what is a 6038b statement

High Contrast

• Asia Pacific
• Latin America
• North America
• Afghanistan
• Bosnia and Herzegovina
• Cayman Islands
• Channel Islands
• Czech Republic
• Dominican Republic
• El Salvador
• Equatorial Guinea
• Hong Kong SAR, China
• Ireland (Republic of)
• Ivory Coast
• Macedonia (Republic of North)
• Netherlands
• New Zealand
• Philippines
• Puerto Rico
• Sao Tome & Principe
• Saudi Arabia
• South Africa
• Switzerland
• United Kingdom
• News releases
• RSM in the news

• AI, analytics and cloud services
• Audit and assurance
• Business operations and strategy
• Business tax
• Consulting services
• Family office services
• Financial management
• Global business services
• Managed services
• Mergers and acquisitions
• Private client
• Risk, fraud and cybersecurity
• See all services and capabilities

Strategic technology alliances

• Sage Intacct
• CorporateSight
• FamilySight
• PartnerSight

Featured topics

• 2024 economy and business opportunity
• Generative AI
• Middle market economics
• Environmental, social and governance
• Supply chain

Real Economy publications

• The Real Economy
• The Real Economy Industry Outlooks
• RSM US Middle Market Business Index
• The Real Economy Blog
• Construction
• Consumer goods
• Financial services
• Food and beverage
• Health care
• Life sciences
• Manufacturing
• Nonprofit and education
• Private equity
• Professional services
• Real estate
• Technology companies
• See all industry insights
• Business strategy and operations
• Family office
• Private client services
• Financial reporting resources
• Tax regulatory resources

Platform user insights and resources

• RSM Technology Blog
• Diversity and inclusion
• Middle market focus
• Our global approach
• Our strategy
• RSM alumni connection
• RSM Impact report
• RSM Classic experience
• RSM US Alliance

Experience RSM

• Your career at RSM
• Student opportunities
• Experienced professionals
• Executive careers
• Life at RSM
• Rewards and benefits

Spotlight on culture

Work with us.

• Careers in assurance
• Careers in consulting
• Careers in operations
• Careers in tax
• Our team in India
• Our team in El Salvador
• Apply for open roles

Popular Searches

Asset Management

Health Care

Partnersite

Your Recently Viewed Pages

Lorem ipsum

Dolor sit amet

Consectetur adipising

Tax Court rules that IRS lacks authority to assess penalties under section 6038(b)

Executive summary: irs must ask first and assess later.

The United States Tax Court has ruled that the IRS can no longer administratively assess and collect penalties under Internal Revenue Code section 6038(b) for the failure to timely file information returns with respect to foreign business entities controlled by U.S. persons. The Tax Court’s opinion does not affect the obligation of taxpayers described in section 6038(a) to timely file the information returns, and taxpayers who fail to do so could still be liable for the penalties. Taxpayers who have unpaid penalties assessed under section 6038(b) should consult their tax advisor.

Statutory Framework

I.R.C. Section 6038(a) requires United States persons to report information to the Commissioner with respect to any foreign business entity which the person controls. The Form used to report the information is Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations . Section 6038(b)(1) imposes a penalty of $10,000 on any U.S. person who fails to timely furnish the information required under section 6038(a). A penalty is imposed with respect to each annual accounting period for which a failure exists. Section 6038(b)(2) imposes a continuation penalty of $10,000 for each 30-day period (or fraction thereof) during which a failure to report the information continues with respect to any annual accounting period after an initial 90-day notice period, subject to a maximum of $50,000.

Alon Farhy v. Commissioner , 160 T.C. No. 6 (April 3, 2023)

During the years 2003 through 2010, Farhy was a U.S. person who owned 100% of Katumba Capital and 100% of Morningstar Ventures, Inc., foreign corporations incorporated in Belize. His ownership percentages triggered the requirement to file Forms 5471 pursuant to Internal Revenue Code section 6038(a). However, Farhy participated in an illegal scheme to evade tax during these years and willfully failed to file Forms 5471 with respect to the two corporations. The IRS mailed Farhy a notice proposing the assessment of penalties pursuant to section 6038(b) for his failure to file Forms 5471 for the years at issue. 

In November 2018, the IRS assessed the initial 6038 penalty of $10,000 for each corporation for each year at issue. Shortly thereafter, the IRS assessed the continuation penalties also under section 6038(b)(2). In total, $50,000 per year was assessed. The IRS issued an intent to levy notice in January 2019. Farhy submitted a timely request for a due process hearing disputing the IRS’s right to assess penalties under section 6038(b). In June 2021, the IRS issued Farhy a Notice of Determination for the unpaid section 6038 penalties. Farhy timely filed a petition with the U.S. Tax Court for a review of the IRS determination. The authority of the IRS to assess these penalties was the only issue entertained by the Tax Court.  

Judge Marvel issued an opinion for the Court on April 3, 2023, and ruled that the IRS could not proceed with collection of the penalties at issue via a levy because the IRS had no authority to assess the penalties and had not taken other action to establish the liabilities. In so ruling, Judge Marvel held that the assessment authority provided for in many of the Internal Revenue Code’s other penalty provisions and the general authority for assessment of certain penalties found in other sections of the Code did not apply to section 6038(b). Nor does the Code contain a provision that deems the section 6038(b) penalties to be treated as tax for purposes of assessment and collection. The court would not infer the power to administratively assess and collect the section 6038(b) penalties when Congress did not see fit to expressly grant that power to the Secretary of the Treasury. 

The opinion acknowledged that section 6038 penalties are not subject to deficiency procedures. The section 6038 penalties assessed against taxpayers are imposed by subtitle F, chapter 61, and therefore outside the Court’s deficiency jurisdiction. However, for the Court this acknowledgement did not lead to a conclusion that the penalties are assessable penalties in the case where, as here, Congress had not given the Commissioner the authority to assess the penalty. The Court concluded by holding that the section 6038 penalties assessed against Farhy were assessed without the statutory authority to do so.

Implications of the opinion

The IRS may respond to the Farhy opinion in several ways. It may file a motion for reconsideration with the Tax Court, asking the Court to review its opinion and reverse itself. It may appeal the opinion to the Circuit Court of Appeals for the District of Columbia. Or it may file a nonacquiescence concerning the opinion, indicating that it does not agree with the opinion but is not pursuing an appeal. With or without a nonacquiesence, the Service could let the opinion stand and seek a legislative fix from Congress. Such a legislative cure might come in the form of an amendment to section 6038 or to some other statute within Subpart A of Part III of Subchapter A of Chapter 61 of Subpart F of the Code that would expressly grant the IRS the authority to assess and collect the penalties in section 6038(b) or in all of Subpart A. 

For now, the Farhy opinion will require the IRS to consider whether the Commissioner should continue to automatically assess penalties under section 6038(b) when U.S. persons fail to file or are delinquent in filing the Forms 5471 required by section 6038(a), or whether the Commissioner should refrain from doing so until the Farhy opinion is reversed or a legislative fix is enacted. Any decisions made by the Commissioner will be in published guidance.

The opinion raises an issue with respect to the statute of limitations on potential claims for refund of section 6038(b) penalties already paid by taxpayers. If the penalties are not assessable, they may be treated as other non-tax exactions collected by the government and if so, may be governed by a six-year statute of limitations found in 28 U.S.C. section 2401(a). Until now, such penalties were governed by the statute of limitations found in section 6511(a), which generally provides for a statute of limitations that extends to the later of three years after the Form 5471 was filed or two years after the penalty was paid.  

It is important to note that the Farhy opinion does not excuse taxpayers from liability for the penalties under section 6038(b). The opinion merely requires the Commissioner to take action— the commencement of a civil action and the securing of a judgment— to establish the liability which can be collected in the manner of a judgment. 

Extension of the opinion to other penalties

Section 6038 is part of Subpart A of Part III of Subchapter A of Chapter 61 of Subpart F of the Code. Other penalties in this Subpart A, such as those found in sections 6038A, 6038B, 6038C, 6038D, 6039E, 6039F and 6039G, similarly contain no language which would make them assessable by the Commissioner. Thus, it would not be surprising to see taxpayers facing such penalties argue, based on the reasoning in the Farhy opinion, that the Commissioner has no authority to collect the penalty without first filing a lawsuit. 

The table below outlines common international tax filings with section 6038 penalty exposure which could be impacted by the Farhy opinion.

Moving forward 

Since several of the issues discussed in the latter half of this alert are currently unanswered, RSM recommends that a taxpayer facing issues of assessment or payment relating to penalties under section 6038(b) consult their tax advisor. 

RSM contributors

Tax resources

Timely updates and analysis of changing federal, state and international tax policy and regulation.

• Read our insights

Subscribe now

Stay updated on tax planning and regulatory topics that affect you and your business.

• Choose your subscriptions

Washington National Tax

Experienced tax professionals track regulations, policies and legislation to help translate changes.

• Learn more about our team

THE POWER OF BEING UNDERSTOOD

ASSURANCE | TAX | CONSULTING

• Technologies
• RSM US client portals
• Cybersecurity

RSM US LLP is a limited liability partnership and the U.S. member firm of RSM International, a global network of independent assurance, tax and consulting firms. The member firms of RSM International collaborate to provide services to global clients, but are separate and distinct legal entities that cannot obligate each other. Each member firm is responsible only for its own acts and omissions, and not those of any other party. Visit rsmus.com/about for more information regarding RSM US LLP and RSM International.

© 2024 RSM US LLP. All rights reserved.

• Terms of Use
• Do Not Sell or Share My Personal Information (California)

The Federal Register

The daily journal of the united states government, request access.

Due to aggressive automated scraping of FederalRegister.gov and eCFR.gov, programmatic access to these sites is limited to access to our extensive developer APIs.

If you are human user receiving this message, we can add your IP address to a set of IPs that can access FederalRegister.gov & eCFR.gov; complete the CAPTCHA (bot test) below and click "Request Access". This process will be necessary for each IP address you wish to access the site from, requests are valid for approximately one quarter (three months) after which the process may need to be repeated.

An official website of the United States government.

If you want to request a wider IP range, first request access for your current IP, and then use the "Site Feedback" button found in the lower left-hand side to make the request.

This site uses cookies to store information on your computer. Some are essential to make our site work; others help us improve the user experience. By using the site, you consent to the placement of these cookies. Read our  privacy policy  to learn more.

IRS cannot assess Sec. 6038(b) penalties

• International Tax
• C Corporation Income Taxation
• IRS Practice & Procedure

The Tax Court held that the IRS lacks the statutory authority to assess penalties under Sec. 6038(b)(1) or (2).

From 2003 to 2010, Alon Farhy owned 100% of Katumba Capital Inc., a corporation incorporated in Belize. From 2005 to 2010, he also owned 100% of the Belize corporation Morningstar Ventures Inc. While he owned both companies, Farhy participated in an illegal scheme to reduce his income, but he obtained immunity from prosecution for his misdeeds.

Sec. 6038(a) requires a U.S. person to furnish certain required information with respect to ownership of any foreign business entity. Farhy, as a U.S. person, had a Sec. 6038(a) reporting requirement with respect to his interests in Katumba and Morningstar Ventures in the years he owned them. To meet this requirement, Farhy was obligated to file Form 5471,  Information Return of U.S. Persons With Respect to Certain Foreign Corporations.  He did not file a Form 5471 for any of the years in question.

For failing to meet the Sec. 6038(a) reporting requirement, Sec. 6038(b)(1) imposes a penalty of $10,000 for each annual accounting period the U.S. person fails to timely file Form 5471. Sec. 6038(b)(2) imposes a continuation penalty of $10,000 for each 30-day period (or fraction thereof) during which the failure continues with respect to any annual accounting period after an initial 90-day notice period, up to a maximum penalty of $50,000. However, central to Farhy’s case, there is no statutory provision, in the Code or otherwise, specifically authorizing the assessment of these penalties.

The IRS assessed Farhy an initial penalty under Sec. 6038(b)(1) of $10,000 for each year at issue and assessed him continuation penalties under Sec. 6038(b)(2) totaling $50,000 for each year. In January 2019, the IRS issued him a levy notice, seeking to collect the Sec. 6038(b) penalties it had assessed.

In response, Farhy requested a Collection Due Process hearing. In the hearing, among other issues, he disputed whether the IRS had the legal authority to assess the underlying Sec. 6038(b) penalties. The notice of determination the IRS issued after the hearing sustained its proposed collection action.

Farhy then petitioned the Tax Court to review the IRS’s determination. After stipulations, the only issue left for the Tax Court to decide was whether the IRS had the authority to assess the Sec. 6038(b) penalties against Farhy and therefore could collect the penalties it had assessed through its proposed levy.

The Tax Court’s decision

The Tax Court held that the IRS did not have the statutory authority to assess penalties under Sec. 6038(b)(1) or (2) and, as a result, could not collect the penalties from Farhy through its proposed levy.

Sec. 6201(a), as the Tax Court explained, authorizes and requires Treasury to make assessments of all taxes (including interest, additional amounts, additions to tax, and assessable penalties) imposed by the Code. Treasury has delegated these assessment duties to the IRS. However, the term “assessable penalties” in Sec. 6201(a) is not defined, creating uncertainty about which penalties the IRS may assess and ultimately collect through administrative means.

The Supreme Court in West Virginia v.  Environmental Protection Agency , 142 S. Ct. 2587, 2609 (2022), stated, “Agencies have only those powers given to them by Congress.” Farhy argued that, unlike many other penalty sections in the Code, Sec. 6038 does not contain a provision authorizing assessment of the penalty for which it provides, and, as a consequence, the Sec. 6038(b) penalties are not assessable penalties. Thus, Farhy maintained, while the United States may be able to collect liabilities for the Sec. 6038(b) penalties through a civil action, under 28 U.S.C. Section 2461(a), the IRS may not assess or administratively collect them.

The IRS, on the other hand, contended that the term “assessable penalties” includes any penalties found in the Code that are not subject to the Code’s deficiency procedures. According to the IRS, neither Sec. 6201 nor any other Code section limits the term “assessable penalties” to those found in Subchapter B of Chapter 68 of Subtitle F of the Code (titled “Assessable Penalties”). Reading that subchapter as the exclusive location for assessable penalties, the IRS argued, would contravene Sec. 7806(b), which provides in relevant part that:

[n]o inference, implication, or presumption of legislative construction shall be drawn or made by reason of the location or grouping of any particular section or provision or portion of this title, nor shall any table of contents, table of cross references, or similar outline, analysis, or descriptive matter relating to the contents of this title be given any legal effect.

The IRS also argued that the term “taxes” in Sec. 6201 is broad enough to encompass Sec. 6038 penalties, citing  Ruesch , 154 T.C. 289 (2020), aff ’d in part, vacated and remanded in part, 25 F.4th 67 (2d Cir. 2022), for support of its statutory arguments. Finally, the IRS claimed that the legislative history surrounding the enactment of penalties in Sec. 6038(b) provided support for its position.

The Tax Court concluded that Farhy was correct. The court observed that for penalties and additions to tax within Subchapter B of Chapter 68 of Subtitle F (i.e., in Secs. 6671–6725), Sec. 6671(a) and Sec. 6665(a)(1), respectively, state that penalties and additions to tax will be assessed in the same manner as taxes. For Code sections outside of Chapter 68 of Subtitle F whose violations the Code specifically penalizes, the court stated, citing numerous examples, that they commonly (1) contain their own express provision specifying the treatment of penalties or other amounts as a tax or an assessable penalty for purposes of assessment and collection; (2) contain a cross-reference to a provision within Chapter 68 of Subtitle F providing a penalty for their violation; or (3) are expressly covered by a penalty provision within Chapter 68 of Subtitle F. However, no way of recovering or enforcing the Sec. 6038(b) penalties is specified in the Code.

Moreover, the Tax Court pointed out that 28 U.S.C. Section 2461(a) expressly provides that “[w]henever a civil fine, penalty or pecuniary forfeiture is prescribed for the violation of an Act of Congress without specifying the mode of recovery or enforcement thereof, it may be recovered in a civil action.” The Sec. 6038(b) penalties at issue in Farhy’s case are prescribed for the violation of Secs. 6038(a)(1) and (2), but unlike many other penalties in the Code, Sec. 6038 does not provide for the administrative assessment or collection of the penalties. The court stated, “We are loath to disturb this wellestablished statutory framework by inferring the power to administratively assess and collect the section 6038(b) penalties when Congress did not see fit to grant that power to the Secretary of the Treasury expressly as it did for other penalties in the Code.”

Regarding the IRS’s assessablepenalties argument, the Tax Court found that while the term “assessable penalties” as used in Sec. 6201(a) is not limited to penalties found in Subchapter B of Chapter 68 of Subtitle F, it does not automatically apply to all penalties in the Code not subject to deficiency procedures. The court stated, “Simply put, while section 6038(b) provides for penalties, it does not provide for assessable penalties. [The IRS’s] argument that section 6038(b) penalties are necessarily assessable penalties because they are not subject to deficiency procedures assumes a faulty premise and must be rejected.”

The Tax Court similarly rejected the IRS’s argument that the penalties were taxes assessable under Sec. 6201(a). It found that its precedent firmly establishes that unless there is a provision treating them the same, taxes and penalties are distinct categories of exactions. It further found that while Sec. 6201(a) did not indicate that it applied only to the items listed as included in taxes (i.e., interest, additional amounts, additions to the tax, and assessable penalties), it rejected the idea that the assessment authority provided by Sec. 6201(a) covers all penalties, or virtually any exaction, imposed by the Code simply because it covers taxes and certain other exactions specifically included. The court found this position did not contravene Sec. 7806(b) because the term “assessable penalties” as used in Sec. 6201(a) was not defined by reference to the title of Subchapter B of Chapter 68 of Subtitle F nor by reference to the grouping of similar provisions in that subchapter.

The Tax Court also found that the IRS’s reliance on Ruesch was misplaced because the decision in that case had no bearing on the issue before it. In  Ruesch , the taxpayer challenged the IRS’s certification of her liability for unpaid Sec. 6038(b) penalties as a seriously delinquent tax debt for purposes of Sec. 7345(b) and the propriety of the penalties. The IRS, finding that it had erroneously certified the debt, reversed its certification and filed a motion to dismiss the taxpayer’s challenge to the underlying penalties for lack of jurisdiction. The court granted the IRS’s motion, and thus it did not address the issue of whether the IRS could assess Sec. 6038(b) penalties in the case.

The IRS also pointed to three statements in the legislative history of current Sec. 6038(c) to support its position. The court found that the statements were immaterial to Farhy’s case, as the statements said nothing about the issue before the court, which was the manner in which Sec. 6038(b) penalties are to be collected.

Reflections

If penalties are authorized for not meeting the information requirements imposed by Sec. 6038(a), it would seem that the appropriate way to collect them would be to authorize the IRS to assess and collect them administratively. However, in what was likely an oversight, Congress did not include a provision in Sec. 6038 to allow the IRS to do so. On the other hand, given the various ways that different penalties are handled throughout the Code, it might not have been an oversight, and the Tax Court properly did not interpret the law to allow the IRS to administratively assess and collect the penalties in the absence of a clear congressional mandate.

Farhy , 160 T.C. No. 6 (2023)

Contributor

James A. Beavers,  CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact  [email protected] .

Sale of clean-energy credits: Traps for the unwary

Tax consequences of employer gifts to employees, top 8 estate planning factors for real estate, success-based fees safe harbor: a ruling raises concerns, pond muddies the waters of the mailbox rule.

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.

PRACTICE MANAGEMENT

CPAs assess how their return preparation products performed.

We use cookies.

A cookie is a piece of data stored by your browser or device that helps websites like this one recognize return visitors. We use cookies to give you the best experience. Some cookies are also necessary for the technical operation of our website. If you continue browsing, you agree to this site’s use of cookies.

Privacy Policy: Our Policies regarding the Collection of Information

• Subchapter A
• § 6038

Sec. 6038. Information Reporting With Respect To Certain Foreign Corporations And Partnerships

More information, 24 / 7 help desk.

• 1-833-697-9559
• [email protected]
• Terms & Conditions
• Privacy Policy
• Bloomberg.com
• Accessibility

26 CFR § 1.6038-3 - Information returns required of certain United States persons with respect to controlled foreign partnerships (CFPs).

• Table of Popular Names

(a) Persons required to make return —(1) Controlling fifty-percent partners. The term controlling fifty-percent partner means a United States person that controlled (as defined in paragraph (b)(1) of this section) the foreign partnership at any time during the partnership 's tax year (as defined in paragraph (b)(8) of this section). Except as provided in paragraph (c) , (d) , or (e) of this section, for each tax year of a foreign partnership during which the partnership has one or more controlling fifty-percent partners, each controlling fifty-percent partner must complete and file Form 8865, “Return of U.S. Persons With Respect to Certain Foreign Partnerships ,” containing the information described in paragraph (g) of this section.

(2) Controlling ten-percent partners. If at any point during a foreign partnership 's tax year (as defined in paragraph (b)(8) of this section) a United States person owned a ten-percent or greater interest in the partnership while the partnership was controlled by United States persons owning ten-percent or greater interests, such United States person is a controlling ten-percent partner . See paragraph (b)(1) of this section for the definition of control . However, a United States person is not a controlling ten-percent partner with respect to a particular foreign partnership for a particular tax year of the foreign partnership if at any point during that year the partnership had a controlling fifty-percent partner , as defined in paragraph (a)(1) of this section. Except as provided in paragraph (c) , (d) , or (e) of this section, for each tax year of a partnership during which the partnership has controlling ten-percent partners, each controlling ten-percent partner must complete and file Form 8865 containing the information described in paragraph (g)(1) of this section.

(3) Separate returns for each partnership. A United States person required to report under this paragraph (a) must file a separate Form 8865 for each foreign partnership with respect to which the person is a controlling fifty-percent partner or a controlling ten-percent partner .

(b) Ownership determinations and definitions —(1) Control. Control of a foreign partnership is ownership of more than a fifty-percent interest in the partnership .

(2) Fifty-percent interest. A fifty-percent interest in a partnership is an interest equal to fifty percent of the capital interest in such partnership , an interest equal to fifty percent of the profits interest in such partnership , or an interest to which fifty percent of the deductions or losses of such partnership are allocated.

(3) Ten-percent interest. A ten-percent interest in a partnership is an interest equal to ten percent of the capital interest in such partnership , an interest equal to ten percent of the profits interest in such partnership , or an interest to which ten percent of the deductions or losses of such partnership are allocated.

(4) Constructive ownership rules. For purposes of determining an interest in a partnership , the constructive ownership rules of section 267(c) (other than section 267(c)(3)) apply, taking into account that such rules refer to corporations and not to partnerships . However, an interest will be attributed from a nonresident alien under the family attribution rules of section 267(c)(2) and (4) only if the person to whom the interest is attributed owns a direct or indirect (under the rules of 267(c)(1) or (5)) interest in the foreign partnership .

(5) Determination of amount of interest. Whether a person owns a fifty-percent interest , or a ten-percent interest , as described in paragraphs (b)(2) and (3) of this section, is determined for each tax year of the foreign partnership by reference to the agreement of the partners relating to such interests during that tax year .

(6) Definition of United States person. The term United States person is defined in section 7701(a)(30).

(7) Definition of a foreign partnership. A foreign partnership is a partnership described in section 7701(a)(5).

(8) Tax year of a foreign partnership. The tax year of a foreign partnership is determined under section 706.

(9) Examples. The rules of paragraph (a) of this section and this paragraph (b) are illustrated by the following examples:

(c) Exceptions when more than one United States person is required to file Form 8865 pursuant to section 6038 —(1) Multiple controlling fifty-percent partners —(i) In general. If, with respect to the same foreign partnership for the same tax year , more than one United States person is a controlling fifty-percent partner , then in lieu of each controlling fifty-percent partner filing a separate Form 8865, only one Form 8865 from one of the controlling fifty-percent partners is required, provided all of the requirements of paragraph (c)(1)(ii) of this section are satisfied. A person that is a controlling fifty-percent partner solely because of an interest to which deductions or losses are allocated may file the single return only if there is no United States person that is a controlling fifty-percent partner by reason of an interest in capital or profits.

(ii) Requirements —(A) The person undertaking the filing obligation must file Form 8865 with that person 's income tax return in the manner provided by Form 8865 and the accompanying instructions. The return must contain all of the information that would have been required to be reported by this section if each controlling fifty-percent partner had filed its own Form 8865.

(B) Any controlling fifty-percent partner not filing Form 8865 must file with its income tax return a statement titled “ Controlled Foreign Partnership Reporting” containing the following information—

(1) A statement that the person qualified as a controlling fifty-percent partner , but is not submitting Form 8865 pursuant to the multiple controlling fifty-percent partners exception ;

(2) The name , address, and taxpayer identification number (if any) of the foreign partnership of which the person qualified as a controlling fifty-percent partner ;

(3) A representation that the filing requirement has been or will be satisfied;

(4) The name and address of the person filing the single return;

(5) The Internal Revenue Service Center where the single return is required to be filed; and

(6) Any additional information that Form 8865 and the accompanying instructions require.

(iii) Penalties. If the requirements listed in paragraph (c)(1)(ii) of this section are not satisfied, a United States person that did not file a Form 8865 pursuant to this paragraph will be subject to the penalties in paragraph (k) of this section, unless the reasonable cause provision in paragraph (k)(4) of this section is satisfied.

(2) Certain constructive owners excepted from furnishing information —(i) In general. A United States person that does not own a direct interest in the foreign partnership and that is required to file Form 8865 under this section solely by reason of constructive ownership from a United States person(s) pursuant to paragraph (b)(4) of this section (an indirect partner) is not required to file Form 8865 if all of the requirements listed in paragraph (c)(2)(ii) of this section are met.

(ii) Requirements —(A) The United States person(s) whose interest the indirect partner constructively owns reports all the information such person(s) is required to submit under this section, unless such person also is required to file solely by reason of constructive ownership from a United States person(s) pursuant to paragraph (b)(4) of this section, or another person reports the information pursuant to paragraph (c)(1) of this section.

(B) The indirect partner files with its income tax return a statement titled “Controlled Foreign Partnership Reporting” containing the following information—

(1) A representation that the indirect partner was required to file Form 8865, but is not doing so pursuant to the constructive owners exception ;

(2) The names and addresses of the United States persons whose interests the indirect partner constructively owns;

(3) The name and address of the foreign partnership with respect to which the indirect partner would have had to have filed Form 8865 but for this exception ; and

(4) Any additional information that Form 8865 and the accompanying instructions require.

(iii) Penalties. A United States person that pursuant to this paragraph (c)(2) does not file a return will be subject to the penalties in paragraph (k) of this section if the requirements listed in paragraph (c)(2)(ii) of this section are not satisfied, unless such failure is due to reasonable cause , as defined in paragraph (k)(4) of this section.

(iv) Overlap with multiple controlling fifty-percent partners exception —(A) If a United States person qualifies for both the exception in paragraph (c)(1) of this section and the exception in this paragraph (c)(2), such person may only utilize the multiple controlling fifty-percent partners exception in paragraph (c)(1) of this section to avoid filing Form 8865.

(B) Example. The following example illustrates the operation of this paragraph (c)(2)(iv):

(3) Members of an affiliated group of corporations filing a consolidated return. If one or more members of an affiliated group of corporations filing a consolidated return are required under section 6038 to file a Form 8865 for a particular foreign partnership , the common parent corporation may file one Form 8865 on behalf of all of the members of the group required to report under section 6038. Except with respect to group members who also qualify under the exception in paragraph (c)(2) of this section, the Form 8865 must contain all the information that would have been required to be submitted if each group member were required to file its own Form 8865.

(d) Exception for certain trusts. Trusts relating to state and local government employee retirement plans are not required to report under this section, unless the instructions to Form 8865 provide otherwise.

(e) Reporting under this section not required with respect to partnerships excluded from the application of subchapter K. The reporting requirements of this section will not apply to any United States person in respect of an eligible partnership as described in § 1.761-2(a) if such partnership has validly elected to be excluded from all of the provisions of subchapter K of chapter 1 of the Internal Revenue Code in the manner specified in § 1.761-2(b)(2)(i) , or such partnership is deemed to have elected to be excluded from all of the provisions of subchapter K of chapter 1 of the Internal Revenue Code in accordance with the provisions of § 1.761-2(b)(2)(ii) .

(f) Period covered by return. The information required under this section must be furnished for the tax year of the foreign partnership ending with or within the United States person 's tax year . See section 706 for rules regarding tax years of partnerships .

(g) Contents of return —(1) Information required to be submitted by controlling fifty-percent partners and controlling ten-percent partners. All controlling fifty-percent partners and all controlling ten-percent partners must submit the following information on Form 8865 in the form and manner and to the extent prescribed by Form 8865 and its instructions—

(i) The name , address, and taxpayer identification number (if any) of the foreign partnership of which the person qualified as a controlling fifty-percent partner or a controlling ten-percent partner ;

(ii) A statement of the income , gain, losses, deductions and credits allocated to the direct interest in the partnership of the person reporting under section 6038;

(iii) A list of all partnerships (foreign or domestic) in which the foreign partnership owned a direct interest , or owned a constructive interest of ten percent of more under the rules of section 267(c)(1) or (5), during the partnership 's tax year for which the Form 8865 is being filed;

(iv) Information about all foreign entities that were disregarded as entities separate from their owner under §§ 301.7701-2 and 301.7701-3 that were owned by the foreign partnership during the partnership 's tax year for which the Form 8865 is being filed;

(v) A summary of the transactions that took place during the partnership 's tax year between the partnership and the person filing the return, between the partnership and any other partnership of which the person filing the return is a controlling fifty-percent partner , and between the partnership and any corporation controlled (under section 6038(e)(2) and the regulations thereunder) by the person filing the return; and

(vi) Any other information that Form 8865 or its accompanying instructions require to be submitted.

(2) Additional information required to be submitted by controlling fifty-percent partners. In addition to the information required pursuant to paragraph (g)(1) of this section, controlling fifty-percent partners must also submit the following information in the form and manner and to the extent required by Form 8865 and its instructions—

(i) A list of the names, addresses and tax identification numbers (if any) of each United States person that owned a direct interest of ten percent or more in the partnership during the partnership 's tax year , and of each United States and foreign person whose interests in the partnership the controlling fifty-percent partner constructively owned under paragraph (b)(4) of this section during the partnership 's tax year ;

(ii) A list of transactions between the partnership and any United States person owning at the time of the transaction at least a 10-percent direct interest (as defined in paragraph (b)(3) of this section) in the foreign partnership ;

(iii) A statement of the aggregate of the partners' distributive shares of items of income , gain, losses, deductions and credits;

(iv) A statement of income , gain, losses, deductions and credits allocated to each United States person holding a direct interest in the foreign partnership of ten percent or more; and

(v) Any other information Form 8865 or its accompanying instructions require controlling fifty-percent partners to submit.

(3) Amounts involving hybrid transactions or hybrid entities under section 267A. In addition to the information required pursuant to paragraphs (g)(1) and (2) of this section, if, during the partnership 's taxable year for which the Form 8865 is being filed, the partnership paid or accrued interest or royalties for which a deduction is disallowed under section 267A and the regulations in this part under section 267A, the controlling fifty-percent partners must provide information about the disallowance in the form and manner and to the extent prescribed by Form 8865 (or successor form), instruction, publication, or other guidance .

(4) Additional information required to be submitted by a controlling ten-percent or a controlling fifty-percent partner that has a deduction under section 250 by reason of FDII. In addition to the information required pursuant to paragraphs (g)(1), (2), and (3) of this section, if, with respect to the partnership 's tax year for which the Form 8865 is being filed, a controlling ten-percent partner or a controlling fifty-percent partner has a deduction under section 250 (by reason of having foreign-derived intangible income), determined, in whole or in part, by reference to the income , assets, or activities of the partnership , or transactions between the controlling -ten percent partner or controlling fifty-percent partner and the partnership , the controlling ten-percent partner or controlling fifty-percent partner must provide its share of the partnership 's gross DEI, gross FDDEI, deductions that are properly allocable to the partnership 's gross DEI and gross FDDEI, and partnership QBAI (as those terms are defined in the section 250 regulations) in the form and manner and to the extent prescribed by Form 8865 (or any successor form), instructions to the form, publication, or other guidance published in the Internal Revenue Bulletin. To the extent that the partnership amounts described in the previous sentence cannot be determined, the controlling ten-percent partner or controlling fifty-percent partner must provide its share of the partnership 's attributes that the partner uses to determine the partner 's gross DEI, gross FDDEI, deductions that are properly allocable to the partner 's gross DEI and gross FDDEI, and the partner 's adjusted bases in partnership specified tangible property .

(h) Method of reporting. Except as otherwise provided on Form 8865 or the accompanying instructions, all amounts required to be furnished on Form 8865 must be expressed in United States dollars. All statements required on or with Form 8865 pursuant to this section must be in English.

(i) Time and place for filing return —(1) In general. Form 8865 must be filed with the United States person 's income tax return on or before the due date (including extensions) of that return. If the United States person is not required to file an income tax return for its tax year with which or within which the foreign partnership 's tax year ends, but is required to file an information return for that year (for example , Form 1065, “U.S. Partnership Return of Income ,” or Form 990, “Return of Organization Exempt from Income Tax”), the Form 8865 must be filed with the United States person 's information return filed on or before the due date (including extensions) of that return.

(2) Duplicate return. If required by the instructions to Form 8865, a duplicate Form 8865 (including attachments and schedules) must also be filed.

(j) Overlap with section 6031. A partner may be required to file Form 8865 under this section and the foreign partnership in which it is a partner may also be required to file a Form 1065 or Form 1065-B under section 6031(e) for the same partnership tax year . For cases where a United States person is a controlling fifty-percent partner or a controlling ten-percent partner with respect to a foreign partnership , and that foreign partnership completes and files Form 1065 or Form 1065-B, the instructions for Form 8865 will specify the filing requirements that address this overlap in reporting obligations .

(k) Failure to comply with reporting requirement —(1) In general. Any United States person required to file Form 8865 under Section 6038 and this section that fails to comply (as defined in paragraph (k)(2) of this section) with the reporting requirements of this section, will be subject to the penalties described in paragraph (k)(3) of this section.

(2) Failure to comply. A failure to comply is separately determined for each foreign partnership for which a United States person has a section 6038 reporting obligation . A failure to comply with the requirements of section 6038 includes the following—

(i) The failure to report at the proper time and in the proper manner any information required to be reported under the rules of this section; or

(ii) The provision of false or inaccurate information in purported compliance with the requirements of this section.

(3) Penalties. A United States person that fails to comply (as defined in paragraph (k)(2) of this section) with the reporting requirements of this section must pay the following penalties , subject to the reasonable cause exception in paragraph (k)(4) of this section:

(i) Dollar amount penalty —(A) $10,000 penalty. A penalty of $10,000 shall be imposed for each tax year of each foreign partnership with respect to which a failure to comply occurs.

(B) Increase in penalty. If a failure to comply with the applicable reporting requirements of section 6038 and this section continues for more than 90 days after the date on which the Commissioner or the Commissioner's delegate mails notice of the failure to the United States person required to file Form 8865, the person must pay an additional penalty of $10,000 for each 30-day period (or fraction thereof) during which the failure continues after the 90-day period has expired.

(C) Limitation. The additional penalty imposed on any United States person by section 6038(b)(2) and paragraph (k)(3)(i)(B) of this section is limited to a maximum of $50,000 for each partnership for each tax year with respect to which the failure occurs.

(ii) Penalty of reducing foreign tax credit —(A) Effect on foreign tax credit. Failure to comply with the reporting requirements of section 6038 and this section may cause a reduction of foreign tax credits under section 901 (taxes of foreign countries and of possessions of the United States). In applying section 901 to a United States person for any tax year with or within which its foreign partnership 's tax year ended, the amount of taxes paid (and deemed paid under sections 902 and 960) by the United States person will be reduced by 10 percent if the person fails to comply. However, no tax deemed paid under section 904(c) will be reduced under the provisions of this paragraph (k)(3)(ii).

(B) Reduction for continued failure. If a failure to comply with the reporting requirements of section 6038 and this section continues for more than 90 days after the date on which the Commissioner or the Commissioner's delegate mails notice of the failure to the person required to file Form 8865, then the amount of the reduction in paragraph (k)(3)(ii)(A) of this section will be 10 percent, plus an additional 5 percent for each 3-month period (or fraction thereof) during which the failure continues after the 90-day period has expired.

(C) Limitation on reduction. The amount of the reduction under paragraphs (k)(3)(ii)(A) and (B) of this section for each failure to furnish information required under this section will not exceed the greater of $10,000, or the gross income of the foreign partnership for its tax year with respect to which the failure occurred.

(D) Offset for dollar amount penalty imposed. The total amount of the reduction which, but for this paragraph (k)(3)(ii)(D), may be made under this paragraph (k)(3)(ii) with respect to any separate failure, may not exceed the maximum amount of the reductions that may be imposed, reduced (but not below zero) by the dollar amount penalty imposed by paragraph (k)(3)(i) of this section with respect to the failure.

(4) Reasonable cause limitation. The time prescribed for filing a complete Form 8865, and the beginning of the 90-day period after the Commissioner or the Commissioner's delegate mails notice under paragraphs (k)(3)(i)(B) and (ii)(B) of this section, will be treated as being not earlier than the last day on which reasonable cause existed for failure to furnish the information. The United States person may show reasonable cause by providing a written statement to the Commissioner's delegate having jurisdiction over the person 's return to which the Form 8865 should have been attached, setting forth the reasons for the failure to comply. Whether a failure to comply was due to reasonable cause will be determined by the Commissioner, or the Commissioner's delegate, under all the facts and circumstances .

(5) Statute of limitations. For exceptions to the limitations on assessment in the event of a failure to provide information under section 6038, see section 6501(c)(8).

(l) Applicability dates. Except as otherwise provided, this section shall apply for tax years of a foreign partnership ending on or after December 31, 2000. For tax years of a foreign partnership ending before December 23, 2002, see § 1.6038-3(j) in effect prior to the amendments made by T.D. 9033 (see 26 CFR part 1 revised April 1, 2002). Paragraph (g)(3) of this section applies for taxable years of a foreign partnership beginning on or after December 20, 2018. Paragraph (g)(4) of this section applies for tax years of a foreign partnership beginning on or after March 4, 2019.

• Internal Revenue Code