Revised Form 5471 creates uncertainties.

• Author: Dubert, Carl A.
• Position: IRS information return concerning foreign corporations

With little fanfare, the IRS earlier this year released a revised version of Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. This release marked the first time the Service has exercised its authority (granted by recent legislative changes to Sec. 6038) to impose new information reporting requirements simply by issuing a new form. Perhaps for this reason, the accompanying guidance has not been viewed as adequate by taxpayers and practitioners.

Revised Form 5471 (along with revised Schedules M and O and revised instructions) takes into account numerous changes to subpart F and related provisions brought about through recent legislation, including:

* Repeal of Sec. 956A, which required U.S. shareholders to include in income their share of the excess passive assets of a controlled foreign corporation (CFC);

* The temporary exceptions from the definition of foreign personal holding company income for active financial services income under Sec. 954(h);

* Other modifications to the definition of foreign personal holding company income (relating to notional principal contracts, securities dealers, etc.);

* The new "appropriate exchange rate" for translating a CFC's functional currency into U.S. dollars, generally the average exchange rate for the CFC's tax year; and

* The increase in the threshold for stock ownership that results in an information reporting obligation under Sec. 6046 from 5% to 10% (for Category 2 and 3 filers).

Also, the principal business activity codes on the new form are based on the new North American Industry Classification System, which has replaced the Standard Industrial Classification system.

The "Changes to Note" section of the revised instructions cites all these changes, but fails to mention that the revised form also requires taxpayers to provide certain new information. In particular, transactions between the CFC and partnerships (both foreign and domestic) controlled by a U.S. person filing the Form 5471 must now be reported on Schedule M.

In the past, such a change would have required prior regulatory authority to become effective. The IRS's process of drafting and releasing regulations explaining modified reporting requirements would have given taxpayers and practitioners some notice that new or additional information would be needed. This process has changed fundamentally, however, as a result of little-noticed amendments to Sec. 6038.

Prior to the Taxpayer Relief Act...