Notice of Certain Transfers to Foreign Partnerships and Foreign Corporations

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-118926-97]

RIN 1545-AV70

Notice of Certain Transfers to Foreign Partnerships and Foreign

Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

[[Page 48149]]

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: This document contains proposed regulations under section

6038B of the Internal Revenue Code on information reporting

requirements for certain transfers by United States persons to foreign

partnerships. The proposed regulations would implement the 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 transfers. This document also

contains proposed regulations that would amend the information

reporting requirements for certain transfers by United States persons

to foreign corporations to require the reporting of the transfer of

cash. The proposed regulations would provide guidance to United States

persons who must furnish this information. This document also provides

notice of a public hearing on these proposed regulations.

DATES: Written comments must be received by November 9, 1998. Outlines

of topics to be discussed at the public hearing scheduled for November

10, 1998, at 10 a.m., must be received by October 20, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-118926-97), room

5226, Internal Revenue Service, POB 7604, Ben Franklin Station,

Washington, DC 20044. Submissions may be hand delivered between the

hours of 8 a.m. and 5 p.m. to CC:DOM:CORP:R (REG-118926-97), Courier's

Desk, Internal Revenue Service, 1111 Constitution Avenue NW.,

Washington, DC. Alternatively, taxpayers may submit comments

electronically via the Internet by selecting the ``Tax Regs'' option of

the IRS Home Page, or by submitting comments directly to the IRS

Internet site at: http://www.irs.ustreas.gov/prod/tax__regs/

comments.html.

A public hearing has been scheduled to be held in room 2615,

Internal Revenue Building, 1111 Constitution Avenue NW., Washington,

DC.

FOR FURTHER INFORMATION CONTACT: Concerning transfers of cash to

foreign corporations, Philip L. Tretiak, and concerning transfers to

foreign partnerships, Christopher Kelley, 202-622-3860; concerning the

hearing and submissions of written comments, Michael Slaughter, 202-

622-7190 (not toll-free calls).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed

rulemaking has been submitted to the Office of Management and Budget

for review in accordance with the Paperwork Reduction Act of 1995 (44

U.S.C. 3507(d)). Comments on the collection of information should be

sent to the Office of Management and Budget, Attention: Desk Officer

for the Department of the Treasury, Office of Information and

Regulatory Affairs, Washington, DC 20503, with copies to the Internal

Revenue Service, Attention: IRS Reports Clearance Officer OP:FS:FP,

Washington, DC 20224. Comments on the collection of information must be

received by November 9, 1998. Comments are specifically requested on:

Whether the proposed collection of information is necessary for the

proper performance of the functions of the IRS, including whether the

information will have practical utility;

The accuracy of the estimated burden associated with the proposed

collection of information (see below);

How the quality, utility, and clarity of the information to be

collected may be enhanced;

How the burden of complying with the proposed collection of

information may be minimized, including through the application of

automated collection techniques or other forms of information

technology; and

Estimates of the capital or start-up costs of operation,

maintenance, and purchase of services to provide information.

The collection of information in these regulations is in

Secs. 1.6038B-1(b) and 1.6038B-2. This information is required by the

IRS to identify United States persons who contribute property to

foreign partnerships and to ensure the correct reporting of items with

respect to those partnerships. The collection of information is

mandatory. The likely respondents will be individuals and businesses or

other for-profit organizations.

The burden of complying with the proposed collection of information

required to be reported on Form 8865 is reflected in the burden for

Form 8865.

The burden of complying with the proposed collection of information

required to be reported on Form 926 is reflected in the burden for Form

926.

The burden of complying with the proposed collection of information

in Sec. 1.6038B-2(f)(2) is as follows:

Estimated total annual reporting burden: 250 hours.

Estimated annual burden per respondent: 0.25 hours to 1 hour, with

an average of 0.5 hours.

Estimated number of respondents: 500.

Estimated frequency of responses: Once per year.

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

Taxpayer Relief Act of 1997

In the Taxpayer Relief Act of 1997 (TRA 1997), Public Law 105-34

(111 Stat. 983 (1997)), Congress significantly modified the information

reporting requirements with respect to foreign partnerships under

sections 6038, 6038B and 6046A (and also amended section 6501(c)(8) to

provide that the statute of limitations on the assessment of tax under

section 6038, 6038B and 6046A does not expire until three years after

the information required under those sections is reported). Certain of

these modifications also affect reporting requirements with respect to

foreign corporations. These regulations under section 6038B are being

proposed along with regulations under sections 6038 (reporting with

respect to certain foreign partnerships) and 6046A (reporting of

certain ownership interests in foreign partnerships). The IRS is also

developing a comprehensive form (Form 8865) for reporting under all of

these provisions. A draft version of the form will be issued for public

comment while the proposed regulations are outstanding.

Section 6038B and Transfers to Foreign Corporations

Section 6038B, as enacted in 1984, provided that United States

persons that made certain transfers of property to foreign corporations

were required to report those transfers in the manner prescribed by

regulations. Prior to the enactment of TRA 1997, section 6038B imposed

a penalty for failure to comply with the regulations equal to 25

percent of the gain realized on the exchange, unless the failure was

due to reasonable cause and not to willful neglect. Thus, in the case

of a transfer of cash or other unappreciated property to a foreign

corporation, no penalty was imposed under section 6038B if the transfer

was not reported. Section 1144(c) of TRA 1997 modified the penalty

applicable to

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the failure to furnish information required to be reported under

section 6038B. The modified penalty is equal to 10 percent of the fair

market value of the property at the time of the transfer.

In response to TRA 1997, Treasury and the IRS issued final

regulations under section 6038B (TD 8770 at 63 FR 33568; June 19,

1998), in conjunction with regulations under section 367(a), to clarify

that transfers to corporations of unappreciated property other than

cash that occur on or after July 20, 1998, generally are required to be

reported in accordance with Sec. 1.6038B-1(b). The preamble to the

final regulations stated that rules regarding transfers of cash to

foreign corporations would be provided in future regulations.

Section 6038B and Transfers to Foreign Partnerships

Prior to the enactment of TRA 1997, section 1491 imposed an excise

tax on certain transfers of property by United States persons to

foreign corporations, partnerships, estates, or trusts. The tax was

equal to 35 percent of the fair market value of the property

transferred in excess of adjusted basis and any gain recognized on the

transfer (built-in gain). Section 1494(c), effective for transfers made

after August 20, 1996, imposed a further penalty for a failure to

report.

Section 1131(a) of TRA 1997 repealed sections 1491 through 1494.

Section 1144 of TRA 1997 amended section 6038B to require a United

States person who transfers property to a foreign partnership to report

the transfer in the time and manner provided in regulations. The 1997

amendments apply to transfers of property made after August 5, 1997.

Notice 98-17 (1998-11 C.B. 6) provided the manner of reporting a

transfer under section 6038B made after August 5, 1997, and before

January 1, 1998.

Explanation of Provisions

Reporting of Cash Transfers to Foreign Corporations

These proposed regulations provide that transfers of cash to

foreign corporations are required to be reported if the U.S. transferor

holds, immediately after the transfer, directly or indirectly, a 10-

percent interest in the foreign corporation, or the amount of the cash

transferred by the transferor or any related person to such foreign

corporation or a related foreign corporation during the 12-month period

ending on the date of the transfer exceeds $100,000. The transfer of

cash to a foreign corporation will not be required to be reported

unless made in a taxable year beginning after the date that final

regulations requiring reporting are published in the Federal Register.

The IRS and Treasury invite comments on these requirements and the

corresponding requirement for foreign partnerships, including a

description of the types of transfers which could appropriately be

excepted (for example, capital contributions and returns of cash made

as part of the normal course of business operations).

Reporting of Transfers to Foreign Partnerships

The proposed regulations would implement the rules of section 6038B

by generally requiring that a United States person that transfers

property (including cash) to a foreign partnership in a contribution

described in section 721 in exchange for a partnership interest, file a

return on Form 8865 ``Information Return of U.S. Persons With Respect

To Certain Foreign Partnerships'', reporting the transfer. Under the

statutory exceptions in section 6038B(b)(1), a United States person

must report such a contribution only if (1) the United States person

holds (immediately after the transfer), directly or indirectly, at

least a 10-percent interest in the partnership, or (2) the value of the

property transferred (when added to the value of the property

transferred by such person to the partnership within the preceding 12

months) exceeds $100,000 (including the value of property transferred

in any transfer not described in section 721, a principal purpose of

which is the avoidance of the reporting requirements of these

regulations). The proposed regulations would also require a transferor,

if still a partner, to notify the IRS when a foreign partnership

disposes of appreciated property contributed by the transferor. This

information will help in determining whether built-in gain has been

properly allocated to and recognized by the U.S. transferor. The

proposed regulations provide that certain indirect transferors need not

report under this section if certain conditions are met.

A 10-percent interest is defined by cross-reference to section

6046A(d), which in turn cross-references section 6038(e)(3)(C) and

regulations issued under that provision. The term means direct or

indirect ownership of an interest equal to 10 percent of the capital

interest or profits interest in a partnership, and an interest to which

10 percent of the deductions or losses of a partnership are allocated.

Partnerships Excluded From Application of Subchapter K

The reporting requirements of this section shall not apply in

respect of any foreign partnership which is an eligible partnership

described in Sec. 1.761-2(a) that has validly elected pursuant to

Sec. 1.761-2(b)(2)(i) to be wholly excluded from the application of

subchapter K. Nor shall the reporting requirements of these proposed

regulations apply to any foreign partnership validly deemed to have

wholly elected out of the provisions of subchapter K as specified in

Sec. 1.761-2(b)(2)(ii). Taxpayers are reminded, however, that a

precondition to being an ``electing-out'' partnership is that, as

provided in Sec. 1.761-2(a)(1), ``[t]he members of such organization

must be able to compute their income without the necessity of computing

partnership taxable income.'' The IRS and Treasury are concerned that

in certain cases the necessary books and records are not being

maintained to allow verification that such computations can indeed be

made without regard to the partnership. If it appears that, in the

absence of a reporting requirement under this section, the members of

the ``electing-out'' partnership cannot make such separate

computations, this exception to the reporting requirements will be

reconsidered.

Reporting of Cash Transfers to Foreign Partnerships

The proposed regulations require the reporting of a cash transfer

to a foreign partnership in a contribution otherwise required to be

reported under section 6038B and these regulations. Such transfers were

required to be reported under Notice 98-17. Reporting of cash transfers

will help to ensure that any earnings and appreciation attributable to

the cash are reported by the U.S. transferor, and help to prevent

United States persons from avoiding the rules applicable to foreign

trusts. As noted above with respect to cash contributions to foreign

corporations, Treasury and the IRS are interested in receiving comments

on specific issues in addition to general comments on this requirement.

Information Required

The proposed regulations would require a United States person to

provide certain information with respect to property transferred in a

reportable contribution. Appreciated property and intangible property

must be listed item by item on the Form 8865. Other items of property

may be aggregated and listed according to the following categories: (1)

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inventory; (2) other tangible trade or business property; (3) cash; (4)

securities; and (5) other property.

The proposed regulations provide that a United States person

reporting a transfer to a foreign partnership under section 6038B must

identify the other partners in the partnership. This allows the IRS,

for example, to determine whether built-in gain is being properly

allocated to and recognized by the U.S. transferor under section

704(c). The proposed regulations except from this rule a United States

person only required to report because of a transfer of cash, if the

transferor holds less than a 10-percent interest in the partnership

immediately following the transfer.

Time and Place for Filing

The proposed regulations would require Form 8865 to be filed with

the United States person's income tax return (including a partnership

return of income) for the year in which the reportable contribution

occurs. However, if the transferor is also required to report under

proposed regulation Sec. 1.6038-3(a), then the transfer must be

reported on the Form 8865 (and filed in accordance with Secs. 1.6038-

3(e) and (h)) for the foreign partnership's taxable year in which the

reportable contribution occurs. Additionally, if required by the

instructions to Form 8865, a duplicate Form 8865 must also be filed.

The proposed regulations would provide alternative filing deadlines

with respect to reportable contributions that occur on or before the

date final regulations on this subject are published in the Federal

Register (see Effective Dates portion of this preamble).

Failure to Provide Information

Section 6038B(c)(1) and the proposed regulations provide that a

failure by the transferor to properly report a transfer that is

required to be reported under section 6038B and these regulations is

subject to a penalty equal to 10 percent of the fair market value of

the property transferred. This penalty is subject to a $100,000 limit

under section 6038B(c)(3), unless the failure is due to intentional

disregard. In addition, the transferor must recognize gain (reduced by

gain recognized, with respect to that property, by the transferor after

the transfer) as if the property had been sold for its fair market

value at the time of the transfer. In addition, section 6501(c)(8)

keeps the statute of limitations open with respect to the transferor in

the case of a failure to report. Any adjustments to the basis of the

partnership or any partner (direct or indirect) as a result of the gain

recognized under this provision, shall be made as though the gain was

recognized in the year in which the failure to report was finally

determined. Section 6038B(c)(2) and the proposed regulations provide a

reasonable cause exception to the penalty and gain recognition

provisions.

Effective Dates

The amendments to the regulations on the reporting of cash

transfers to foreign corporations apply to taxable years beginning

after these regulations are published as final regulations in the

Federal Register.

The proposed regulations on the reporting of transfers to foreign

partnerships apply to transfers made on or after January 1, 1998.

Notice 98-17 (1998-11 I.R.B. 6) provides reporting requirements for

transfers made after August 5, 1997, and before January 1, 1998. The

proposed regulations would permit United States persons who made

transfers in that period to rely on either Notice 98-17 or the final

regulations.

Special Analyses

It has been determined that this notice of proposed rulemaking is

not a significant regulatory action as defined in EO 12866. Therefore,

a regulatory assessment is not required. It has also been determined

that section 553(b) of the Administrative Procedure Act (5 U.S.C.

chapter 5) does not apply to these proposed regulations. It is hereby

certified that the collection of information contained in these

proposed regulations will not have a significant economic impact on a

substantial number of small entities. This certification is based on

the fact that the amount of time required to complete the form and file

the information required under these regulations is brief and will not

have a significant impact on those small entities that are required to

provide notification. Furthermore, the number of small entities that

will be required to file the form is not significant. Accordingly, 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, these regulations will be submitted to the Chief

Counsel for Advocacy of the Small Business Administration for comment

on their impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,

consideration will be give to any written comments (preferably a signed

original and eight (8) copies) that are submitted timely to the IRS.

All comments will be made available for public inspection and copying.

A public hearing has been scheduled for Tuesday, November 10, 1998,

at 10 a.m., in room 2615, Internal Revenue Building, 1111 Constitution

Avenue NW., Washington, DC. Because of access restrictions, visitors

will not be admitted beyond the Internal Revenue Building lobby more

than 15 minutes before the hearing starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must

submit written comments and an outline of the topics to be discussed

(preferably a signed original and eight (8) copies) by October 20,

1998.

A period of 10 minutes will be allotted for each person making

comments.

An agenda showing the scheduling of the speakers will be prepared

after the deadline for receiving outlines has passed. Copies of the

agenda will be available free of charge at the hearing.

Drafting Information. The principal authors of these proposed

regulations are Christopher Kelley 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 in 26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding

an entry 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:

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Sec. 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 ``Return by Transferor of Property to

a Foreign Corporation''. * * *

* * * * *

(3) Special rule for transfers of cash. A U.S. person that

transfers cash must report the transfer of cash to a foreign

corporation if--

(i) Such U.S. person holds (immediately after the transfer)

directly or indirectly (determined under the rules of sections 318(a)

and 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)) to such foreign corporation or

a related 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 U.S. 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 Sec. 1.6038B-1T(c)

(1) through (5). * * *

* * * * *

(g) Effective dates. This section applies to transfers occurring on

or after July 20, 1998, except the first sentence of paragraph

(b)(1)(i), paragraph (b)(3), and the first sentence of paragraph (c)

apply to taxable years beginning after the date that final regulations

are published in the Federal Register. See Sec. 1.6038B-1T for

transfers occurring prior to July 20, 1998.

Par. 6. Section 1.6038B-2 is added to read as follows:

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

(a) Reporting requirements--(1) Requirement to report transfers.

Any United States person that makes a transfer to a foreign partnership

in a contribution described in section 721 is required to report

pursuant to section 6038B and the rules of this section by filing Form

8865 ``Information Return of U.S. Persons With Respect To Certain

Foreign Partnerships'' attached to the transferor's income tax return

(including a partnership return of income) for the taxable year that

includes the date of the transfer by the due date (including

extensions) for that return, if--

(i) The United States person holds (immediately after the transfer)

directly or indirectly at least a 10-percent interest in the

partnership; or

(ii) The value of the property transferred, when added to the value

of the property transferred by such person or any related person

(described in section 267(b) or 707(b)(1)) to such partnership or a

related partnership (described in section 707(b)(1)(B)) during the 12-

month period ending on the date of the transfer, exceeds $100,000. For

purposes of determining the relevant amounts, there shall also be taken

into account the value of any property transferred in a transfer not

subject to section 721, where a principal purpose of such transfer was

the avoidance of these reporting requirements.

(2) Requirement to report dispositions--(i) In general. If a United

States person was required to report a transfer to a foreign

partnership under paragraph (b)(1) of property with a fair market value

in excess of basis (built-in gain property), and the partnership

disposes of the property while such United States person remains a

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 transferor's income tax return for

the year in which the disposition occurred.

(ii) Disposition of property in nonrecognition transaction. If a

foreign partnership disposes of contributed built-in gain property in a

nonrecognition transaction and substituted basis property is received

in exchange, and the substituted basis property has built-in gain under

Sec. 1.704-3(a)(8), the transferor must report the disposition of the

substituted basis property in the same manner as provided for the

contributed property.

(3) Returns to be made--(i) Separate returns for each partnership.

If a United States person transfers property to more than one foreign

partnership in a taxable year, a separate return must be made by the

United States for each partnership.

(ii) Duplicate form to be filed. If required by the instructions to

Form 8865, a duplicate Form 8865 (including attachments and schedules)

must also be filed.

(4) Time for filing when transferor also required to report under

Sec. 1.6038-3(a). If the United States person required to file under

this section is also required to file under Sec. 1.6038-3(a) 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 partnerships

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 Secs. 1.6038-3(e) and (h).

(b) Relief for indirect transferors--(1) Requirements. A United

States person otherwise required to file a return under this section

with respect to a transfer to a foreign partnership need not file a

return if all of the following conditions are met--

(i) The person does not directly own an interest in the foreign

partnership;

(ii) The person is required to file a return solely by reason of

attribution of ownership from a United States person (as determined

under the rules of section 6038(e)(3) and the regulations thereunder);

and

(iii) A United States person from whom the ownership is attributed

files all of the information required under section 6038B and this

section with respect to the transfer.

(2) Statement required. A United States person who does not furnish

an information return under the provisions of paragraph (b)(1) of this

section must file a statement with the person's income tax return--

(i) Indicating that the filing requirement has been or will be

satisfied;

(ii) Identifying the person who has or will file the return;

(iii) Identifying the IRS Service Center where the return was or

will be filed; and

(iv) Providing any additional information as Form 8865 and the

accompanying instructions may require.

(c) Information required with respect to transfers of property. In

respect of transfers described in section 6038B(a)(1)(B), the return

must contain information in such form or manner as Form 8865 (and its

accompanying instructions) prescribes with respect to reportable

events, including--

(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

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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, the return must contain information in such

form or manner as Form 8865 (and its accompanying instructions)

prescribes with respect to reportable events, including--

(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 Sec. 1.761-2(a) in which that United States person is a

partner, 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 Sec. 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 Sec. 1.761-2(a) in which that United States

person is a partner, 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 Sec. 1.761-2(b)(2)(ii).

(g) Deemed contributions. If by reason of an adjustment under

section 482 or otherwise, a contribution required to be reported under

section 6038B(a)(1)(B) and this section 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 taxable year

during 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--

(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;

(ii) The United States person will 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; and

(iii) Adjustments to the basis of the partnership and any relevant

partner 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)(3) 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 facts and circumstances.

(4) Limitation on penalties. The penalty under paragraph (h)(1)(i)

of this section with respect to any transfer cannot exceed $100,000,

unless the failure to comply with respect to such transfer was due to

intentional disregard.

(5) Statute of limitations. For exceptions to the limitations on

assessment and collection in the event of a failure to provide

information under section 6038B, see section 6501(c)(8).

(i) Definitions--(1) 10-percent interest. 10-percent interest is

defined in sections 6046A(d) and 6038(e)(3)(C) and the regulations

thereunder.

(2) United States person. United States person is defined in

section 7701(a)(30).

(3) Foreign partnership. Foreign partnership is defined in section

7701(a)(2) and (5).

(4) Substituted basis property. Substituted basis property is

defined in section 7701(a)(42).

(5) Value of the property transferred. Under section 6038B and this

section, the value of the property transferred is the fair market value

of the property at the time of its transfer.

(j) Effective dates--(1) In general. This section applies to

transfers made on or after January 1, 1998. However, for a transfer

made prior to the date final regulations are published in the Federal

Register, Form 8865 will be considered timely filed with respect to a

transfer if filed with the taxpayer's income tax return for the first

taxable year beginning after the date that final regulations are

published in the Federal Register.

(2) Transfers after August 5, 1997 and before January 1, 1998. A

U.S. person who made a transfer of property required to be reported

under section 6038B prior to the effective date of these regulations

may satisfy its reporting

[[Page 48154]]

requirements by reporting in accordance with the provisions of this

section.

Michael P. Dolan,

Deputy Commissioner of Internal Revenue.

[FR Doc. 98-23882 Filed 9-8-98; 8:45 am]

BILLING CODE 4830-01-U