Reporting outbound cash transfers.

• Author: Gregoire, Brent
• Position: Taxation

For transfers to foreign corporations, Sec. 6038B(a)(1)(A), as modified by the Taxpayer Relief Act of 1997 (TRA '97), provides that U.S. persons who make certain outbound transfers of property to foreign corporations must report them as prescribed by regulations. The statute specifies the types of outbound transfers that must be reported; these include transfers described in Secs. 332, 351,354, 355,356 and 361 (reportable transfers). There is some question, however, as to whether Sec. 6038B applies to Sec. 351 transfers arising from the application of Sec. 367(c)(2), which expressly applies for purposes of a Code chapter that does not include Sec. 6038B. Sec. 6038B(a)(1)(A) does not apply to property transfers for sales or exchanges, loans or disregarded circular flows of property.

Prior to the TRA '97 modifications, Sec. 6038B imposed a penalty for failure to comply with the regulations equal to 25% of the gain realized on the exchange, unless the failure was due to reasonable cause and not willful neglect. Thus, although potentially subject to reporting, a transfer of non-appreciated property (e.g., cash) suffered no penalty if the transfer was not reported; there was no gain to which the penalty rate could be applied. The TRA '97 modified the penalty, effective for transfers made after Aug. 5, 1997, by instituting a penalty equal to 10% of the property's fair market value at the time of the transfer. Accordingly, if a taxpayer failed to report a cash transfer to a foreign corporation made after that date, the taxpayer could become subject to a 10% penalty of the amount of cash transferred. However the statute did not make clear whether cash transfers must be reported to avoid the new penalties. Regs. Sec. 1.6038B-1, dating to 1986 and modified three times after 1997 (TD 8770 (6/19/98), TD 8817 (3/5/99) and TD 8817 (4/1/99)) now answer this question by expressly providing that reporting is required for cash transfers occurring in tax years beginning after Feb. 5, 1999; unreported cash transfers prior to that date would not be penalized.

Regs. Sec. 1.6038B-1(b)(3)(i) requires reporting all reportable cash transfers described in Sec. 6038B(a)(1)(A) (regardless of amount) made to foreign corporations in which the transferor owns at least a 10% interest (by vote or value) after applying the Sec. 318 attribution rules. Regs. Sec. 1.6038B-1 (b)(3)(ii) contains a separate rule with a minimum threshold of $100,000, but this rule applies only to...