Wedding bells and filing requirements.

• Author: Foster, Patricia T.
• Position: Tax filing rules where foreign spouse is a business owner

Couples deciding to marry have many things to consider, from wedding plans to families to where to live. When the future husband or wife is a citizen of another country, there are even more issues to consider, both cultural and geographical. Now, newlyweds have an additional worry, courtesy of the Code. If the foreign spouse is also a business owner, the U.S. citizen spouse may have filing requirements under Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, due to an inconsistency between two Code provisions.

Sec. 957 defines a controlled foreign corporation (CFC) as "any foreign corporation if more than 50% of the total combined voting power of all classes of stock ... entitled to vote, or the total value of the stock of such corporation, is owned ... by United States shareholders on any day during the taxable year of such foreign corporation." Sec. 958 states that Sec. 318(a) (requiring attribution between husbands and wives) applies in determining ownership for Sec. 957 purposes. However, Sec. 958(b)(1) states that "stock owned by a nonresident alien individual ... shall not be considered as owned by a citizen"

Example: A is a U.S. citizen married to J, a citizen of country x. They live in X. Together, they operate a business (A J) in x. Each owns 50% of the business. If A and J were U.S. citizens, each would be deemed to own 100% of the business under Sec. 318(a). However, Sec. 958(b)(1) prevents attribution from J to A, because J is not a U.S. citizen, in determining whether a business is a CFC.

AJ is not a CFC, because A does not own more than 50% of the stock. Because AJ is not a CFC, A should not be required to file Form 5471, but due to an inconsistency in the Code, A will have to file this form.

Sec. 6038 requires information reporting for certain foreign corporations and partnerships. Every...