Schedule R is used to report basic information pertaining to distributions from foreign corporations. According to the instructions for Schedule R, the information reported on the schedule is required by Sections 245A, 959, and 986(c) of the Internal Revenue Code. Form 5471 filers that are classified as Category 3 and Category 4 filers must complete and attach Schedule R to their Form 5471.
The Schedule R consists of four columns. Below, we will discuss the meaning of each column.
(a) Description of Distribution
Each filer required to complete Schedule R will be required to state whether it received a distribution in cash, non-cash, taxable, or nontaxable distributions from the foreign corporation. The distribution will need to be identified under code sections. For example, “taxable cash dividend eligible for a dividends received deduction under Section 245A” (Section 245A allows an exemption for certain foreign income of a domestic corporation that is a U.S. shareholder by means of a 100% dividends received deduction for the portion foreign-source portion of dividends received from “specified 10-percent owned foreign corporations” by certain domestic corporations that are U.S. shareholders of those foreign corporations within the meaning of Internal Revenue Code Section 951(b)) or “nontaxable cash distribution of previously taxed earnings and profits (“PTEP”). The filer should report parts of a distribution on separate rows if the distribution is partially taxable and partially nontaxable by reasons of different Internal Revenue Code sections.
For example, a cash distribution of $100 that is a nontaxable distribution of PTEP under Section 959(a) of $30, a taxable dividend eligible for a dividends received deduction under Section 245A of $15, a taxable dividend under Section 301(c)(1) of $25, a nontaxable distribution applied against basis under Section 301(c)(2) of $10, and a taxable distribution treated as gain from the sale or exchange of property under Section 301(c)(3) of $20, would be reported on five rows.
If non-cash distributions were made, the filer should attach a statement and show both the tax basis and fair market value.
(b) Date of Distribution
Under column (b), the filer is required to complete Schedule R must enter the month, day, and year of distributions received from the foreign corporation.
(c) Amount of Distribution in Foreign Corporation’s Functional Currency
Under Column (c), the filer must disclose the amount of any money paid plus the fair market value of any property transferred to the filer from the foreign corporation reduced by the following liabilities: 1) any liability of the corporation the shareholder assumes in connection with the distribution; or 2) any liability to which the property is subject immediately after, the distribution. In other words, each filer is required to complete Schedule R must report whether the distribution made to them was made from either current earnings and profits (“E&P”) or accumulated earnings and profits. If a PTEP (the term “PTEP” refers to E&P of a CFC) was distributed, any currency gains or losses under Section 986(c) must be disclosed on Schedule R.
The distributions must be valued in the CFC’s functional currency. The functional currency is “the currency of the economic environment in which a significant part of such activities” is “conducted and which is used by the [corporation] in keeping its books and records.” See IRC Section 985(b)(1)(B).
(d) Amount of E&P Distribution in Foreign Corporation’s Functional Currency
Under Column (d), the filer must report distributions treated as a distribution of earnings and profits in functional currency. An actual distribution is first out of PTEP, if any, and then out of Section 959(c)(3) balances. If PTEP was distributed, any currency gains as per Internal Revenue Code Section 986(c) should be disclosed on Schedule I, line 6. (Under Section 986(c), a foreign currency gain or loss with respect to distribution of PTEP (as described in Section 959 or 1293(c)) attributable to the movements in exchange rates between the times of the deemed and actual distributions is recognized and treated as ordinary income or loss). With respect to foreign currency gain or loss on a distribution of Global Intangible Low-Taxed Income (“GILTI”): For a U.S. corporate shareholder, the shareholder should include the gain or loss as “other income” on Form 1120, line 10, or on the comparable line of other corporate tax returns. For a noncorporate U.S. shareholder, the amount should be included as “Other income” on Schedule 1 (Form 1040), line 8z, or on the comparable line of other non-corporate tax returns. Amounts entered in column (d) are also included on line 9, column (f) of Schedule J and Part I, line 8 of Schedule P.
Conclusion
The IRS Form 5471 is an incredibly complicated return. Each year an international tax attorney should review direct, indirect, and constructive ownership of the reporting CFC to determine the impact of any changes in percentages, filer categories, and CFC status. Workpapers should also be prepared and maintained for each U.S. GAAP adjustment and foreign exchange. In addition, an accounting should be made for adjustments to prior and current year previously taxed E&P that become PTEPs on Schedule J, E-1, and P.
Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi & Liu, LLP. Anthony focuses his practice on domestic and international tax planning for multinational companies, closely held businesses, and individuals. Anthony has written numerous articles on international tax planning and frequently provides continuing educational programs to other tax professionals.
He has assisted companies with a number of international tax issues, including Subpart F, GILTI, and FDII planning, foreign tax credit planning, and tax-efficient cash repatriation strategies. Anthony also regularly advises foreign individuals on tax efficient mechanisms for doing business in the United States, investing in U.S. real estate, and pre-immigration planning. Anthony is a member of the California and Florida bars. He can be reached at 415-318-3990 or adiosdi@sftaxcounsel.com.
This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.
