Revisions to 2007 form 1120-F.

• Author: Mitchell, John E.

The IRS has revised Form 1120-F, U.S. Income Tax Return of a Foreign Corporation, and related schedules, effective for filing periods ending on or offer December 31, 2007. The draft form and related schedules were released in May 2007, but the finalized version had not yet been released to the public as of early January 2008.

Generally, Form 1120-F must be filed by a foreign corporation that:

1. Was engaged in a trade or business in the United States (whether or not it actually bad income from that U.S. trade or business);

2. Had income that was effectively connected with the conduct of a U.S. trade or business under Sec. 864; or

3. Had U.S. source income (FDAP) that was not effectively connected with the conduct of a U.S. trade or business under Sec. 881 even if that income was tax exempt, based on an income tax treaty between the United States and the foreign country, or based on a Code section. "FDAP" refers to the gross amount of U.S. nonbusiness income (or investment-type income) that is "fixed or determinable, annual, or periodic" and is subject to withholding of tax at o rate of 30% (or a lower rate allowed by an income tax treaty between the United States and the applicable foreign country) without the benefit of any deductions (as provided under Secs. 1441 and 1442).

   Since many foreign corporations that are required to file Form 1120-F do not have an office or other place of business in the United States, the normal filing deadline for them is June 15, 2008.

   The updated 2007 Form 1120-F and new schedules will provide more informational disclosures regarding items such as the direct and indirect allocations of expenses to income that is effectively connected with the conduct of a U.S. trade or business. The IRS anticipates that the increased reporting will enable the service center to better identify compliance actions for foreign corporations.

   For tax practitioners, it is now more critical than ever to understand foreign taxpayers' businesses and structures, since the new forms focus on providing a more transparent understanding of the entities and their ownership structures. For example, new Schedule P, List of Foreign Partner Interests in Partnerships, requires taxpayers to identify their partnership investments and provide more detailed information.

   The introduction of Schedule M-3, Net Income (Loss) Reconciliation for Foreign Corporations with Reportable Assets of $10 Million or More, for Form 1120-F is likely to be used us a tool...