What is Form 926?
Form 926 is required to report transfers by U.S. persons to foreign corporations in an exchange described as a non-recognition transaction. IRC Section 6038B gives rise to the reporting requirement for Form 926.
The nonrecognition transactions that apply are:
- IRC Section 332 – Complete liquidation of corporate subsidiary,
- IRC Section 351 – Transfer to corporation controlled by transferor,
- IRC Section 354 – Exchanges of stock and securities in certain reorganizations,
- IRC Section 355 – Distribution of stock and securities of a controlled corporation,
- IRC Section 356 – Receipt of additional consideration, and
- IRC Section 361 – Nonrecognition of gain or loss to corporations; treatment of distributions.
The Form 926 is largely required to keep track of U.S. persons sending property outside the U.S. and determining of there should be tax on any built-in gain on the transfer. It appears the IRS also cares about transfers of cash as they want to know what U.S. shareholders end up owning.
Who has to file Form 926?
U.S. persons who transfer property to a foreign corporation in a non-recognition transaction have to file Form 926. The property can be largely anything, but it is most often cash in exchange for shares in a foreign corporation under a Section 351 transfer.
The taxpayer needs to understand if the entity it is transferring property to is a corporation for U.S. tax purposes. To do so, the taxpayer should understand how the U.S. determines if an entity is an association taxable as a corporation or if any check-the-box elections have been made in the U.S. with respect to the entity.
With respect to a cash transfer, the U.S. taxpayer must report cash transfers of $100,000 or more or if the taxpayer owns 10% or more of the corporation after the transfer. With respect to transfers of other property there is no threshold limit, and any transfer will require reporting.
There are a number of exceptions to filing. One exception relates to exchanges described in 354 and 356 being part of a recapitalization or is an asset reorganization. The second exception relates to a domestic corporation distributing stock under section 355. The third exception applies to instances where a U.S. person transfers stock and securities under Section 367(a) and the person meets certain other requirements. The exceptions are fairly limited and they should be carefully considered before assuming they will apply.
Transfers by a partnership:
An important point to note is that if a partnership transfers property to a foreign corporation, the partners will be responsible for any Form 926 filing if they meet the filing thresholds, not the partnership. Most often the partnership will provide a schedule K-1 for making Form 926 determinations.
How do I know I have to file Form 926?
Ideally, you will be told. Form 926 reporting is often referred to in a Schedule K-1 when a partnership makes contribution. The taxpayer will apply the filing rules to the information presented in the K-1 to determine if they have to file the Form 926. Otherwise, the taxpayer has to make the determination if a Form 926 should be filed. This includes determining what was transferred during what periods, and if the entity is, in fact, a foreign corporation. Any time a U.S. person makes a contribution to a foreign corporation in exchange for stock, Form 926 filing considerations should be made.
What are the most common reasons to file Form 926?
The Form 926 requirement most often occurs when a taxpayer forms a foreign corporation or transfers cash to a foreign corporation in exchange for stock.
Liquidations of U.S. corporations into a foreign parent corporation also require filing a Form 926.
What should I pay attention to?
- Taxpayers should make note of the chain of ownership when it comes to following the transfer and Form 926 filing. This means understanding what the partnership or lower tier partnership has transferred.
- Paying close attention to what was transferred is helpful as well. If appreciated assets are transferred Section 367 could apply to deny the non-recognition of gain. There may be options for the taxpayer filing a gain recognition agreement to preserve the non-recognition.
- When considering if a Form 926 is required to be filed for cash transfers, the taxpayer needs to determine the sum of cash that was transferred during the 12 months leading up to the latest transfer of cash. Those 12 months could span two tax filing periods. If the amount of transfers over the 12 months is $100,000 or more, there will be a Form 926 filing even if some of the transfers were made during the prior tax period of the taxpayer.
- It is also important to ensure that all transfers to a specific foreign corporation are accounted for. There can be instances where a taxpayer has made investments into several different partnerships, and those partnerships have made investments into the same foreign corporation. Taxpayers need to aggregate their contributions into each foreign corporation to determine their Form 926 filing obligations.
What happens if I don’t file Form 926?
Taxpayers who fail to file or late file the Form 926 are subject to penalty. The penalty is 10% of the fair market value of the property at the time of transfer. The penalty is limited to $100,000 unless the failure to file was due to intentional disregard. Note, the IRS may take a position that if the Form 926 is filled out incorrectly, then the taxpayer has not timely filed the form.
The penalty does not apply if the failure to file is due to reasonable cause and not willful neglect. The reasonable cause standard appears to be a moving target within the IRS.
What do I do if I filed Form 926 late or didn’t file Form 926?
First the taxpayer should consider its options for compliance. The taxpayer may be eligible for Streamlined filing compliance procedures or the taxpayer may have reasonable cause for the failure to file. If the taxpayer didn’t timely file the Form 926 (either for one period, or several periods) the taxpayer should amend their tax returns to include the Form 926 through the Streamline program or using a reasonable cause argument.
The Form 926 is not usually a very difficult form to complete or file. The primary nuance with the form is knowing when it is needed. The penalties for failure to comply with Form 926 filing are high so ensuring proper compliance is important. Our firm has extensive expertise in this area and helps taxpayers and their advisors make the required determinations with respect to Form 926 and helps taxpayers get, and stay, compliant with their current and past Form 926 filing obligations. Please reach out to John McGuire or Christopher Stroh with any questions or needed assistance.
John McGuire J.D & LL.M (taxation)
Christopher Stroh J.D & LL.M (taxation)
This is an article that covers the highlights and most common reporting occurrences for Form 926. Please keep in mind that the topic can get very nuanced and detailed. This article does not address all aspects that relate to Form 926. Perhaps the day will come when we produce THE definitive article on Form 926, but that day is not today.