Notice of Certain Transfers to
Foreign Partnerships & Foreign Corporations

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Parts 1 and 602 [TD 8817] RIN 1545-
AV70

TITLE: Notice of Certain Transfers to Foreign Partnerships and
Foreign Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

SUMMARY: This document contains final regulations under section
6038B relating to information reporting requirements for certain
transfers by United States persons to foreign partnerships. The
regulations implement amendments made by the Taxpayer Relief Act of
1997 that require a United States person who transfers property to a
foreign partnership to furnish certain information with respect to
such transfer. This document also contains final regulations that
require certain cash transfers to foreign corporations to be
reported. The regulations provide guidance needed to comply with the
reporting requirements with respect to transfers of cash to foreign
corporations and transfers of property to foreign partnerships.

DATES: Effective Dates: These regulations are effective January 1,
1998, except that the amendments to §1.6038B-1 are effective
February 5, 1999.

Dates of Applicability: For dates of applicability of the amendments
to §1.6038B-1, see §1.6038B-1(g). For dates of applicability of
§1.6038B-2, see §1.6038B-2(j). FOR FURTHER INFORMATION CONTACT:
Eliana Dolgoff, 202-622-3860 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these final regulations
have been reviewed and approved by the Office of Management and
Budget in accordance with the Paperwork Reduction Act (44 U.S.C.
3507) under control number 1545-1615. Responses to these collections
of information are mandatory.

An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless the collection of
information displays a valid control number.

The collections of information contained in these final regulations
are in §§1.6038B-1(b) and 1.6038B-2. The burden of complying with
the collection of information required to be reported on Form 8865
is reflected in the burden for Form 8865.

The burden of complying with the collection of information required
to be reported on Form 926 is reflected in the burden for Form 926.

Comments concerning the accuracy of the burden estimates and
suggestions for reducing the burden should be sent to the Internal
Revenue Service, Attn: IRS Reports Clearance Officer, OP:FS:FP,
Washington, DC 20224, and to the Office of Management and Budget,
Attn: Desk Officer for the Department of the Treasury, Office of
Information and Regulatory Affairs, Washington, DC 20503. Books or
records relating to these collections 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

On September 9, 1998, the IRS published in the Federal Register
proposed regulations relating to the reporting of certain transfers
to foreign corporations and foreign partnerships under section
6038B. A public hearing was held on November 10, 1998, even though
no requests to speak at the hearing were received. Written comments
regarding the proposed regulations, however, were received. After
consideration of all of the comments received, the proposed
regulations under section 6038B are adopted as revised by this
Treasury decision. The revisions are discussed below.

Public Comments

Some commentators suggested that the final regulations provide that
state and local government employee retirement plans be exempt from
the section 6038B reporting requirements, asserting that
contributions from such plans to foreign partnerships will not have
federal income tax consequences. The final regulations provide that
trusts relating to state and local government employee retirement
plans are not required to report transfers to foreign partnerships
under section 6038B, unless required to do so in the instructions to
Form 8865. One commentator noted that under the proposed
regulations, if a United States person transfers property other than
cash with a value in excess of $100,000 to a foreign partnership,
such person must report the names and addresses of all the other
partners of the partnership, regardless of the size of the person's
ownership interest in the foreign partnership after the transfer.
The commentator requested that the final regulations provide that if
a United States person owns less than a 10 percent interest in the
foreign partnership after the transfer, regardless of the type of
property transferred, such person does not have to report the names
and addresses of all the other partners. Alternatively, the
commentator requested that it be recognized that a person that makes
a good faith effort to obtain such information will have reasonable
cause preventing the imposition of any penalties under section 6038B
if such person fails to obtain and submit the information.

The final regulations do not adopt the commentator's
recommendations. As in the proposed regulations, the final
regulations contain a reasonable cause exception that, if satisfied,
prevents the IRS from imposing penalties under section 6038B.
Whether reasonable cause exists for a failure to comply with the
requirements of section 6038B is determined by the district director
under all the facts and circumstances.

Although the final regulations do not explicitly say so, a failure
to submit the names and addresses of the other partners will
constitute a failure to comply with the requirements of section
6038B and therefore will always be subject to the reasonable cause
exception.

Commentators also questioned whether United States persons must
report indirect transfers from a foreign partnership to another
foreign partnership. The final regulations reserve on such
reporting. If a foreign partnership transfers property to another
foreign partnership, a United States person that is a partner of the
transferor partnership is not required to report that transfer until
such time as the IRS and Treasury implement rules requiring such
reporting. However, the IRS remains concerned about transfers from
one foreign partnership to another. In conjunction with its study of
section 721(c), the IRS is evaluating whether there is a need for
the reporting of transfers from foreign partnerships to foreign
partnerships.

The final regulations also clarify that if a domestic partnership
contributes property to a foreign partnership, the partners of the
domestic partnership will be considered to have contributed a
proportionate share of the property transferred.

Therefore, the partners of the transferor domestic partnership may
be required to report under section 6038B transfers made by the
transferor partnership. The proposed regulations provide, however,
that an indirect transferor does not have to report the contribution
on Form 8865 if certain conditions are satisfied, including the
filing by the indirect transferor of a statement with the IRS. In an
attempt to reduce the burden imposed on taxpayers, the final
regulations eliminate the requirement that indirect transferors must
file a statement. If the domestic transferor partnership properly
reports the transfer of property to a foreign partnership, a United
States person that is an indirect transferor need not report the
transfer.

The final regulations also modify the reporting requirements with
respect to deemed contributions. The proposed regulations provided
that if by reason of an adjustment under section 482 a contribution
required to be reported under section 6038B is deemed to have been
made, the information required to be reported will be furnished
timely if filed by the due date (including extensions) of the income
tax return for the taxable year during which the adjustment is made.
The final regulations provide that deemed contributions resulting
from IRS-initiated section 482 adjustments are not required to be
reported under section 6038B.

However, taxpayers must report deemed contributions resulting from
taxpayer-initiated adjustments. Such information will be furnished
timely if filed by the due date, including extensions, for filing
the taxpayer's income tax return for the year in which the taxpayer
makes the section 482 adjustment.

Additionally, the final regulations clarify that a transfer to a
foreign partnership made on or after January 1, 1998, but before
January 1, 1999, will be considered timely reported either if it is
reported on a Form 8865 attached to the taxpayer's income tax return
for the first taxable year beginning on or after January 1, 1999, or
it is reported on a Form 926 attached to the taxpayer's income tax
return for the taxable year in which the transfer occurred.

The final regulations also clarify that transfers that were made
between August 5, 1997, and January 1, 1998, may be reported in
accordance with the provisions of the final section 6038B
regulations or in accordance with Notice 98-17(1998-11 IRB 6).

Special Analyses

It has been determined that this regulation is not a significant
regulatory action as defined in EO 12866. Therefore, a regulatory
assessment is not required. It is hereby certified that the
collections of information contained in this regulation will not
have a significant economic impact on a substantial number of small
entities. This certification is based upon the fact that these final
regulations reduce or eliminate the reporting requirements for
certain United States persons.

Moreover, in general, only a United States person that owns a
significant interest in a foreign partnership, or transfers a
substantial amount to a foreign partnership, will be subject to
these regulations. Thus, a Regulatory Flexibility Analysis under the
Regulatory Flexibility Act (5 U.S.C. chapter 6) is not required.

Pursuant to section 7805(f) of the Internal Revenue Code, the notice
of proposed rulemaking preceding these regulations was submitted to
the Chief Counsel for Advocacy of the Small Business Administration
for comment on the impact of the proposed regulations on small
business.

Drafting Information The principal authors of these regulations are
Eliana Dolgoff and Philip Tretiak of the Office of Associate Chief
Counsel (International). However, other personnel from the IRS and
Treasury Department participated in their development.

List of Subjects

26 CFR Part 1 Income taxes, Reporting and recordkeeping
requirements.

26 CFR Part 602 Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations Accordingly, 26 CFR part 1
is amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding
entries in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * * Section 1.6038B-1 also issued under
26 U.S.C. 6038B.

Section 1.6038B-2 also issued under 26 U.S.C. 6038B. * * * Par. 2.
Section 1.6038B-1 is amended as follows:

1. The section heading is revised.

2. Paragraph (b)(1)(i), first sentence, is revised.

3. The text of paragraph (b)(3) is added.

4. Paragraph (c), first sentence, is revised

5. Paragraph (g) is revised.

The additions and revisions read as follows:

§1.6038B-1 Reporting of certain transfers to foreign corporations.

* * * * *

(b) Time and manner of reporting--(1) In general--(i) Reporting
procedure. Except for stock or securities qualifying under the
special reporting rule of paragraph (b)(2) of this section, or cash,
which is subject to special rules contained in paragraph (b)(3) of
this section, any U.S. person that makes a transfer described in
section 6038B(a)(1)(A), 367(d) or (e)(1), is required to report
pursuant to section 6038B and the rules of this section and must
attach the required information to Form 926, A Return by Transferor
of Property to a Foreign Corporation.

@

* * *

* * * * *

(3) Special rule for transfers of cash. A U.S. person that transfers
cash to a foreign corporation must report the transfer if--

(i) Immediately after the transfer such person holds directly,
indirectly, or by attribution (determined under the rules of section
318(a), as modified by section 6038(e)(2)) at least 10 percent of
the total voting power or the total value of the foreign
corporation; or

(ii) The amount of cash transferred by such person or any related
person (determined under section 267(b)(1) through (3) and (10)
through (12)) to such foreign corporation during the 12- month
period ending on the date of the transfer exceeds $100,000.

* * * * *

(c) Information required with respect to transfers described in
section 6038B(a)(1)(A). A United States person that transfers
property to a foreign corporation in an exchange described in
section 6038B(a)(1)(A) (including cash and other unappreciated
property) must provide the following information, in paragraphs
labeled to correspond with the number or letter set forth in this
paragraph (c) and §1.6038B-1T(c)(1) through (5). * * *

* * * * *

(g) Effective dates. This section applies to transfers occurring on
or after July 20, 1998, except that the first sentence of paragraph
(b)(1)(i), paragraph (b)(3), and the first sentence of paragraph (c)
apply to transfers occurring in taxable years beginning after
February 5, 1999. See §1.6038B-1T for transfers occurring prior to
July 20, 1998.

Par. 3. Section 1.6038B-2 is added to read as follows:

§1.6038B-2 Reporting of certain transfers to foreign partnerships.

(a) Reporting requirements--(1) Requirement to report transfers. A
United States person that transfers property to a foreign
partnership in a contribution described in section 721 (including
section 721(b)) must report that transfer on Form 8865 A Information
Return of U.S. Persons With Respect To Certain Foreign Partnerships
@ pursuant to section 6038B and the rules of this section, if--

(i) Immediately after the transfer, the United States person owns,
directly, indirectly, or by attribution, at least a 10- percent
interest in the partnership, as defined in section 6038( e)(3)(C)
and the regulations thereunder; or

(ii) The value of the property transferred, when added to the value
of any other property transferred in a section 721 contribution by
such person (or any related person) to such partnership during the
12-month period ending on the date of the transfer, exceeds
$100,000.

(2) Indirect transfer through a domestic partnership--For purposes
of this section, if a domestic partnership transfers property to a
foreign partnership in a section 721 transaction, the domestic
partnership's partners shall be considered to have transferred a
proportionate share of the property to the foreign partnership.
However, if the domestic partnership properly reports all of the
information required under this section with respect to the
contribution, no partner of the transferor partnership, whether
direct or indirect (through tiers of partnerships), is also required
to report under this section.

For illustrations of this rule, see Examples 4 and 5 of paragraph
(a)(7) of this section.

(3) Indirect transfer through a foreign partnership.

[Reserved]

(4) Requirement to report dispositions--(i) In general. If a United
States person was required to report a transfer to a foreign
partnership of appreciated property under paragraph (a)(1) or (2) of
this section, and the foreign partnership disposes of the property
while such United States person remains a direct or indirect
partner, that United States person must report the disposition by
filing Form 8865. The form must be attached to, and filed by the due
date (including extensions) of, the United States person's income
tax return for the year in which the disposition occurred.

(ii) Disposition of contributed property in nonrecognition
transaction. If a foreign partnership disposes of contributed
appreciated property in a nonrecognition transaction and substituted
basis property is received in exchange, and the substituted basis
property has built-in gain under §1.704- 3(a)(8), the original
transferor is not required to report the disposition. However, the
transferor must report the disposition of the substituted basis
property in the same manner as provided for the contributed
property.

(5) Time for filing Form 8865--(i) General rule. The Form 8865 on
which a transfer is reported must be attached to the transferor's
timely filed (including extensions) income tax return (including a
partnership return of income) for the tax year that includes the
date of the transfer.

(ii) Time for filing when transferor also required to report
information about the partnership under section 6038. If the United
States person required to file under this section is also required
to file a Form 8865 under section 6038 for the period in which the
transfer occurs, then the United States person must report under
this section on the Form 8865 for the foreign partnership's annual
accounting period in which the transfer occurred (not its own
taxable year) and file with its income tax return for that year as
provided in Section 6038 and the regulations thereunder.

(6) Returns to be made--(i) Separate returns for each partnership.
If a United States person transfers property reportable under this
section to more than one foreign partnership in a taxable year, the
United States person must submit a separate Form 8865 for each
partnership.

(ii) Duplicate form to be filed. If required by the instructions
accompanying Form 8865, a duplicate Form 8865 (including attachments
and schedules) must also be filed by the due date for submitting the
original Form 8865 under paragraph (a)(5)(i) or (ii) of this
section, as applicable.

(7) Examples. The application of this paragraph (a) may be
illustrated by the following examples:

Example 1. On November 1, 2001, US, a United States person that uses
the calendar year as its taxable year, contributes $200,000 to FP, a
foreign partnership, in a transaction subject to section 721. After
the contribution, US owns a 5% interest in FP. US must report the
contribution by filing Form 8865 for its taxable year ending
December 31, 2001. On March 1, 2002, US makes a $40,000 section 721
contribution to FP, after which US owns a 6% interest in FP. US must
report the $40,000 contribution by filing Form 8865 for its taxable
year ending December 31, 2002, because the contribution, when added
to the value of the other property contributed by US to FP during
the 12-month period ending on the date of the transfer, exceeds
$100,000.

Example 2. F, a nonresident alien, is the brother of US, a United
States person. F owns a 15% interest in FP, a foreign partnership.
US contributes $99,000 to FP, in exchange for a 1- percent
partnership interest. Under sections 6038(e)(3)(C) and 267(c)(2), US
is considered to own at least a 10-percent interest in FP and,
therefore, US must report the $99,000 contribution under this
section.

Example 3. US, a United States person, owns 40 percent of FC, a
foreign corporation. FC owns a 20-percent interest in FP, a foreign
partnership. Under section 267(c)(1), US is considered to own 8
percent of FP due to its ownership of FC. US contributes $50,000 to
FP in exchange for a 5-percent partnership interest. Immediately
after the contribution, US is considered to own at least a 10-
percent interest in FP and, therefore, must report the $50,000
contribution under this section.

Example 4. US, a United States person, owns a 60-percent interest in
USP, a domestic partnership. On March 1, 2001, USP contributes
$200,000 to FP, a foreign partnership, in exchange for a 5-percent
partnership interest. Under paragraph (a)(2) of this section, US is
considered as having contributed $120,000 to FP ($200,000 x 60%).
However, under paragraph (a)(2), if USP properly reports the
contribution to FP, US is not required to report its $120,000
contribution. If US directly contributes $5,000 to FP on June 10,
2001, US must report the $5,000 contribution because US is
considered to have contributed more than $100,000 to FP in the 12-
month period ending on the date of the $5,000 contribution.

Example 5. US, a United States person, owns an 80-percent interest
in USP, a domestic partnership. USP owns an 80-percent interest in
USP1, a domestic partnership. On March 1, 2001, USP1 contributes
$200,000 to FP, a foreign partnership, in exchange for a 3-percent
partnership interest. Under paragraph (a)(2) of this section, USP is
considered to have contributed $160,000 ($200,000 x 80%) to FP. US
is considered to have contributed $128,000 to FP ($200,000 x 80% x
80%). However, if USP1 reports the transfer of the $200,000 to FP,
neither US nor USP are required to report under this section the
amounts they are considered to have contributed. Additionally,
regardless of whether USP1 reports the $200,000 contribution, if USP
reports the $160,000 contribution it is considered to have made, US
does not have to report under this section the $128,000 contribution
US is considered to have made.

(b) Transfers by trusts relating to state and local government
employee retirement plans. Trusts relating to state and local
government employee retirement plans are not required to report
transfers under this section, unless otherwise specified in the
instructions to Form 8865.

(c) Information required with respect to transfers of property. With
respect to transfers required to be reported under paragraph (a)(1)
or (2) of this section, the return must contain information in such
form or manner as Form 8865 (and its accompanying instructions)
prescribes with respect to reportable events, including

B-(1) The name, address, and U.S. taxpayer identification number of
the United States person making the transfer;

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

(3) A general description of the transfer, and of any wider
transaction of which it forms a part, including the date of
transfer;

(4) 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 transferee
foreign partnership immediately after the transfer;

(5) A description of the partnership interest received by the United
States person, including a change in partnership interest;

(6) A separate description of each item of contributed property that
is appreciated property subject to the allocation rules of section
704(c)(except to the extent that the property is permitted to be
aggregated in making allocations under section 704(c)), or is
intangible property, including its estimated fair market value and
adjusted basis.

(7) A description of other contributed property, not specified in
paragraph (c)(6) of this section, aggregated by the following
categories (with, in each case, a brief description of the
property)--

(i) Stock in trade of the transferor (inventory);

(ii) Tangible property (other than stock in trade) used in a trade
or business of the transferor;

(iii) Cash;

(iv) Stock, notes receivable and payable, and other securities; and

(v) Other property.

(d) Information required with respect to dispositions of property.
In respect of dispositions required to be reported under paragraph
(a)(4) of this section, the return must contain information in such
form or manner as Form 8865 (and its accompanying instructions)
prescribes with respect to reportable events, including

B-(1) The date and manner of disposition;

(2) The gain and depreciation recapture amounts, if any, realized by
the partnership; and

(3) Any such amounts allocated to the United States person.

(e) Method of reporting. Except as otherwise provided on Form 8865,
or the accompanying instructions, all amounts reported as required
under this section must be expressed in United States currency, with
a statement of the exchange rates used. All statements required on
or with Form 8865 pursuant to this section must be in the English
language.

(f) Reporting under this section not required of partnerships
excluded from the application of subchapter K--(1) Election to be
wholly excluded. The reporting requirements of this section will not
apply to any United States person in respect of an eligible
partnership as described in §1.761-2(a), if such partnership has
validly elected to be excluded from all of the provisions of
subchapter K of chapter 1 of the Internal Revenue Code in the manner
specified in §1.761-2(b)(2)(i).

(2) Deemed excluded. The reporting requirements of this section will
not apply to any United States person in respect of an eligible
partnership as described in §1.761-2(a), if such partnership is
validly deemed to have elected to be excluded from all of the
provisions of subchapter K of chapter 1 of the Internal Revenue Code
in accordance with the provisions of §1.761-2(b)(2)(ii).

(g) Deemed contributions. Deemed contributions resulting from IRS-
initiated section 482 adjustments are not required to be reported
under section 6038B. However, taxpayers must report deemed
contributions resulting from taxpayer-initiated adjustments. Such
information will be furnished timely if filed by the due date,
including extensions, for filing the taxpayer's income tax return
for the year in which the adjustment is made.

(h) Failure to comply with reporting requirements--(1) Consequences
of failure. If a United States person is required to file a return
under paragraph (a) of this section and fails to comply with the
reporting requirements of section 6038B and this section, then such
person is subject to the following penalties:

(i) The United States person is subject to a penalty equal to 10
percent of the fair market value of the property at the time of the
contribution. Such penalty with respect to a particular transfer is
limited to $100,000, unless the failure to comply with respect to
such transfer was due to intentional disregard.

(ii) The United States person must recognize gain (reduced by the
amount of any gain recognized, with respect to that property, by the
transferor after the transfer) as if the contributed property had
been sold for fair market value at the time of the contribution.
Adjustments to the basis of the partnership's assets and any
relevant partner's interest as a result of gain being recognized
under this provision will be made as though the gain was recognized
in the year in which the failure to report was finally determined.

(2) Failure to comply. A failure to comply with the requirements of
section 6038B includes--

(i) The failure to report at the proper time and in the proper
manner any information required to be reported under the rules of
this section; and

(ii) The provision of false or inaccurate information in purported
compliance with the requirements of this section.

(3) Reasonable cause exception. Under section 6038B(c)(2) and this
section, the provisions of paragraph (h)(1) of this section will not
apply if the transferor shows that a failure to comply was due to
reasonable cause and not willful neglect. The transferor may attempt
to do so by providing a written statement to the district director
having jurisdiction of the taxpayer's return for the year of the
transfer, setting forth the reasons for the failure to comply.
Whether a failure to comply was due to reasonable cause will be
determined by the district director under all the facts and
circumstances.

(4) Statute of limitations. For exceptions to the limitations on
assessment in the event of a failure to provide information under
section 6038B, see section 6501(c)(8).

(i) Definitions--(1) Appreciated property. Appreciated property is
property that has a fair market value in excess of basis.

(2) Domestic partnership. A domestic partnership is a partnership
described in section 7701(a)(4).

(3) Foreign partnership. A foreign partnership is a partnership
described in section 7701(a)(5).

(4) Related person. Persons are related persons if they bear a
relationship described in section 267(b)(1) through (3) or (10)
through (12), after application of section 267(c) (except for (c)
(3)), or in section 707(b)(1)(B).

(5) Substituted basis property. Substituted basis property is
property described in section 7701(a)(42).

(6) Taxpayer-initiated adjustment. A taxpayer-initiated adjustment
is a section 482 adjustment that is made by the taxpayer pursuant to
§1.482-1(a)(3).

(7) United States person. A United States person is a person
described in section 7701(a)(30).

(j) Effective dates--(1) In general. This section applies to
transfers made on or after January 1, 1998. However, for a transfer
made on or after January 1, 1998, but before January 1, 1999, the
filing requirements of this section may be satisfied by--

(i) Filing a Form 8865 with the taxpayer's income tax return
(including a partnership return of income) for the first taxable
year beginning on or after January 1, 1999; or

(ii) Filing a Form 926 with the taxpayer's income tax return
(including a partnership return of income) for the taxable year in
which the transfer occurred.

(2) Transfers made between August 5, 1997 and January 1, 1998. A
United States person that made a transfer of property between August
5, 1997, and January 1, 1998, that is required to be reported under
section 6038B may satisfy its reporting requirement by reporting in
accordance with the provisions of this section or in accordance with
the provisions of Notice 98-17 (1998-11 IRB 6)(see §601.601(d)(2) of
this chapter).

* * * * * PART 602--OMB CONTROL NUMBERS UNDER THE Paperwork
Reduction Act

Par. 4. The authority citation for part 602 continues to read as
follows:

Authority: 26 U.S.C. 7805.

Par. 5. In §602.101, paragraph (c) is amended by adding an entry in
numerical order to the table to read as follows:

§602.101 OMB Control numbers.

* * * * *

(c) * * *

CFR part or section where Current OMB identified and described
control No.

* * * * *

1.6038B-1..........................................1545-1615

* * * * *

1.6038B-2..........................................1545-1615

Robert E. Wenzel
Deputy Commissioner of Internal Revenue.
Approved: January 29, 1999
Donald C. Lubick
Assistant Secretary of the Treasury.

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