What Is Treasury Regulation 1.6046-1?
Learn about Treasury Regulation 1.6046-1, which outlines the IRS reporting obligations for U.S. persons involved in foreign corporate ownership events.
Treasury Regulation 1.6046-1 provides the rules for United States persons involved with foreign corporations. These regulations support Internal Revenue Code (IRC) Section 6046, which mandates reporting on the organization, reorganization, and acquisition of stock of foreign corporations. The regulation specifies who must report, what events trigger reporting, and the information that must be provided to the Internal Revenue Service (IRS).
Determining Who Must File
The filing obligation under Treasury Regulation 1.6046-1 applies to “U.S. persons,” a term including citizens or residents of the United States, domestic partnerships, domestic corporations, and certain estates or trusts.
Two primary groups are required to file. The first group includes U.S. citizens or residents who serve as an officer or director of a foreign corporation when a U.S. person acquires stock meeting the 10% ownership threshold.
The second group consists of U.S. persons who acquire, dispose of, or own a certain percentage of a foreign corporation’s stock through direct or constructive ownership. Constructive ownership means an individual is treated as owning stock legally held by a family member, such as a spouse, sibling, ancestor, or lineal descendant, or by a related entity. These attribution rules broaden the scope of who is considered a shareholder.
Identifying Reportable Transactions
A filing obligation arises when a U.S. person engages in specific transactions related to a foreign corporation’s stock that meet certain percentage thresholds.
One of the most common triggers is the acquisition of stock. A U.S. person must report when they acquire stock that results in them owning 10% or more of the total value of the foreign corporation’s stock or 10% or more of the total combined voting power.
Further reporting is required for subsequent acquisitions or changes. A filing is also triggered when:
- A U.S. person who already meets the 10% ownership test acquires an additional 10% or more in value or voting power.
- An individual becomes a U.S. person while already meeting the 10% stock ownership requirement.
- A U.S. person disposes of stock, causing their ownership interest to fall below the 10% threshold.
- The foreign corporation undergoes a reorganization, as defined in the Internal Revenue Code.
Information Required for the Return
When a reportable event occurs, the information must be submitted to the IRS on Schedule O of Form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations.”
Filers must report their identifying information and address, along with the foreign corporation’s name, address, and country of incorporation. The return also requires a description of the transaction, including the date and number of shares involved.
The filer must also list all known U.S. persons who owned 10% or more of the stock. To avoid duplicative reporting, a person may satisfy the requirement by stating on their return that another person with an equal or greater interest has already filed the information.
Filing Procedures and Deadlines
The completed Form 5471 must be attached to the filer’s annual income tax return for the year of the reportable transaction, such as a Form 1040 for an individual or Form 1120 for a corporation.
The deadline for filing Form 5471 is the same as the due date for the income tax return to which it is attached, including any extensions.
Penalties for Failure to File
Non-compliance with Section 6046 reporting requirements carries significant penalties. The IRS can penalize filers for failing to submit a complete and accurate Form 5471 on time.
The base penalty is $10,000 for each annual accounting period of each foreign corporation. If the IRS notifies the taxpayer of the failure, a continuation penalty of $10,000 can be assessed for each 30-day period the failure continues, up to a maximum of $50,000.
A severe consequence relates to the statute of limitations. If a required Form 5471 is not filed, the assessment period for the taxpayer’s entire income tax return for that year remains open until the form is filed. If the failure is due to reasonable cause, this extension applies only to items related to the Form 5471. Willful failure to file may also lead to criminal penalties.