Avoiding the 35% penalty on failure to report outbound transfers to foreign entities under sec. 1494(c).

• Jurisdiction: United States
• Author: Seitz, Timothy
• Date: 01 May 1997

The IRS has issued guidance on the application of the penalty provision of Sec. 1494(c) in Notice 97-18. As noted in the March Tax Clinic item (page 151), "Penalty for Failing to File Information Returns on Certain Outbound Transfers of Property Substantially Expanded," this provision subjects a U.S. person making certain transfers of property to a foreign entity after Aug. 20, 1996 to a penalty equal to 35% of the gross value of the property transferred if it does not properly report the transfer on Form 926,5471 or 5472.

Scope of Transfers Subject to Sec. 1494(c)

Sec. 1494(c) potentially applies to capital contributions to foreign corporations and all transactions with foreign partnerships and trusts (collectively, "Sec. 1491 transfers"). In response to taxpayer alarm and confusion over the scope of this provision, the Service suspended the application of Sec. 1494(c) until it could provide additional guidance; see Notice 96-60. Application of the penalty to Sec. 1491 transfers occurring in the context of Secs. 301, 302, 305 and 731 remains...