New Form 926: return by a U.S. Transferor of Property to a Foreign Corporation.

• Author: Ji, Frank

U.S. taxpayers must always be vigilant when engaging in transactions with foreign entities, especially with related foreign corporations. Taxpayers must not only correctly calculate their control and income associated with the foreign corporation, they must also satisfy all the informational reporting requirements imposed by the Internal Revenue Code. One such transaction, subject to information reporting by Sec. 6038B, is a transfer of property by a U.S. person to the foreign corporation. To fulfill this reporting obligation, the U.S. taxpayer must complete Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. This article will focus briefly on the history and purpose of this form, followed by a description of changes that were made effective beginning in December 2008.

History and Purpose of Form 926 and Sec. 6038B

Sec. 6038B was added to the Code as part of the Deficit Reduction Act of 1984. (1) As it was originally enacted, Sec. 6038B required any U.S. person who transferred property to a foreign corporation to report that transfer to the extent prescribed in the regulations. At that time, Sec. 6038B imposed a penalty of 25% of any gain recognized on the exchange unless the failure was due to reasonable cause, not willful neglect. Thus, there could be no penalty on transfers of cash or on property whose basis equaled or exceeded its fair market value. As a result, taxpayers making these transfers saw no need to report such transactions. The Taxpayer Relief Act of 1997 remedied this situation for the IRS by adding a 10% penalty on the amount of the fair market value of any property transferred. (2) Therefore, taxpayers could no longer avoid reporting transfers of any type of property to a foreign corporation. The penalty is limited to $100,000 unless there is intentional disregard of the filing requirements. (3)

Form 926 has always been the means by which to report transfers to a foreign corporation. When a U.S. person (4) transfers, or is deemed to transfer, property to a foreign corporation in specified nonrecognition transactions (whether or not the property has appreciated), the U.S. person must complete Form 926 and attach it to that year's income tax return. For cash contributions, the form is required for cash transfers exceeding $100,000 over a 12-month period or if the cash transfer results in the transferor holding more than 10% of the total voting power or total value of the foreign corporation...