Penalty for failing to file information returns on certain outbound transfers of property substantially expanded.

• Author: Reynolds, Bruce

Under provisions added by the Small Business Job Protection Act of 1996 (SBJPA), U.S. individuals transferring property to a foreign entity may be subject to a penalty equal to 35% of the gross value of the property transferred if they do not properly file a return required under Secs. 367, 1491, 6038, et al. This provision substantially increases the present penalty for these failures, which until this time had been based on gain (whether or not recognized). The new penalty applies without regard to whether the property transferred is appreciated property, and it can apply to deemed transfers resulting from liquidations or changes in form of a foreign entity.

Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, Foreign Estate or Trust, or Foreign Partnership, is the applicable return, and it has different due dates for different transactions; in some cases, the due date is the date of the transaction, not the later date on which the Federal income tax return is filed.

Discussion

SBJPA Section 1902 added Sec. 1494(c) to the Internal Revenue Code. Sec. 1494(c) imposes a specific, nonfiling penalty on US. persons who make transfers "described in section 1491" md who fail to file a return required by the IRS for such transfer. "Failures to file" under this section include late filings.

In addition, under Sec. 6677 (as modified by the SBJPA), the penalty equals 35% of the gross amount of property transferred, rather than the property's inherent gain. This penalty appears to be imposed in addition to any other penalties or tax imposed on the transfer.

Transfers Described in Sec. 1491

Sec. 1491 transfers include any transfer by a US. person:

_____ to a foreign corporation as a contribution of capital or as paid-in surplus, _____ to a foreign estate or trust, or _____ to a foreign partnership.

The broad language of Sec. 1494(c) may make it applicable to situations in which formerly a penalty was not a concern. For example, it may apply when Sec. 1491 does not actually apply, or when there is no exposure to the excise tax that causes the filing of the return. Certain transactions described in Sec. 1491, including transactions covered by Sec. 367, are not subject to the Sec. 1491 excise tax (Sec. 1492). However, the Code and the IRS do require returns to be filed for transfers that are described in Sec. 1491 but are also covered under other provisions of the Code, see Secs. 367 and 6038B and related regulations. Unfortunately...