# Notice of Certain Transfers to Foreign Partnerships and Foreign Corporations

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## Record

- **Collection:** Federal Register
- **Document type:** Proposed Rule
- **Published:** September 9, 1998
- **Citation:** 63 FR 48148

## Text

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

[[Page 48150]]

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)

[[Page 48151]]

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:

[[Page 48152]]

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

[[Page 48153]]

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/fr%3A98-23882. Public record. Not legal advice.