Form 5471 reporting for resident aliens complicated by family attribution rules.

• Author: Smaston, Carla M.

U.S. persons are required under Secs. 6035, 6038 and 6046 and the related regulations to report certain information concerning foreign corporations in which they own stock. Form 5471, Information Return of U.S. Person With Respect to Certain Foreign Corporations, is generally used for this purpose. The definition of a U.S. person under Sec. 7702(a)(30) includes any "citizen or resident of the United States." A foreign person who meets the definition of a resident alien under Sec. 7701(b) is subject to these information reporting requirements.

These reporting rules may have a significant impact on foreign individuals who become U.S. residents and whose families own foreign businesses, because of the various ownership attribution rules contained in the applicable regulations.

Example: Executive E is a national of country X. E is transferred to oversee the U.S. operations of company A, a family business, while his parents and siblings remain in X to conduct A's business activities there, including the activities of several other X affiliates. E owns a minority interest in A, and also has minority ownership interests in some, but not all, of A's foreign affiliates (all of whose activities are conducted in X); his parents and siblings own the other outstanding shares of these companies. Several of the companies are holding companies or investment companies, whose use is common in X.

Although prudent tax planning may dictate the use of such holding companies and investment companies in X, these types of companies may trigger the application of very unfavorable U.S. tax rules applicable to controlled foreign corporations (CFCs), foreign personal holding companies (FPHCs) and passive foreign investment companies (PFICs), as well as onerous reporting rules.

FPHC reporting rules

Sec. 6035 and the related regulations require U.S. officers, directors and 10% shareholders of FPHCs to file information reports on such companies with their personal U.S. income tax returns. Regs. Sec. 1.6035-1(b)(2)(i) provides that the term 10% shareholder "means any individual who owns directly or indirectly (within the meaning of section 554) 10 percent or more in value of the outstanding stock of a foreign corporation." Ownership of stock in an FPHC must be attributed to an individual from his spouse, ancestors, lineal descendants, and brothers and sisters (Sec. 554(a)(2)). Under Sec. 554(c), special rules limit the attribution of stock from nonresident alien family...