fails to properly file its form. In addition, the requirement that 95% of the corporation's stock be owned by three or fewer U.S. shareholders makes this exception applicable only in a very limited subset of cases. FORM 5471, CATEGORY 4 The Category 4 filing requirement applies to U.S. persons who control the foreign corporation for an uninterrupted period of 30 days or more during the annual accounting period. 18 For purposes of Category 4 reporting, a U.S. person is in control of a corporation if such person owns stock possessing (1) more than 50% of the total combined voting power of all classes of stock entitled to vote, or (2) more than 50% of the total value of shares of all classes of stock of a corporation. 19 Constructive and Indirect Ownership Rules A different set of constructive and indirect ownership rules applies for purposes of Category 4 filing requirements. Section 6038(e)(2)

4 and the Regulations refer to the rules described in Section 318(a), but make certain modifications. Attribution from family members. Under the general rules of Section 318(a)(1), an individual is treated as owning stock that is owned, directly or indirectly, by or for his or her spouse, children, grandchildren and parents. Stock constructively owned by a person by reason of family attribution will not be treated as actually owned by such person for purposes of then reattributing ownership from such person to another family member by reason of family attribution. 20 In contrast to the Category 2 and Category 3 attribution rules, the Category 4 family attribution rules are more limited because there is no attribution from siblings or grandparents. Attribution from entities, trusts, or estates. Stock owned by or for a partnership or an estate is considered as owned proportionately by its partners or beneficiaries. 21 Stock owned by a trust (other than certain tax-exempt trusts) is considered owned by the beneficiaries in proportion to their actuarial interest in the trust. 22 Stock owned by a grantor trust is considered owned by the owner of the grantor trust. 23 Under the general rule of Section 318, if 50% or more in value of the stock in the corporation is owed, directly or indirectly, by any person, such person is considered as owning the stock owned by such corporation in that proportion which the value of the stock owned by the person bears to the value of all the stock in the corporation. 24 Section 6038 modifies the general rule of Section 318 in two respects: (1) If a person is in control of a corporation which in turn controls another corporation, then such person will be treated as in control of the controlled subsidiary corporation. 25 (2) The 50% threshold for attribution from corporations is lowered to 10% so that a shareholder who owns 10% or more of the value of a corporation is considered to own his or her proportionate share of stock owned by the corporation. 26 Attribution to entities, trusts, or estates. Stock owned by a partner or a beneficiary of an estate is considered as owned by the partnership or the estate. 27 Stock owned by a beneficiary of a trust (other than certain tax-exempt trusts) is considered as owned by the trust, except if the beneficiary's interest in the trust is a remote contingent interest. 28 Stock owned by an owner of a grantor trust is considered as owned by the trust. 29 Section 6038 modifies this attribution rule so that attribution to entities, trusts, or estates cannot be used to make a U.S. person a constructive owner of stock owned by a non-u.s. person. 30 If 50% or more in value of the stock in a corporation is owned, directly or indirectly, by or for any person, the corporation will be considered as owning the stock owned, directly or indirectly, by or for such person. Stock that is attributed to a partnership, corporation, estate, or a trust is not reattributed to other owners, shareholders, or beneficiaries. Attribution through options. A person who has an option to acquire stock is treated as owning such stock. The term "option" includes an option to acquire such an option and each of a series of such options. 31 Exceptions From Filing Requirements If more than one person is required to file under Category 4 with respect to the same corporation, the filing requirement may be satisfied by one person that files the required form. 32 In addition, a U.S. person in control of a foreign corporation is not required to file Form 5471 with respect to a foreign corporation if (1) the person has no direct interest in the foreign corporation, (2) is within Category 4 "solely by reason of" constructive ownership from another U.S. person, and (3) that other U.S. person files a Form 5471 that includes all information required of the Category 4 person. 33 The Category 4 filer using either of these two exceptions must file a statement with her return stating that the obligation to furnish the information has been or will be satisfied and identifying the return that includes or will include the information, as well as the place of filing. 34 Nonresident alien attribution. A Category 4 filer does not have to file Form 5471 if such person (1) has no direct or indirect interest in the foreign corporation, and (2) is required to file Form 5471 solely because of constructive ownership from a nonresident alien. 35 This provision exempts U.S. persons who are attributed control of a foreign corporation solely through family attribution rules from foreign family members and have no direct or indirect ownership interest in the foreign corporation.

5 FORM 5471, CATEGORY 5 As noted above, Form 5471 Category 5 filing requirements apply to U.S. shareholders of a CFC. 36 For this purpose a "U.S. shareholder" is a U.S. person who directly, indirectly, or constructively owns more than 10% of the voting power of a foreign corporation. 37 A CFC is a foreign corporation in which U.S. shareholders own more than 50% of the vote or value of the corporation. Constructive and Indirect Ownership Rules A different set of indirect and constructive ownership rules applies for purpose of determining if the foreign corporation is a CFC and if the U.S. person is a U.S. shareholder who has to file Category 5 information report. 38 These rules also use Section 318(a) rules as a starting point, but make certain modifications. The modifications for Category 5 filers are very similar to those for Category 4 filers, with a couple of key differences. First, for Category 5 filers there is no family attribution from nonresident alien individuals. Second, for Category 5 filers attribution from entities, trusts, and estates is expanded. Attribution from family members. The same family attribution rules of Section 318 apply as for Category 4 filers, which attribute stock owned by the spouse, children, grandchildren, and parents. 39 Section 958 modifies this family attribution rule so that stock owned by nonresident alien individuals cannot be attributed to U.S. family members. 40 Attribution from entities, trusts, or estates. As discussed above in connection with Category 4 attribution, under the general rule of Section 318(a), stock owned by or for a partnership or an estate is considered as owned proportionately by its partners or beneficiaries. Stock owned by a trust (other than certain tax-exempt trusts) is considered owned by the beneficiaries in proportion to their actuarial interest in the trust. Stock owned by a grantor trust is considered owned by the owner of the grantor trust. 41 Under the general rule of Section 318, if 50% or more in value of the stock in the corporation is owed, directly or indirectly, by any person, such person is considered owning the stock owned by such corporation in that proportion which the value of the stock owned by the person bears to the value of all the stock in the corporation. 42 The 50% threshold is lowered for Category 5 filers to 10%, so that a shareholder who owns 10% or more of the value of a corporation is considered to own his or her proportionate share of stock owned by the corporation. 43 Section 958(a)(2) modifies this rule and expands attribution from foreign persons. Stock owned, directly or indirectly, by or for a foreign corporation, foreign partnership, foreign trust, or foreign estate will be considered as being owned proportionately by its shareholders, partners, grantors or other persons treated as owners, or beneficiaries, respectively. 44 This rule creates a chain of stock ownership which stops with the first U.S. person in the chain. In addition, if a partnership, estate, trust, or corporation owns, directly or indirectly, more than 50% of the total combined voting power in a corporation, it is deemed to own all of the voting stock. 45 This special rule applies only for purposes of constructive ownership under Section 958(b) if the U.S. person owns 10% of the stock of the corporation. This rule is designed to prevent insertion of multiple intermediate entities that would dilute the nominal voting control of the U.S. shareholder below the 10% or the 50% threshold. Example: U.S. person A owns 5%, and U.S. person B owns 25%, of the one class of stock in foreign corporation C. Corporation C owns 60% of the one class of stock in foreign corporation D. Because C owns more than 50% of D, C is considered to own all of the stock of D solely for purposes of constructive ownership under Section 958(b) (if a U.S. person owns at least 10% of C). Thus, A, who owns less than 10% of C, would be deemed to own his proportionate interest of 3% in D (5% of 60%). B, who owns more than 10% of C, would be deemed to own 25% of D (25% of 100%). 46 The term "proportionately," as applied to the rules under Section 958, is misleadingly simple in theory but is quite complex to apply in practice. Reg (c)(2) provides that "[t]he determination of a person's proportionate interest in a foreign corporation, foreign partnership, foreign trust, or foreign estate will be made on the basis of all the facts and circumstances in each case." This facts and circumstances test is flexible enough to make it very challenging to try to plan around the constructive and indirect ownership rules applicable to Category 5 filers. Attribution to entities, trusts, and estates. This rule is identical for Category 5 and Category 4 filers. Stock owned by a partner or a beneficiary of an estate is considered as owned by the partnership or the estate. 47 Stock owned by a beneficiary of a trust (other than certain tax-exempt trusts) is considered as owned by the trust, except if the beneficiary's interest in the trust is a remote contingent interest. 48 Stock owned by an owner of a grantor trust is considered as owned by the trust. 49

6 If 50% or more in value of the stock in the corporation is owed, directly or indirectly, by any person, such person is considered owning the stock owned by such corporation in that proportion which the value of the stock owned by the person bears to the value of all the stock in such corporation. 50 Stock that is attributed to a partnership, corporation, estate, or trust is not reattributed to other owners, shareholders, or beneficiaries. Attribution to entities, trusts, or estates cannot be used to make a U.S. person a constructive owner of a stock owned by a non-u.s. person. 51 Attribution through options. The rule for options for Category 5 filers is identical to that for Category 4 filers. A person who has an option to acquire stock is treated as owning such stock. The term "option" includes an option to acquire such an option and each of a series of such options. 52 Exceptions From Filing Requirements If more than one person is required to file under Category 5 or Category 4 with respect to the same corporation, the filing requirement may be satisfied by one Category 4 person filing the required form. The Category 5 filer that uses this exemption must file a statement with her return stating that the obligation to furnish the information has been or will be satisfied and identifying the return that includes or will include the information, as well as the place of filing. 53 Exception if no direct or indirect ownership. A Category 5 filer does not have to file Form 5471 if such person (1) has no direct or indirect interest in the foreign corporation, and (2) is required to file Form 5471 solely because of constructive ownership from a nonresident alien. 54 Because under Category 5 constructive ownership rules there is no attribution from a nonresident alien to family members or to entities, trusts, or estates, this exception does not appear to have any application. There should not be any Category 5 filers who are required to file under Category 5 solely because of attribution under the constructive ownership rules from a nonresident alien. FORM 8865 As noted above, there are four separate categories of U.S. persons who are required to file Form 8865 with respect to foreign partnerships: (1) Category 1 applies to U.S. persons who control the foreign partnership at any time during the year. 55 "Control" is defined as owning or being attributed, directly or indirectly, at least 50% of the capital interest, 50% of the profits interest, or 50% of the deductions or losses in the foreign partnership. 56 There can be more than one U.S. person who meets the definition of "control" for a foreign partnership. (2) Category 2 applies to U.S. persons who own at least 10% of the capital or profits interest, or are allocated at least 10% of the loss and deductions of a partnership ("10% partner") which is controlled (as defined in 1, above) by one or more U.S. persons each of whom is a 10% partner. 57 (3) Category 3 applies to certain U.S. persons who contributed property during the person's tax year to a foreign partnership in exchange for an interest in the partnership. In order to meet the requirements for Category 3 filing, the U.S. person must either (a) own, directly or constructively, at least a 10% interest in the foreign partnership immediately after the contribution, or (b) contribute property with value in excess of $100, (4) Category 4 applies to U.S. persons who acquire or dispose of a significant interest in the foreign partnership, or whose direct proportionate interest changes. For an acquisition to trigger this requirement, the person must either acquire an additional 10% direct interest in the foreign partnership (without regard to interest already owned), or must have less than a 10% interest before the acquisition and at least a 10% interest after the acquisition (taking into account the interest already owned). For a disposition to trigger the Category 4 filing requirement, the disposition must result in at least a 10% reduction in the direct interest in the partnership, or in a reduction of the person's direct interest in the partnership below 10%. A change in proportional interest triggers the Category 4 filing requirement if it increases or decreases the person's direct proportionate interest in the partnership by at least 10%. Constructive and Indirect Ownership Rules All four categories under Form 8865 apply the same constructive ownership rules of Section 267(c), with certain modifications.

7 Attribution from family members. An individual is attributed a partnership interest owned by spouse, siblings, ancestors, and lineal descendants. 59 Reg (c)-1(a)(4) defines "ancestors" to include parents and grandparents, and "lineal descendants" to include children and grandchildren. An interest in the partnership can be attributed from a nonresident alien to a U.S. person only if the U.S. person owns a direct or an indirect (through application of constructive ownership rules through entities, trusts, or estates) interest in the partnership. 60 Attribution from entities, trusts, and estates. Partnership interests owned, directly or indirectly, by or for a corporation, partnership, estate, or trust are considered as being owned proportionately by or for its shareholders, partners, or beneficiaries. 61 Attribution to entities, trusts, and estates. There is no attribution to entities, trusts, and estates under the constructive ownership rules that apply to Form Also, for purposes of Form 8865, the partner-to-partner attribution of Section 267(c)(3) does not apply. 62 Attribution through options. As a general rule, for purposes of Form 8865, owning an option to purchase shares is not treated as owning the shares themselves, although if the terms of the option make it very likely to be exercised, the IRS could argue that the substance should control and the owner of the option should be treated as the owner of the shares. 63 Exceptions From Filing Requirements If there are multiple U.S. persons who control the foreign partnership and are required to file under Category 1, then only one person is required to file Form If a Category 1 or Category 2 filer does not own any direct interest in the foreign partnership and is required to file solely because of constructive ownership attributed from a U.S. person, then such constructive owner is not required to file Form 8865 if (1) Form 8865 is filed by the person or persons through which the ownership is attributed, (2) Form 8865 is filed by another Category 1 filer, or (3) the ownership is attributed from another U.S. person who qualifies for this filing exception. The persons who are not filing Form 8865 because of the two exceptions described above must attach to their tax returns a statement entitled "Controlled Foreign Partnership Reporting" that includes information prescribed in the instructions to Form A person who contributes property in exchange for a 10% interest in the foreign partnership may be required to file under both Category 3 and Category 4. Reg A-1(f) provides that such person is required to file Form 8865 only under Category 3. CONCLUSION The table in Exhibit 1 summarizes the application of constructive and indirect ownership rules to various information reporting categories. There are significant differences among the constructive ownership rules applicable to different information reporting requirements. Understanding these distinctions is important for properly filing information returns or for advising clients on how to reduce their information return compliance burdens. Exhibit 1. Summary of Attribution Rules

8 Practice Notes A Form 5471 Category 2 filer does not need to file with respect to an acquisition of stock of a foreign corporation if (1) as a result of such acquisition of stock of such foreign corporation, a U.S. person files under Category 3, and (2) immediately after such acquisition of stock, three or fewer U.S. persons own 95% or more in value of the outstanding stock of such foreign corporation. The usefulness of this exception is limited by the fact that the Category 2 filer is only exempted from reporting if a Category 3 filer properly files its Form Many Category 2 filers probably would choose to file Form 5471 anyway to protect against the risk of penalties if one of the Category 3 filers fails to properly file its form. 1 2 For purposes of this article, a U.S. person is defined in Section 7701(a)(30). P.L , 3/18/10. See generally Packman and Rivero, "Increased Disclosure, Penalties, and Audit Periods Courtesy of the Foreign Account Tax Compliance Act," 112 JTAX 266 (May 2010). 3 There was previously a fifth category (Category 1), but it was repealed by American Jobs Creation Act of 2004 (P.L , 10/22/04). 4 As used in this article, "indirect" ownership means ownership attributed through another entity. In all other cases, "constructive" ownership is used. This usage is consistent with the terminology used by Sections 958(a) and (b).

9 5 6 Unlike other categories of filers, Category 2 applies only to individuals. Under Section 6046(a)(2), a person meets the 10% stock ownership requirements with respect to any corporation if such person owns 10% or more of (1) the total combined voting power of all classes of stock of such corporation entitled to vote, or (2) the total value of the stock of such corporation. 7 This requirement appears in Reg (a)(2) and the instructions to Form The statutory support for this requirement is unclear. Section 6046(a)(1)(A) actually requires filing by a U.S. citizen or resident who becomes an officer or director while a U.S. person meets the 10% ownership requirement. See Martinez, "Using Inconsistent Regs. as a Defense Against 5471 Information Reporting Penalties," 23 J. Int'l Tax'n No. 3 (March 2012), page See note 6, supra, for the definition of the 10% ownership requirement. See Martinez, supra note 7. In general, taxpayer challenges to Regulations appear to have a diminished likelihood of success after Mayo Foundation for Medical Education and Research, 107 AFTR 2d , 178 L Ed 2d 588 (2011). See Lipton and Young, "Mayo Foundation, Treasury Regulations, and the Death of National Muffler," 114 JTAX 206 (April 2011). 11 See, e.g., Rev. Rul , CB 110 (purchase of "deep-in-the-money" option treated as acquisition of underlying stock for former foreign personal holding company purposes) Reg (e)(5) and the instructions to Form Reg (e)(4)(iii). Reg (e)(4)(iii) refers to "attribution of stock ownership from a U.S. person under [Reg (i)]." Shareholders of foreign captive insurance companies would apply the constructive ownership rules of Section 958 instead Reg (e)(4)(iv). See Regs (a)(2)(i) and (f). The constructive ownership rules apply only for purposes of determining "ownership," but not for purposes of determining if there is an "acquisition." Reg (e)(4)(ii). Section 6038(a)(1); Reg (a). Section 6038(e)(2); Reg (b). Section 318(a)(5)(B). Section 318(a)(2)(A). Section 318(a)(2)(B)(i). Section 318(a)(2)(B)(ii). Section 318(a)(2)(C).

10 Section 6038(e)(2). Section 6038(e)(2)(B); Reg (c)(3). Section 318(a)(3)(A). Section 318(a)(3)(B)(i). A contingent interest of a beneficiary in a trust will be considered remote if, under the maximum exercise of discretion by the trustee in favor of such beneficiary, the value of that interest, computed actuarially, is 5% or less of the value of the trust property. Id Section 318(a)(3)(B)(ii). Section 6038(e)(2)(A); Regs (c)(1) and (2). Section 318(a)(4). Reg (j)(1). Reg (j)(2). Reg (j)(3). Reg (l). Section 6038(a)(4). Section 951(b). Sections 958(a) and (b); Regs and -2. Sections 958(b) and 318(a)(1). Section 958(b)(1); Reg (b)(3). See notes 21-23, supra. See note 24, supra. Section 958(b)(3); Reg (c)(1)(iii). Section 958(a). Section 958(b)(2); Reg (c)(2). See Reg (g), Example 1. Section 318(a)(3)(A); Reg (d)(1)(i).

11 Section 318(a)(3)(B)(i); Reg (d)(1)(ii)(a). Section 318(a)(3)(B)(ii); Reg (d)(1)(ii)(b). Section 318(a)(3)(C); Reg (d)(1)(iii). Section 958(b)(4); Reg (d)(2). Section 318(a)(4). Regs (j)(1) and (3). Reg (l). Section 6038(a)(1); Reg (a)(1). Section 6038(e)(3); Reg (b). Section 6038(e)(3); Reg (b)(3). Section 6038B(b)(1); Reg B-2(a)(1). For purposes of determining if the value of the transferred property exceeds $100,000, the value of all property contributed to the partnership by the person or by related persons during the preceding 12-month period is aggregated Sections 267(c)(2) and (4). Reg (b)(4). Section 267(c)(1). Reg (b)(4). See note 11, supra Thomson Reuters/RIA. All rights reserved.