81 FR 89849 - Treatment of Certain Domestic Entities Disregarded as Separate From Their Owners as Corporations for Purposes of Section 6038A

DEPARTMENT OF THE TREASURY
Internal Revenue Service

Federal Register Volume 81, Issue 239 (December 13, 2016)

Page Range		89849-89852
FR Document		2016-29641
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.
Federal Register, Volume 81 Issue 239 (Tuesday, December 13, 2016)
[Federal Register Volume 81, Number 239 (Tuesday, December 13, 2016)]
[Rules and Regulations]
[Pages 89849-89852]
From the Federal Register Online  [www.thefederalregister.org]
[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.

-----------------------------------------------------------------------

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
Federal Register / Vol. 81, No. 239 / Tuesday, December 13, 2016 / Rules and Regulations 89849

concerning who must register DEPARTMENT OF THE TREASURY number assigned by the Office of
establishments and list human drugs, Management and Budget.
human drugs that are also biological Internal Revenue Service Books or records relating to a
products, and animal drugs. The final collection of information must be
rule was published with an incorrect 26 CFR Parts 1 and 301 retained as long as their contents may
statement in the preamble about the become material in the administration
[TD 9796] of any internal revenue law. Generally,
rule’s effect on establishments at which
investigational drugs are manufactured. tax returns and tax return information
RIN 1545–BM94
are confidential, as required by 26
This document corrects that error.
Treatment of Certain Domestic Entities U.S.C. 6103.
DATES: Effective December 13, 2016. Disregarded as Separate From Their Background and Explanation of
FOR FURTHER INFORMATION CONTACT: Owners as Corporations for Purposes Provisions
David Joy, Center for Drug Evaluation of Section 6038A
On May 10, 2016, the Department of
and Research, Food and Drug AGENCY: Internal Revenue Service (IRS), the Treasury (Treasury Department) and
Administration, 10903 New Hampshire Treasury. the Internal Revenue Service (IRS)
Ave., Bldg. 51, Rm. 6254, Silver Spring, ACTION: Final regulations.
published in the Federal Register a
MD 20993–0002, 301–796–2242. notice of proposed rulemaking (REG–
SUMMARY: This document contains final 127199–15; 81 FR 28784) under sections
SUPPLEMENTARY INFORMATION: In the
regulations that treat a domestic 6038A and 7701 (the proposed
Federal Register of August 31, 2016 (81 regulations). The proposed regulations
disregarded entity wholly owned by a
FR 60169), FDA published the final rule would treat a domestic disregarded
foreign person as a domestic corporation
‘‘Requirements for Foreign and entity wholly owned by a foreign person
separate from its owner for the limited
Domestic Establishment Registration as a domestic corporation separate from
purposes of the reporting, record
and Listing for Human Drugs, Including maintenance and associated compliance its owner for the limited purposes of the
Drugs That Are Regulated Under a requirements that apply to 25 percent reporting, record maintenance and
Biologics License Application, and foreign-owned domestic corporations associated compliance requirements
Animal Drugs.’’ The final rule published under section 6038A of the Internal that apply to 25 percent foreign-owned
with an incorrect statement in the Revenue Code. domestic corporations under section
preamble about the rule’s effect on DATES: Effective date: These regulations
6038A of the Internal Revenue Code.
establishments at which investigational are effective December 13, 2016. The proposed regulations would have
drugs are manufactured. Under the applied to taxable years of the entities
Applicability date: For dates of
amended regulations, manufacturers, described in § 301.7701–2(c)(2)(vi)
applicability, see §§ 1.6038A–1(n)(1)
repackers, relabelers, or salvagers who ending on or after the date that is 12
and (2) and 301.7701–2(e)(9).
manufacture, repack, relabel, or salvage months after the date of publication of
FOR FURTHER INFORMATION CONTACT: the Treasury decision adopting the
drugs solely for use in research, Ronald M. Gootzeit, (202) 317–6937 (not
teaching, or chemical analysis and not proposed rules as final regulations in
a toll-free number). the Federal Register.
for sale are exempt from the
SUPPLEMENTARY INFORMATION: In addition to generally soliciting
establishment registration requirement
Paperwork Reduction Act comments on all aspects of the proposed
under 21 CFR 207.13(e) if they do not
rules, the preamble to the proposed
engage in other activities that require The collection of information regulations specifically requested
them to register. contained in these final regulations has comments on possible alternative
In the Federal Register of August 31, been previously reviewed and approved methods for reporting a domestic
2016, in FR Doc. 2016–20471, the by the Office of Management and disregarded entity’s transactions in
following correction is made: On page Budget in accordance with the cases in which the foreign owner of the
60185, in the first column, in the third Paperwork Reduction Act of 1995 (44 domestic disregarded entity already has
paragraph under ‘‘2. When must initial U.S.C. 3507(d)) under control number an obligation to report the income
registration information be provided? 1545–1191. The estimated average resulting from those transactions—for
(§ 207.21),’’ the following sentence is annual recordkeeping burden per example, transactions resulting in
removed: ‘‘Accordingly, an recordkeeper is 10 hours. The estimated income effectively connected with the
establishment at which an reporting burden is being reported conduct of a U.S. trade or business.
under Form 5472 (OMB #1545–0123). No written comments on the proposed
investigational drug is manufactured is
The collection of information in these regulations were received, and no
subject to the establishment registration
final regulations is in §§ 1.6038A–2 and public hearing was requested or held.
requirement.’’
1.6038A–3. This information will However, these final regulations reflect
Dated: December 7, 2016. enhance the United States’ compliance a limited number of changes by the
Leslie Kux, with international standards of Treasury Department and the IRS to the
Associate Commissioner for Policy. transparency and exchange of proposed regulations.
[FR Doc. 2016–29774 Filed 12–12–16; 8:45 am]
information for tax purposes and will First, it was and remains the intent of
strengthen the enforcement of U.S. tax the Treasury Department and the IRS
BILLING CODE 4164–01–P
laws. The likely respondents are that the generally applicable exceptions
pmangrum on DSK3GDR082PROD with RULES

foreign-owned domestic entities that are to the requirements of section 6038A
disregarded as separate from their should not apply to a domestic
owners. disregarded entity that is wholly owned
An agency may not conduct or by a foreign person. Accordingly, the
sponsor, and a person is not required to proposed regulations provided that the
respond to, a collection of information exceptions to the record maintenance
unless it displays a valid control requirements in § 1.6038A–1(h) and (i)

VerDate Sep<11>2014 15:03 Dec 12, 2016 Jkt 241001 PO 00000 Frm 00019 Fmt 4700 Sfmt 4700 E:\FR\FM\13DER1.SGM 13DER1
Federal Register / Vol. 81, No. 239 / Tuesday, December 13, 2016 / Rules and Regulations 89851

consideration, nonmonetary reported as monthly averages or year 4 are reportable transactions with
consideration, and the value of outstanding balances at the beginning respect to X. Therefore, Z has a section
transactions involving less than full and end of the taxable year, as the form 6038A reporting and record maintenance
requirement for years 1 through 4; Y has a
consideration) is not more than shall prescribe;
section 6038A reporting and record
$5,000,000 and is less than 10 percent * * * * * maintenance requirement for years 1, 3, and
of its U.S. gross income. * * * (xi) With respect to an entity that is 4; and X has a section 6038A reporting and
* * * * * a reporting corporation as a result of record maintenance requirement in years 1,
(n) * * * being treated as a corporation under 2, and 4 in addition to its section 6038A
(1) * * * However, § 1.6038A–1 as it § 301.7701–2(c)(2)(vi) of this chapter, reporting and record maintenance described
applies to entities that are reporting any other transaction as defined by in Example 1 of this paragraph (b)(9).
corporations as a result of being treated § 1.482–1(i)(7), such as amounts paid or * * * * *
as a corporation under § 301.7701– received in connection with the (d) * * * In the case of an entity that
2(c)(2)(vi) of this chapter applies to formation, dissolution, acquisition and is a reporting corporation as a result of
taxable years of such reporting disposition of the entity, including being treated as a corporation under
corporations beginning after December contributions to and distributions from § 301.7701–2(c)(2)(vi) of this chapter,
31, 2016, and ending on or after the entity. Form 5472 must be filed at such time
December 13, 2017. * * * * * and in such manner as the
(2) * * * Section 1.6038A–2 as it (9) Examples. The following examples Commissioner may prescribe in forms or
applies to entities that are reporting illustrate the application of paragraph instructions.
corporations as a result of being treated (b)(3) of this section: (e) * * *
as a corporation under § 301.7701– (3) * * * A reporting corporation
Example 1. (i) In year 1, W, a foreign
2(c)(2)(vi) of this chapter applies to corporation, forms and contributes assets to (other than an entity that is a reporting
taxable years of such reporting X, a domestic limited liability company that corporation as a result of being treated
corporations beginning after December does not elect to be treated as a corporation as a corporation under § 301.7701–
31, 2016, and ending on or after under § 301.7701–3(c) of this chapter. In year 2(c)(2)(vi) of this chapter) is not
December 13, 2017. 2, W contributes funds to X. In year 3, X required to make a return of information
makes a payment to W. In year 4, X, in on Form 5472 with respect to a related
* * * * * liquidation, distributes its assets to W. foreign corporation for a taxable year for
■ Par. 4. Section 1.6038A–2 is amended (ii) In accordance with § 301.7701–
which a U.S. person that controls the
as follows: 3(b)(1)(ii) of this chapter, X is disregarded as
■ 1. Revise the second sentence of an entity separate from W. In accordance foreign related corporation makes a
paragraph (a)(2). with § 301.7701–2(c)(2)(vi) of this chapter, X return of information on Form 5471 that
■ 2. Revise paragraph (b)(3)(vii). is treated as an entity separate from W and is required under section 6038 and this
■ 3. Remove the word ‘‘and’’ at the end classified as a domestic corporation for section, if that return contains
of paragraph (b)(3)(ix). purposes of section 6038A. In accordance information required under § 1.6038–
with paragraphs (a)(2) and (b)(3) of this 2(f)(11) with respect to the reportable
■ 4. Remove the undesignated
section, each of the transactions in years 1 transactions between the reporting
paragraph following paragraph (b)(3)(x). through 4 is a reportable transaction with
■ 5. Remove the period at the end of
corporation and the related corporation
respect to X. Therefore, X has a section
paragraph (b)(3)(x) and add ‘‘; and’’ in for that taxable year.* * *
6038A reporting and record maintenance
its place. requirement for each of those years. (4) Transactions with a foreign sales
■ 6. Add paragraphs (b)(3)(xi) and (b)(9). Example 2. (i) The facts are the same as corporation. A reporting corporation
■ 7. Add a sentence at the end of in Example 1 of this paragraph (b)(9) except (other than an entity that is a reporting
paragraph (d). that, in year 1, W also forms and contributes corporation as a result of being treated
■ 8. Revise the first sentence of assets to Y, another domestic limited liability as a corporation under § 301.7701–
company that does not elect to be treated as 2(c)(2)(vi) of this chapter) is not
paragraph (e)(3).
a corporation under § 301.7701–3(c) of this required to make a return of information
■ 9. Revise paragraph (e)(4).
chapter. In year 1, X and Y form and on Form 5472 with respect to a related
The additions and revisions read as contribute assets to Z, another domestic
follows: corporation that qualifies as a foreign
limited liability company that does not elect
to be treated as a corporation under sales corporation for a taxable year for
§ 1.6038A–2 Requirements of return. § 301.7701–3(c) of this chapter. In year 2, X which the foreign sales corporation files
(a) * * * transfers funds to Z. In year 3, Z makes a Form 1120–FSC.
(2) * * * However, if neither party to payment to Y. In year 4, Z distributes its * * * * *
the transaction is a United States person assets to X and Y in liquidation.
as defined in section 7701(a)(30) (ii) In accordance with § 301.7701– PART 301—PROCEDURE AND
(which, for purposes of section 6038A, 3(b)(1)(ii) of this chapter, Y and Z are ADMINISTRATION
includes an entity that is a reporting disregarded as entities separate from each
other, W, and X. In accordance with ■ Par. 5. The authority citation for part
corporation as a result of being treated § 301.7701–2(c)(2)(vi) of this chapter, Y, Z
as a corporation under § 301.7701– 301 continues to read in part as follows:
and X are treated as entities separate from
2(c)(2)(vi) of this chapter) and the each other and W, and are classified as Authority: 26 U.S.C. 7805 * * *
transaction— domestic corporations for purposes of section ■ Par. 6. Section 301.7701–2 is
* * * * * 6038A. In accordance with paragraph (b)(3)
amended by revising the last sentence of
(b) * * * of this section, each of the transactions in
paragraph (a) and adding paragraphs
pmangrum on DSK3GDR082PROD with RULES

(3) * * * years 1 through 4 involving Z is a reportable
transaction with respect to Z. Similarly, W’s (c)(2)(vi) and (e)(9) to read as follows:
(vii) Amounts loaned and borrowed
contribution to Y and Y’s contribution to Z
(except open accounts resulting from in year 1, the payment to Y in year 3, and
§ 301.7701–2 Business entities;
sales and purchases reported under definitions.
the distribution to Y in year 4 are reportable
other items listed in this paragraph transactions with respect to Y. Moreover, X’s (a) * * * But see paragraphs (c)(2)(iii)
(b)(3) that arise and are collected in full contribution to Z in Year 1, X’s funds transfer through (vi) of this section for special
in the ordinary course of business), to be to Z in year 2, and the distribution to X in rules that apply to an eligible entity that

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Document Created: 2016-12-13 02:44:57
Document Modified: 2016-12-13 02:44:57
Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Rules and Regulations
Action		Final regulations.
Contact		Ronald M. Gootzeit, (202) 317-6937 (not a toll-free number).
FR Citation		81 FR 89849
RIN Number		1545-BM94
CFR Citation		26 CFR 1 26 CFR 301
CFR Associated		Income Taxes; Reporting and Recordkeeping Requirements; Employment Taxes; Estate Taxes; Excise Taxes; Gift Taxes and Penalties
81 FR 89849 - Treatment of Certain Domestic Entities Disregarded as Separate From Their Owners as Corporations for Purposes of Section 6038A

DEPARTMENT OF THE TREASURYInternal Revenue Service

Federal Register Volume 81, Issue 239 (December 13, 2016)

DEPARTMENT OF THE TREASURY
Internal Revenue Service
