Filing relief for foreign exempt organizations.

• Author: Dillon, Randy

Foreign organizations are eligible to apply for exemption from U.S. income taxes under Sec. 501(a). Exemption may be granted to foreign corporations and trusts that meet the tests applicable to U.S. charities, trade associations, title holding companies and other organizations described in Sec. 501(c). Exemption is sought most frequently to shield the organization's U.S.-source investment income from U.S. income taxes. If U.S. income tax exemption is granted, however, most foreign organizations are required to file Form 990, Return of Organization Exempt from Income Tax, or Form 990-PF, Return of Private Foundation. If the organization also has U.S.-source "unrelated business taxable income" from an effectively connected trade or business, it is also required to file Form 990-T, Exempt Organization Business Income Tax Return; see Secs. 6033, 512(a)(2) and 4948, and Regs. Sec. 1.6012-2(e).

Forms 990 and 990-PF require information on all income and expense of the organization, not just U.S.-source income. Moreover, the returns must be prepared in English and all financial information must be translated into U.S. dollars. Consequently, foreign organizations receiving only small amounts of U.S.-source income may find U.S. tax exemption to be extremely burdensome.

Pursuant to its authority under Sec. 6033(a)(2)(B), the IRS relieves tax-exempt organizations from filing Form 990 when their gross receipts from all sources are "normally" $25,000 or less (Rev. Proc. 83-23). Foreign corporations thus were required to file U.S. income tax returns even if their U.S.-source income was minimal. To provide some parity for foreign organizations with relatively small amounts...