Extension of Assessment Period for Certain Foreign Transfers Applies Only to Required Information, Not Entire Return

On March 15, 2000, taxpayer T timely filed Form 1120 for calendar year 1999 but failed to attach Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (as required by Regs. Sec. 1.6038A-2(a)). On Feb. 15, 2001, during examination, T submitted Form 5472, reporting in Part IV several 1999 transactions with foreign related parties. In September 2003, Examination discovers an error in T's 1999 deductions for depreciation on assets unrelated to any of the transactions reportable on Form 5472.

Issue: Assuming no other adjustment to the statute of limitations (SOL) under Sec. 6501 occurs:

1. Has the IRS lost its right to assert any deficiency attributable to depreciation after March 15, 2003 (the expiration of the SOL without regard to Sec. 6501(c)(8)), or has Sec. 6501(c)(8) operated to extend the period to Feb. 15, 2004 (three years after submission of the required Form 5472 information)?

2. Is the result different if Part IV of Form 5472 was not required to be completed, because all reportable transactions were with domestic related parties?

Analysis

Sec. 6501(c)(8) provides as follows:

(8) FAILURE TO NOTIFY SECRETARY OF CERTAIN FOREIGN TRANSFERS.— In the case of any information which is required to be reported to the Secretary under section 6038, 6038A, 6038B, 6046, 6046A or 6048, the time for assessment of any tax imposed by this title with respect to any event or period to which such information relates shall not expire before the date which is 3 years after the date on which the Secretary is furnished the information required to be reported.

The Senate Finance Committee states in its explanation of this provision:

[I]n the case of a failure to report required information with respect to a foreign corporation, partnership, or trust, the statute of limitations with respect to any event or period to which such information relates [shall] not expire before the date that is three years after the date on which such information is provided.

The application of Sec. 6501(c)(8) was clarified in January 2000. In response to public comments on proposed regulations under Sec. 6038 relating to foreign corporations and foreign partnerships, the preamble to final regulations under Secs. 6038 and 6038B stated:

The IRS and Treasury wish to clarify that if a U.S. person fails to comply with sections 6038, 6038B, or 6046A, the extended statute of limitations provided by section 6501(c)(8) shall apply only to the tax consequences related to the information required to be reported under the relevant reporting section and not to all transactions within the U.S. person's tax year at issue. For example, if a U.S. person with a calendar tax year fails to comply with section 6038 for a controlled foreign partnership's 2001 calendar tax year, section 6501(c)(8) will only extend the statute of limitations applicable to the U.S. person's tax year with respect to any tax consequences associated with the U.S. person's interest in the foreign partnership during the partnership's 2001 tax year.

Although these comments do not specifically address the reporting requirements under Secs. 6038A, 6046 and 6048, Sec. 6501(c)(8) should be applied in a consistent manner to all the listed code sections.

Accordingly, Sec. 6501(c)(8) keeps the assessment period open beyond the normal three-year limitations period only for the tax imposed for any event or period to which information required to be furnished to the Service relates. Therefore, the extension of the SOL does not apply to the entire income tax return.

For Form 5472, Sec. 6038A(b) grants the Secretary authority to prescribe by regulations the information that must be furnished under Sec. 6038A(a) by "reporting corporations." Regs. Sec. 1.6038A-2 specifically identifies the information required to be furnished, as well as the manner in which such information is to be presented. Specifically, Regs. Secs. 1.6038A-1(b) and -2(a)(1) require a reporting corporation to furnish the information required by Sec. 6038A(a) and described in Regs. Sec. 1.6038A-2 by filing an annual information return (Form 5472) with its applicable income tax return.

If T timely filed Form 1120 for its 1999 tax year on March 15, 2000, but waits until Feb. 15, 2001 to submit an untimely (but complete) Form 5472 for its 1999 tax year, the SOL will be extended only for the tax affected by items required to be reported on Form 5472. The SOL on the assessment of tax affected by those items will begin to run on Feb. 15, 2001, which is the date the required information was furnished to the IRS.

For the error in T's 1999 deductions for depreciation on assets unrelated to transactions reportable on Form 5472, Sec. 6501(c)(8) does not extend the SOL on the assessment of tax affected by these items beyond March 15, 2003, because the information is not required to be reported on Form 5472. The filing of Form 5472 will not operate to extend the SOL until Feb. 15, 2004 (the date three years after the submission of the required Form 5472 information.)

This result would not change simply because Part IV (Monetary Transactions Between Reporting Corporations and Foreign Related Party) of Form 5472 was not required to be completed, as all reportable transactions were with domestic related parties. A reporting corporation under Sec. 6038A must provide information on a Form 5472 if it had reportable transactions with a domestic related party, as well as with a foreign related party (see Regs. Sec. 1.6038A-2(b)(1), 1.6038-2(b)(2) and -2(f)(2); but see Regs. Sec. 1.6038A-2(f)(3) (limited exception when information required by Secs. 6038 and 6038A is contained in a return of information on Form 5471, Information Return of U.S. Persons With Respect To Foreign Corporations).

IRS Letter Ruling (TA) 200024051 (4/20/00)