Sect 6038A summons when U.S. company is foreign-owned | KPMG | GLOBAL

Section 6038A summons when U.S. company is 25% foreign-owned

Sect 6038A summons when U.S. company is foreign-owned

The IRS Large Business and International (LB&I) division today publicly released a “practice unit”—part of a series of IRS examiner “job aides” and training materials intended to describe for IRS agents leading practices for specific international and transfer pricing issues and transactions. The topic of today’s practice unit is:

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  • Using a section 6038A summons when a U.S. corporation is 25% foreign owned

The practice unit (release date of January 30, 2017) is available on the IRS practice unit webpage.

 

Overview

Under section 6038A, a Domestic Reporting Corporation (DRC), which is a domestic corporation with a 25% foreign owner, has certain recordkeeping requirements. The IRS may seek copies of records or testimony related to a transaction between a DRC and a foreign related party.

Noncompliance with such a request, or if the foreign related party has not named the DRC as its limited agent under section 6038A, can result in the IRS determining, in its sole discretion, the amount of the DRC’s deductions related to the transaction as well as the cost of property purchased from or transferred to  the related party. No reasonable cause exception is provided, although the rules provide “small corporation” and “de minimis” exceptions. 

Pursuant to recently issued final regulations, these rules apply to U.S. disregarded entities that are wholly owned by a foreign person in the same manner as if the disregarded entity were a DRC. However, neither the “small corporation” nor the “de minimis” exceptions apply.

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