Final regulations: Rules for reporting foreign financial assets

IRS rules for reporting foreign financial assets

The Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9752) relating to provisions that require “domestic entities” to report their foreign financial assets to the IRS pursuant to section 6038D.

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The final regulations [PDF 210 KB] generally adopt rules that were proposed in December 2011 with certain changes, and remove corresponding temporary regulations.

Summary

The preamble to today’s final regulations explains that comments were received but no hearing held with respect to the proposed regulations. The changes in the final regulations made in response to comments including measures that: 

  • Make an organizational change regarding the reporting threshold, to eliminate the application of the reporting threshold twice in determining whether an entity is a “specified domestic entity”
  • Eliminate the “principal purpose test” for determining whether a corporation or a partnership is a specified domestic entity, so that taxpayers can determine their reporting requirements based on objective (and not subjective) requirements
  • Adopt the definition of “passive income” as included under the “comprehensive” FATCA regulations of 2013, and include measures clarifying that “dividends” includes substitute dividends, and that “interest” covers income equivalent to interest; adding an exception for certain active business gains or losses from the sale of commodities; and defining “notional principal contracts” by reference to existing regulations
  • Provide that rents and royalties derived in the active conduct of a trade or business conducted “as least in part” by employees of a corporation of partnership will not be considered passive income
  • Retain the rule from the proposed regulations for determining if a domestic partnership is closely held
  • Simplify the aggregation rule, by eliminating a reference from the proposed regulations to treat all domestic corporations and partnerships as a single entity
  • Clarify that with respect to domestic trusts, the term “current beneficiary” also includes any holder of a general power of appointment (whether exercised or not) that was exercisable at any time during the tax year, but does not include any holder of a general power of appointment that is exercisable only on the death of the holder
  • Include the rules from the proposed regulations that except certain entities from being treated as a specified domestic entity, and reject a request from a commenter that publicly traded partnerships be excepted from being specified domestic entities

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