Form 8938 for U.S. entities

Author: Jurate Gulbinas

As we all start preparing for the new tax season and gathering tax documents, it’s good to review tax laws passed during 2016. In this blog post I am going to discuss Final Regulations regarding reporting Foreign Financial Assets by Specified Domestic Entities.

On February 23, 2016, the IRS issued final regulations regarding the application of reporting obligations under Internal Revenue Code Section 6038D as applied to any U.S. entity which is formed or availed for purposes of holding, directly or indirectly, specified foreign financial assets.

U.S. individual taxpayers have been subject to IRC Section 6038D disclosure requirements for several years. In general, IRC section 6038D requires U.S. taxpayers to report specified foreign financial assets, which include foreign bank and securities accounts, foreign stocks, interests in certain foreign trusts; indeed, an interest in almost any foreign entity, and an interest in a contract or instrument that is issued by a foreign person or that has a foreign person as a party on Form 8938. Please note that Form 8938 is not a substitute for another foreign account reporting Form FinCen 114 or FBAR.

IRC Code 6038D applies to individuals only, however a provision authorizes issuance of the regulations under which entities would be subject to a reporting requirement. It took a couple years for the IRS to finalize its regulations regarding entity reporting.

Reporting requirement applies to a “specified domestic entity”. IRS Code Regulations 1.6038D-6 explain that a specified domestic entity is a “domestic corporation, partnership, or a trust”, if such entity is “formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets”. In order to be “formed or availed of for purposes of holding specified foreign financial assets”, a U.S. entity has to be closely held by a U.S. person and “at least 50% of the corporation’s or partnership’s gross income for the taxable year is passive income or at least 50% of the assets held by the corporation or partnership for the taxable year are assets that produce or are held for the production of passive income”. This determination is made annually, thus a U.S. entity can have Form 8938 filing required one year and not the next, even if the specified foreign financial assets are the same for both years.

Passive income is defined by regulations as “dividends, including substitute dividends; interest; rents and royalties, other than rents and royalties derived in the active conduct of a trade or business conducted, at least in part, by employees of the corporation or partnership; annuities; capital gains; IRC 988 foreign currency gains; and net income from notional principal contracts”.

It’s worth noting that a taxpayer who holds multiple corporations or partnerships that have an interest in a specified foreign financial asset and are closely held by the same taxpayer, has to treat those entities as if they were a single entity for purposes of the reporting threshold. In that case, each entity is treated as owning the foreign financial assets of each related entity.

Certain U.S. entities are excluded from being specified domestic entities. U.S. grantor trust is excluded from this filing requirement. U.S. grantor trust is not a separate taxable entity for U.S. tax return purposes and U.S. grantor would be required to file Form 8938 to report specified foreign financial assets. In addition, certain domestic trusts are excluded from being specified domestic entities. IRC Regulations 1.6038D-6(d) lists exclusions for the domestic trust, among which is when the trustee has supervisory authority over or fiduciary obligations with respect to the specified foreign financial assets of the trust.
IRC Section 6038D requirement applies to specified domestic entity if the aggregate value of U.S. entity’s specified foreign financial assets exceeds: (1) USD 50,000 on the last day of the taxable year, or (2) USD 75,000 at any time during the taxable year.

2016 Form 8938 was updated already and asks for additional questions to identify type of the filer.

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