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New Form 926

Return by a U.S. transferor of property to a foreign corporation.

October 29, 2009
by Frank Ji and Chris Bennett/The Tax Adviser

U.S. taxpayers must always be vigilant when engaging in transactions with foreign entities, especially with related foreign corporations. Taxpayers must not only correctly calculate their control and income associated with the foreign corporation, they must also satisfy all the informational reporting requirements imposed by the Internal Revenue Code. One such transaction, subject to information reporting by Sec. 6038B, is a transfer of property by a U.S. person to the foreign corporation. To fulfill this reporting obligation, the U.S. taxpayer must complete Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. This article will focus briefly on the history and purpose of this form, followed by a description of changes that were made effective beginning in December 2008.

History and Purpose of Form 926 and Sec. 6038B

Sec. 6038B was added to the Code as part of the Deficit Reduction Act of 1984. As it was originally enacted, Sec. 6038B required any U.S. person who transferred property to a foreign corporation to report that transfer to the extent prescribed in the regulations. At that time, Sec. 6038B imposed a penalty of 25 percent of any gain recognized on the exchange unless the failure was due to reasonable cause, not willful neglect. Thus, there could be no penalty on transfers of cash or on property whose basis equaled or exceeded its fair market value. As a result, taxpayers making these transfers saw no need to report such transactions. The Taxpayer Relief Act of 1997 remedied this situation for the IRS by adding a 10 percent penalty on the amount of the fair market value of any property transferred. Therefore, taxpayers could no longer avoid reporting transfers of any type of property to a foreign corporation. The penalty is limited to $100,000 unless there is intentional disregard of the filing requirements.

Form 926 has always been the means by which to report transfers to a foreign corporation. When a U.S. person4 transfers, or is deemed to transfer, property to a foreign corporation in specified nonrecognition transactions (whether or not the property has appreciated), the U.S. person must complete Form 926 and attach it to that year’s income tax return. For cash contributions, the form is required for cash transfers exceeding $100,000 over a 12-month period or if the cash transfer results in the transferor holding more than 10 percent of the total voting power or total value of the foreign corporation immediately after the transfer.

Information required to be reported includes descriptions of assets transferred (such as type and basis) and a description of the transaction that was used to transfer the assets. Transactions that trigger a filing include transfers to a controlled subsidiary under Sec. 351, transfers in liquidation to a foreign parent under Sec. 332, transfers to a foreign corporation in a tax-free reorganization, and transfers of a foreign corporation in a spin-off under Sec. 355.

What is the overall purpose of this requirement? By requiring such information to be included on the form, the Service is able to assess a taxpayer’s compliance with Sec. 367, which generally requires the current recognition of gain on transfers of appreciated property (whether personal or intangible) to a foreign corporation unless an exception applies. With regard to certain outbound stock transfers, the exceptions for gain recognition found in the Sec. 367(a) regulations may require that a gain recognition agreement (GRA) be filed with the IRS. Where a GRA is filed by the taxpayer for a transfer, there may be no need to also file Form 926, but the taxpayer should always be advised to consult with a professional on this matter.

This article has been excerpted from The Tax Adviser. View the full article here (PDF).