Demystifying IRS Form 5471 Schedule O Used to Report the Organization and Reorganization of a CFC

Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) is used by certain U.S. persons who are officers, directors, or shareholders in respect of certain foreign entities that are classified as corporations for U.S. tax purposes. Form 5471 and its schedules are used to satisfy the reporting requirements of Internal Revenue Code Sections 6038 and 6046.

Substantively, Form 5471 backstops various international sections of the Internal Revenue Code, including Sections 901 and 904 (foreign tax credits), Section 951(a) (subpart F income), Section 951A (global intangible low-taxed income or “GILTI”), Section 965 (one-time transition tax on a U.S. shareholder’s deferred foreign income), and Section 482 (transfer pricing). Other forms associated with Form 5471 include Form 926 (Return by a U.S. Transferor of Property to a Foreign Corporation), Form 5713 (International Boycott Report), Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund), and Forms 1116 and 1118 (Foreign Tax Credit).

Form 5471 includes 12 schedules. This article discusses the Schedule O of Form 5471. Schedule O is used to report the organization or reorganization of a foreign corporation and the acquisition or disposition of its stock.

Key Terms for Form 5471

Form 5471 provides for five general categories of filers, numbered 1 through 5. Two of these general categories are subdivided into three subtypes each, with each subtype being a separate filer category as well. The filer category that a taxpayer falls under dictates the schedule or schedules that the taxpayer must include with the form. In order to understand how these filer categories work, it is helpful to review some basic terms.

U.S. Person

Only U.S. persons who own stock in a foreign corporation can have a Form 5471 filing obligation. A U.S. person is generally a citizen or resident of the United States, a domestic partnership, a domestic corporation, or a domestic trust or estate, each as defined in Internal Revenue Code Section 7701(a)(30)(A) through (E). A tax-exempt U.S. entity may have a Form 5471 filing obligation. In addition, an individual who relies on the residency provision of an income tax treaty to reduce his or her U.S. income tax liability (and files Form 8833) remains a U.S. person for purposes of Form 5471. See Treas. Reg. Section 301.7701(b)-7(a)(3). There are some slight modifications to the definition of a U.S. person which will be discussed in more detail below. All of the Form 5471 filer categories apply to U.S. persons.

U.S. Shareholder

Internal Revenue Code Section 951(b) defines a “U.S. shareholder” as a U.S. citizen, resident alien, corporation, partnership, trust, or estate that owns 10 percent or more of the total combined voting power of all classes of voting stock of a foreign corporation, or 10 percent or more of the total value of all the outstanding stock of a foreign corporation. All forms of stock ownership, — i.e., direct, indirect (ownership through intervening entities), and constructive (attribution of ownership from one related party to another) — are considered in applying the 10 percent test.

Controlled Foreign Corporation (“CFC”)

A foreign corporation is a CFC if, on any day during its taxable year, all of its U.S. shareholders, taken together as a group, own more than 50 percent of the combined voting power of all classes of the foreign corporation’s voting stock, or more than 50 percent of the total value of all of the foreign corporation’s outstanding stock. See IRC Section 957(a). Only U.S. persons who constitute U.S. shareholders are considered in applying the 50 percent test. Just as in the case of the 10 percent test for determining whether a U.S. person is a U.S. shareholder, direct, indirect, and constructive ownership of stock are all considered in applying the 50 percent test for CFCs. The term “foreign,” when applied to a corporation, means a corporation that is not domestic — i.e., a corporation that is not incorporated in a U.S. state or the District of Columbia. See IRC Section 7701(a)(5).

Treasury Regulations 301.7701-2(b)(8) provides a list of foreign entities that are conclusively treated as “per se” corporations for U.S. tax purposes. An individual preparing a Form 5471 should be aware that abbreviations in an entity name such as “Ltd.” and “S.A.” do not always stand for “Limited” or “Sociedad Anonima” (or “Societe Anonyme”). The preparer should confirm what the unabbreviated terms are, preferably from a charter or other official document from the relevant jurisdiction. If a foreign entity is not in the list of per se corporations, Treasury Regulations Section 301.7701-3(b)(2) provides that, unless a contrary election is made, the foreign entity will be treated as (1) an association taxable as a corporation if all its members have limited liability, (2) a partnership it it has two or more members (at least one of which does not have limited liability), or (3) a disregarded entity if it has a single owner who does not have limited liability.

Section 965 Specified Foreign Corporation (“SFC”)

An SFC is a foreign corporation that either is a CFC or has at least one U.S. shareholder that is a domestic corporation. See IRC Section 965(e)(1). The term SFC includes not only CFCs, but also entities commonly referred to as “10/50 corporations.” These foreign corporations have at least one U.S. shareholder, but are not CFCs because U.S. shareholders do not collectively own more than 50 percent of the corporation’s stock either by vote or value.

Stock Ownership

For purposes of Form 5471, a U.S. person can own stock in a corporation in three possible ways. First, the person can own the stock “directly.” For example, owning stock in a brokerage account constitutes direct ownership of the stock. Second, the U.S. person can own the stock “indirectly” through an intervening entity, such as a corporation, partnership, estate, or trust, in which the U.S. person owns an interest. In these cases, the stock owned by the intervening entity is typically considered to be owned proportionately by its shareholders, partners, or beneficiaries, as the case may be. For example, if a U.S. person directly owns 40 percent of the stock of a corporation and that corporation, in turn, directly owns 50 percent of the stock of a second corporation, then the U.S. person is considered to own indirectly 20 percent (i.e., 40% × 50%) of the stock of the second corporation. Indirect stock ownership can extend through several layers of intervening entities, where each intervening entity directly owns an interest in the one immediately below it. The third way that a U.S. person can own stock is by “constructively” owning the stock due to a relationship with another person. This relationship most commonly involves family members. For example, if a U.S. citizen mother directly owns 6 percent of a corporation’s stock and her U.S. citizen daughter directly owns 5 percent of the same corporation’s stock, then each of them is considered to own constructively the shares of the other. As a result, the mother and daughter are each considered to own 11 percent of the corporation’s stock. Another less common relationship involves sister entities. This form of constructive ownership (referred to as downward attribution) arises when an individual or entity parent directly or indirectly owns stock in a corporation and, at the same time, owns an interest in another entity. Under downward attribution, the corporation’s stock that the parent owns is attributed downward from the parent to the second entity. As a result, the second entity is considered to own constructively the same stock owned by the parent. Generally, the stock that is owned constructively by one person due to family or downward attribution cannot be further owned constructively by another.

All three kinds of stock ownership apply when determining which Form 5471 filer category or categories a taxpayer falls under, but there are variations among the categories. For example, in Categories 2 and 3, constructive family ownership includes attribution of stock from siblings, grandparents, and nonresident aliens, whereas the other three categories do not allow for these attributions. Categories 1, 4, and 5 define indirect ownership to mean only indirect ownership through foreign intervening entities, and include indirect ownership through intervening U.S. entities as constructive upward attribution. Categories 2 and 3 specifically provide for indirect ownership, but only through entities that are foreign corporations or partnerships, and refer to this type of non-direct ownership as both indirect and constructive ownership. Constructive ownership in the form of downward attribution does not exist in Categories 2 and 3, but exists in Categories 1, 4, and 5. Category 4’s version of downward attribution prohibits attribution of stock from a foreign entity to a U.S. person. Category 1 and 5’s version, however, contains no such prohibition due to the Tax Cuts and Jobs Act of 2017 (the “TCJA”). All these variations, as well as others not described above, will need to be taken into account when preparing a Form 5471.

Filer Categories

Form 5471, together with its applicable schedules, must be completed (to the extent required on the form) and filed by the taxpayer according to the taxpayer’s filer category. What follows is a description of each filer category.

Category 1 Filer

A Category 1 filer is a U.S. shareholder of a foreign corporation that is an SFC at any time during the corporation’s taxable year. However, to be classified as a Category 1 filer, the U.S. shareholder of the SFC must also own the SFC’s stock on the last day of the SFC’s taxable year.

The stock ownership rules applicable to Category 1 (including Categories 1a, 1b, and 1c) are contained in Internal Revenue Code Section 958, which incorporates and modifies the constructive stock ownership rules of Section 318(a). For Category 1 purposes, if a person does not directly own stock, the person can own stock as follows:

• Indirect stock ownership through an intervening entity. The intervening entity (i.e., a corporation, partnership, estate, or trust) can only be a foreign entity. The person, who is to become the indirect owner of stock through the intervening entity, is not required to hold a minimum ownership interest (i.e., stock, partnership interest, or beneficial interest) in the intervening foreign entity.
• Constructive stock ownership from another person.
  • Attribution from family members. A person can only be attributed stock owned by his or her parent, spouse, child, or grandchild. However, no attribution is permitted from a nonresident alien to a U.S. citizen or resident.
  • Upward attribution from entities. The attributing entity can be either a U.S. or foreign entity. However, if the attributing entity is a corporation, the person to whom the stock is to be attributed must own at least 10 percent (by value) of the attributing entity’s stock. Furthermore, if the stock to be attributed upward constitutes more than 50 percent of a corporation’s voting stock, then the stock is deemed to constitute 100% of the corporation’s voting stock when it gets proportionately allocated among the attributing entity’s owners.
  • Downward attribution from persons. The attributing person can be either an individual or entity. However, if the stock is to be attributed downward to a corporation, the attributing person must own at least 50 percent (by value) of that corporation’s stock.

Category 1a, 1b, and 1c Filers

Category 1 is subdivided into Categories 1a, 1b, and 1c. Category 1a is a catchall category and applies to Category 1 filers who do not otherwise fall under either Category 1b or 1c. Categories 1b and 1c were added to Form 5471 as the result of Revenue Procedure 2019-40, which the IRS issued in response to the repeal of provisions in Section 958(b) that previously disapplied the constructive downward attribution rules of Section 318(a)(3) to the extent that they attributed stock owned by a foreign person to a U.S. person.

Categories 1b and 1c specifically apply to those SFCs that are considered to be foreign-controlled for purposes of Form 5471. Such an SFC, referred to herein as a “Foreign-Controlled SFC,” is a foreign corporation that, although classified as an SFC, would not be so classified if the determination were made without applying Section 318(a)(3)’s downward attribution rules so as to consider a U.S. person as owning the stock owned by a foreign person.

A Category 1b filer is a U.S. shareholder who owns, directly or indirectly under Section 958(a) (but not constructively under Section 958(b)), the stock of a Foreign-Controlled SFC and is not related (within the meaning of Section 954(d)(3)) to that Foreign-Controlled SFC. Section 954(d)(3) defines two persons as being “related” to each other in terms of “control,” where one person controls or is controlled by the other, or is controlled by the same person or persons who control the other. Here, control over a corporation means directly or indirectly owning more than 50 percent of the corporation’s stock by either vote or value. A Category 1b filer is typically a shareholder who owns, directly or indirectly, stock in a foreign corporation but is not related to the foreign corporation because the common parent of both the shareholder and the foreign corporation does not control the foreign corporation.

A Category 1c filer is a U.S. shareholder who does not own, either directly or indirectly, the stock of a Foreign-Controlled SFC but is related (within the meaning of Section 954(d)(3)) to that Foreign-Controlled SFC. A Category 1c filer is typically a shareholder that owns the stock of a foreign corporation only because of constructive stock ownership under Section 318(a)(3) and the shareholder is related to the foreign corporation because each of them is under the control of a common parent.

A U.S. shareholder who does not own, either directly or indirectly, the stock of a Foreign-Controlled SFC and is not related (within the meaning of Section 954(d)(3)) to that Foreign-Controlled SFC, is neither a Category 1b nor 1c filer. Such U.S. shareholder is deemed not to fall under the Category 1a catchall and is exempt from the obligation to file Form 5471.

Category 2 Filer

A Category 2 filer is a U.S. person who is an officer or director of a foreign corporation in which there has been a substantial change in its U.S. ownership. A U.S. person can be a Category 2 filer even if the change relates to stock owned by another U.S. person and regardless of whether or not that other U.S. person is an officer or director of the foreign corporation. For Category 2 purposes, a U.S. person is defined as a U.S. citizen, resident alien, corporation, partnership, estate, or trust. However, Category 2 also expands the definition of a U.S. person to include a bona fide Puerto Rico resident, a bona fide possessions resident, and a nonresident alien as to whom a Section 6013(g) or (h) election is in effect (i.e., where a nonresident alien spouse has made an election to be taxed as a U.S. person). In regard to the definition of an officer or director, there is no clear answer as to what constitutes an officer or director for purposes of a Category 2 filer. Treasury Regulations Section 1.6046-1(d) provides that “persons who would qualify by the nature of their functions and ownership in such associations, etc., as officers, directors, or shareholders thereof will be treated as such for purposes of this section without regard to their designations under local law.”

For purposes of Category 2, a substantial change in U.S. ownership in a foreign corporation occurs when any U.S. person (not necessarily the U.S. citizen or resident who is the officer or director) either (1) acquires stock that causes that U.S. person to own a 10 percent block of stock in that foreign corporation (by vote or value) or (2) acquires an additional 10 percent block of stock in that corporation (by vote or value). More precisely, if any U.S. person acquires stock that, when added to any stock previously owned by that U.S. person, causes the U.S. person to own stock meeting the 10 percent stock ownership requirement, the U.S. officers and directors of that foreign corporation must report. A disposition of shares in a foreign corporation by a U.S. person, however, does not create filing obligations under Category 2 for U.S. officers and directors of that foreign corporation.

The stock ownership rules applicable to Category 2 are contained in Internal Revenue Code Section 6046(c) and Treasury Regulations Section 1.6046-1(i). For Category 2 purposes, if a person does not directly own stock, the person can own stock as follows:

• Constructive stock ownership from another person.
  • Attribution from family members. A person can only be attributed stock owned by his or her brother, sister, spouse, ancestors, and lineal descendants. Attribution from nonresident aliens is permitted.
  • Upward attribution from entities. The attributing entity can be either a foreign corporation or a foreign partnership. The person, who is to become the constructive/indirect owner of stock through the attributing foreign corporation or partnership, is not required to hold a minimum ownership interest (i.e., stock or partnership interest) in the attributing foreign corporation or partnership. By negative implication, there is no attribution of stock from U.S. entities, or from foreign estates or trusts. Nevertheless, stock owned by U.S. entities that are not treated as entities separate from their owners for U.S. income tax purposes (i.e., grantor trusts and disregarded entities) should be attributable to their owners.

Category 3 Filer

A U.S. person who owns stock in a foreign corporation is a Category 3 filer if any one of the following events occurs during the taxable year:

1. The U.S. person acquires stock in the corporation that, when added to any stock already owned by the person, causes the person to own at least 10 percent (by vote or value) of the corporation’s stock.
2. The U.S. person acquires stock that, without regard to any stock already owned by the person, constitutes at least 10 percent (by vote or value) of the corporation’s stock.
3. The U.S. person becomes a U.S. person while owning at least 10 percent (by vote or value) of the corporation’s stock.
4. The U.S. person disposes of sufficient stock in the corporation to reduce the person’s interest to less than 10 percent (by vote or value) of the corporation’s stock.
5. The U.S. person owns at least 10 percent (by vote or value) of the corporation’s stock when the corporation is reorganized.

For Category 3 purposes, a U.S. person is defined as a U.S. citizen, resident alien, corporation, partnership, estate, or trust. However, Category 3 also expands the definition of a U.S. person to include a bona fide Puerto Rico resident, a bona fide possessions resident, and a nonresident alien as to whom a Section 6013(g) or (h) election is in effect (i.e., where a nonresident alien spouse has made an election to be taxed as a U.S. person).

The stock ownership rules applicable to Category 3 are the same as the ones applicable to Category 2, as described above under “Filer Categories–Category 2 Filer.” These rules are contained in Internal Revenue Code Section 6046(c) and Treasury Regulations Section 1.6046-1(i).

Category 4 Filer

A U.S. person is a Category 4 filer with respect to a foreign corporation for a taxable year if the U.S. person controls the foreign corporation. For Category 4 purposes, a U.S. person is defined as a U.S. citizen, resident alien, corporation, partnership, estate, or trust. However, Category 4 also expands the definition of a U.S. person to include a bona fide Puerto Rico resident, a bona fide possessions resident, and a nonresident alien as to whom a Section 6013(g) or (h) election is in effect (i.e., where a nonresident alien spouse has made an election to be taxed as a U.S. person). See Treas. Reg. Section 1.6038-2(d).

A U.S. person is considered to “control” a foreign corporation for purposes of Category 4 if at any time during the person’s taxable year, such person owns more than 50 percent of the combined voting power of all classes of the foreign corporation’s voting stock, or more than 50 percent of the total value of all of the foreign corporation’s outstanding stock. See IRC Section 6038(e)(2). It is important to note that the concept of control here for Category 4 filers is distinct from the one in the definition of CFC, a term used for Category 1 and Category 5 filers. There, control over a foreign corporation exists when more than 50 percent (by vote or value) of the corporation’s stock is owned by one or more U.S. shareholders, each of whom individually owns at least 10 percent of the corporation’s stock. By contrast, a Category 4 filer is a single U.S. person who individually owns more than 50 percent (by vote or value) of the foreign corporation’s stock.

The stock ownership rules applicable to Category 4 are contained in Internal Revenue Code Section 6038(e)(2), which incorporates and modifies the constructive stock ownership rules of Section 318(a). For Category 4 purposes, if a person does not directly own stock, the person can own stock as follows:

• Constructive stock ownership from another person.
  • Attribution from family members. A person can only be attributed stock owned by his or her parent, spouse, child, or grandchild. Attribution from nonresident aliens is permitted.
  • Upward attribution from entities. The attributing entity can be either a U.S. or foreign entity. However, if the attributing entity is a corporation, the person to whom the stock is to be attributed must own at least 10 percent (by value) of the attributing entity’s stock. Furthermore, because Section 6038(e)(2) defines control for purposes of Category 5 as owning more than 50% (by vote or value) of a corporation’s stock, if a person controls a corporation that, in turn, owns more than 50% (by vote or value) of the stock of a second corporation, then such person will be treated as in control of the second corporation as well.
  • Downward attribution from persons. The attributing person can be either an individual or entity. However, if the stock is to be attributed downward to a corporation, the attributing person must own at least 50 percent (by value) of that corporation’s stock. Furthermore, no downward attribution is allowed if it results in a U.S. person constructively owning stock that is owned by a foreign person (as the attributing person).

Category 5 Filer

A Category 5 filer is a U.S. shareholder of a foreign corporation that is a CFC at any time during the corporation’s taxable year. However, to be classified as a Category 5 filer, the U.S. shareholder of the CFC must also own the CFC’s stock on the last day of the CFC’s taxable year.

The stock ownership rules applicable to Category 5 (including Categories 5a, 5b, and 5c) are the same as the ones applicable to Category 1 (including Categories 1a, 1b, and 1c), as described above under “Filer Categories–Category 1 Filer.” These rules are contained in Internal Revenue Code Section 958, which incorporates and modifies the constructive stock ownership rules of Section 318(a).

Category 5a, 5b, and 5c Filers

Category 5 is subdivided into Categories 5a, 5b, and 5c. Category 5a is a catchall category and applies to Category 5 filers who do not otherwise fall under either Category 5b or 5c. Categories 5b and 5c were added to Form 5471 as the result of Revenue Procedure 2019-40, which the IRS issued in response to the repeal of provisions in Section 958(b) that previously disapplied the constructive downward attribution rules of Section 318(a)(3) to the extent that they attributed stock owned by a foreign person to a U.S. person.

Categories 5b and 5c specifically apply to those CFCs that are considered to be foreign-controlled for purposes of Form 5471. Such a CFC, referred to herein as a “Foreign-Controlled CFC,” is a foreign corporation that, although classified as a CFC, would not be so classified if the determination were made without applying Section 318(a)(3)’s downward attribution rules so as to consider a U.S. person as owning the stock owned by a foreign person.

A Category 5b filer is a U.S. shareholder who owns, directly or indirectly under Section 958(a) (but not constructively under Section 958(b)), the stock of a Foreign-Controlled CFC and is not related (within the meaning of Section 954(d)(3)) to that Foreign-Controlled CFC. Section 954(d)(3) defines two persons as being “related” to each other in terms of “control,” where one person controls or is controlled by the other, or is controlled by the same person or persons who control the other. Here, control over a corporation means directly or indirectly owning more than 50 percent of the corporation’s stock by either vote or value. A Category 5b filer is typically a shareholder who owns, directly or indirectly, stock in a foreign corporation but is not related to the foreign corporation because the common parent of both the shareholder and the foreign corporation does not control the foreign corporation.

A Category 5c filer is a U.S. shareholder who does not own, either directly or indirectly, the stock of a Foreign-Controlled CFC but is related (within the meaning of Section 954(d)(3)) to that Foreign-Controlled CFC. A Category 5c filer is typically a shareholder that owns the stock of a foreign corporation only because of constructive stock ownership under Section 318(a)(3) and the shareholder is related to the foreign corporation because each of them is under the control of a common parent.

A U.S. shareholder who does not own, either directly or indirectly, the stock of a Foreign-Controlled CFC and is not related (within the meaning of Section 954(d)(3)) to that Foreign-Controlled CFC, is neither a Category 5b nor 5c filer. Such U.S. shareholder is deemed not to fall under the Category 5a catchall and is exempt from the obligation to file Form 5471.

Schedule O

Every U.S. citizen or resident described in Category 2 must complete Part I of Schedule O. Every U.S. person described in Category 3 must complete Part II of Schedule O.

Part I of Schedule O
Part I of Schedule O is filled out by U.S. Officers of Directors of foreign corporations and provides information of U.S. shareholders. Part I of Schedule O is designed to provide information of U.S. shareholders and their acquisition of shares in their foreign corporation.

(a) Name of shareholder for whom acquisition information is reported

This column requires the filer to disclose the names of the U.S. shareholders.

(b) Address of Shareholder
This column requires the filer to disclose the address of the U.S. shareholders.

(c) Identifying Number of Shareholders

This column requires the filer to state the identifying number of the U.S. shareholders of the foreign corporation.

(d) Date of Original 10 percent Acquisition
This column requires the filer to state the date a U.S. shareholder first acquired 10 percent or more (in value or voting power) of the outstanding stock of the foreign corporation.

(e) Date of Additional 10 Percent Acquisition

This column requires the filer to list any dates a U.S. shareholder may have acquired additional shares over and beyond the 10 percent ownership threshold of the foreign corporation. This reporting must be done whether or not the shares were acquired (whether in one or more transactions) or in the value or voting power of the outstanding stock of the foreign corporation.

Overview of Part I to Schedule O
Part I of Schedule O requires U.S. Officers and U.S. Directors of a foreign corporation to report U.S. shareholders of the foreign corporation to the IRS.

Part II of Schedule O

Part II is broken into Sections A, B, C, D, E, F. This section must be completed by Category 3 filers. Category 3 filers are U.S. shareholders of the foreign corporation who has acquired a cumulative ten percent or greater ownership in the outstanding stock of the corporation.

Section A- General Shareholder Information
Section A requires the filer to disclose basic information regarding the U.S. shareholders of the foreign corporation.

(a) Name, Address, and Identifying Number or Shareholder(s) Filing this Section
This column requires the shareholder to disclose the name, address, and identifying number of the U.S. shareholders of the foreign corporation.

(b)(1) For Shareholder’s Latest U.S. Income Tax Return
This column requires the shareholder to disclose the type of last tax return filed in the U.S.. For example, if the U.S. shareholder’s last tax return was a Form 1040, enter Form 1040 in column (b)(1).

(b)(2) Date Return Filed
This column requires the shareholder to disclose the last date the U.S. return stated on column (b)(1) was filed.

(b)(3) Internal Revenue Service Center Where Filed
This column requires the shareholder to disclose the IRS Center where the return stated of column (b)(1) was filed. If the shareholder’s latest tax return was filed electronically, enter “e-filed” in column (b)(30 instead of a service center.

(c) Date (if any) Shareholder last Filed an Information Return under Section 6048 for the Foreign Corporation

Internal Revenue Code Section 6048 discusses the reporting requirements for U.S. persons with interests in the CFC. Column (c) of Part II requires U.S. shareholders to disclose the date the U.S. shareholder (if applicable) last filed a Form 5471 with the IRS for this foreign corporation.

Note that category 3 filers include individuals who become U.S. residents during the year. Thus, if a non-resident alien moves to the United States or establishes U.S. residency during the year, and becomes a U.S. person during that year, for purposes of filing Form 5471, the individual is effectively considered as acquiring the shares in the CFC when they establish U.S. residency.

Section B- U.S. Persons Who are Officers of the Foreign Corporation
Part II Section B requires U.S. shareholders of the CFC to disclose certain information regarding U.S. Officers and Directors. Just as Part I of Schedule O had U.S. Officers and Directors disclosing information regarding U.S. shareholders, Part II Section B has U.S. shareholders reporting information regarding U.S. Officers and Directors to the IRS.

(a) Name of U.S. Officer or Director
In this column, the names of the U.S. Officers and Directors must be disclosed to the IRS.

(b) Address
In this column, the addresses of the U.S. Officers and Directors of the CFC must be disclosed to the IRS.

(c) Social Security Number
In this column, the Social Security numbers of the U.S. Officers and Directors of the CFC must be disclosed to the IRS.

(d) Check Appropriate Boxes
This column requires the shareholder to check the correct box whether or not the individual being disclosed to the IRS is either an “Officer” or “Director.”

Section C- Acquisition of Stock
Section C the shareholder of a CFC lists the details of the acquisition of stock.

(a) Name of Shareholder(s) Filing this schedule

In this column, the name of the shareholder acquiring the stock in the CFC must be stated.

(b) Class of Stock Acquired
In this column, the class of shares acquired in the CFC must be stated.

(c) Date of Acquisition
In this column, the date the CFC shares were acquired must be stated.

(d) Method of Acquisition
In this column, the filer must enter the method of acquisition of the CFC shares (for example, purchase, gift, bequest, trade).

(e) Number of Shares Acquired
In order to properly complete columns (e)(1), (e)(2), and (e)(3) of Section C, (and columns (e)(1), (e)(2), and (e)(3) of Section D discussed below) the filer must understand the direct, indirect, and constructive ownership rules of Internal Revenue Code Section 958. Section 958 applies direct, indirect, and constructive ownership rules to determine stock ownership in a foreign corporation. Section 958(a)(1) provides the direct ownership rules for determining stock ownership for such purposes.

Section 958(a)(2) provides indirect ownership rules to determine beneficial ownership of shares when a foreign entity is interposed between the U.S. person and the foreign corporation. Specifically, stock of a foreign corporation owned, in turn, by another foreign corporation or by a foreign partnership, trust, or estate is deemed to be owned proportionately by the latter’s shareholders, partners, or beneficiaries. There is no minimum threshold of ownership interest in the foreign corporation necessary to trigger the application of this indirect ownership rule involving foreign entities. Thus, if a foreign partnership with four equal partners owns four percent of the stock of a foreign corporation, each partner is treated under Internal Revenue Code Section 958(a)(2) as owning one percent of the stock of the foreign corporation. (i.e., one-fourth of the partnership’s four-percent stock interest in the corporation). Likewise, if a U.S. person owns 10 percent of the stock of a foreign corporation’s stock, the U.S. person is treated as owning 2.5 percent of the stock of the second foreign corporation under Section 958(a)(2).

Section 958(b) applies the constructive ownership rules of Internal Revenue Code Section 318(a). These constructive ownership rules of Section 318(a) require attribution of stock between certain family members, and their shareholders, partners or beneficiaries, on the other.

For purposes of any one determination, in applying the direct, indirect, and constructive ownership rules in Section 958(a) and (b), the same stock cannot be counted twice (i.e., the same stock cannot be attributed twice to the same person under different indirect ownership or attribution rules or to two different rules under the same or different indirect ownership or attribution rules. However, stock which may be owned by a person under more than one of these rules, or by more than one person, is treated as “owned under that attribution rule which imputes to the person, or persons, concerned the largest total percentage of such stock.” See Treas. Reg. Section 1.958-2(f)(2).

Column (e)(1)
Column (e)(1) asks the filer to disclose his or her shares directly owned in the CFC. These would be shares that the shareholder directly holds.

Column (e)(2)
Enter the number of shares acquired indirectly (within the meaning of Section 958(a)(2)) by the shareholder listed in column (a). These would be shares owned through another foreign corporation, foreign partnership, trust, or estate.

Column (e)(3)
Enter the number of shares constructively owned (within the meaning of Section 958(b)) by the shareholder listed in column (a). These would be shares owed by the application of Section 318(a).

(f) Amount Paid or Value Given
This column asks the filer to disclose the amount paid or value given for any shares acquired in the CFC. This column also asks the filer to disclose the name and address from whom the shares were acquired.

Section D- Disposition of Stock
Section D must be completed by shareholders who dispose of their interest (in whole or in part) in a foreign corporation.

(a) Name of Shareholder Disposing of Stock
This column asks the filer to state the name of any shareholder that disposed of any shares of the CFC during the tax year.

(b) Class of Stock
This column asks the filer to disclose the class of shares that were disposed of during the year.

(c) Date of Disposition

This column asks the shareholder to state the date the shares were disposed of during the year.

(d) Method of Disposition

Column (d) Enter the method of disposition (for example, sale, bequest, gift, trade).

(e) Number of Shares disposed of
Sections (e)(1), (e)(2), and (e)(3) asks the filer to state the number of shares that were directly, indirectly, and constructively during the year to be itemized and listed.

Below see Illustration 1 which provides an example as to how to report disposition of stock on Section D of Part II of Schedule O.

Illustration 1.

In 1999, Mr. Jackson, a U.S. citizen, purchased 10,000 shares of common stock of foreign corporation X. The purchase represented 10 percent ownership of the foreign corporation.

On July 1, 2018, Mr. Jackson made a gift of 5,000 shares of foreign corporation X to his son, John. Because Mr. Jackson has reduced his holding in the foreign corporation, he is required to complete Form 5471 and Schedule O. To show the required information about the disposition, Mr. Jackson completes Section D as follows:

Enters his name in column (a).
Enters “common” in column (b).
Enters “July 1, 2018” in column (c).
Enters “gift” in column (d).
Enters “5,000” in column (e)(1).
Enters “-0-” in column (f) because the disposition was by gift.
Enters the name and address of his son, John, in column (g).

Section E- Organization or Reorganization

Section E is completed if the CFC was just organized or reorganized.

(a) Name and Address of Transferor
If the CFC was just organized, the names of the transferors should be stated in this column.

(b) Identifying Number (if any)
In this column, the identifying numbers of the individual transferors of property or money to the CFC during the year should be listed.

(c) Date of Transfer
In this column, the dates of any transfers to the CFC should be stated.

(d) Assets Transferred to Foreign Corporation

(1) Description of Assets
The description of any assets transferred to the CFC should be stated in this column.

(2) Fair Market Value
The fair market value of any property transferred to the CFC should be stated in this column.

(3) Adjusted Basis (if Transferor was U.S. Person)
The value or adjusted basis of any property transferred to the CFC should be stated in this column.

(e) Description of Assets Transferred by, or Notes or Securities Issued by, Foreign Corporation

Any securities or stock issued by the CFC should be listed in this column.

Section F- Additional Information

Item (a) of Section F states if the foreign corporation or a predecessor U.S. corporation filed (or joined with a consolidated group in filing) a U.S. income tax return for any of the last three years, attach a statement indicating the year for which a return was filed (and, if applicable, the name of the corporation filing a consolidated return), the taxable income or loss, and the U.S. income tax paid (after all credits).

In the event the CFC or a predecessor U.S. corporation filed a U.S. income tax return for any of the last three years, a statement must be attached to Schedule O indicating the year for which the return was filed, the taxable income or loss reported on the return, and the amount of U.S. income tax paid.

Item (b) of Section F asks the filer to list the date of any reorganization of the foreign corporation that occurred during the last 4 years while any U.S. person held 10 percent or more in value or vote (directly or indirectly) of the corporation’s stock.

In the event the CFC was reorganized during the last 4 years while any U.S. person held 10 percent or more in value or vote of the entity’s stock, item (b) an attachment should accompany the Schedule O. If there is more than one such date, use the most recent date. However, do not enter a date for which information was reported in Schedule E. Instead, enter the date (if any) of any reorganization prior to that date (if it is within the last 4 years).

Item (c) of Schedule F asks if the foreign corporation is a member of a group constituting a chain of ownership, attach a chart, for each unit of which a shareholder owns 10 percent or more in value or voting power of the outstanding stock. The chart must indicate the corporation’s position in the chain of ownership and the percentages of stock ownership.

In the event the CFC was a member of a group constituting a chain of ownership, a chart must be attached to Schedule O. The chart must indicate the CFC’s position in the chain of ownership and the percentage of stock ownership in each entity.

Below see Illustration 2 which provides an example how Section F of Schedule O is reported.

Illustration 2.

Mr. Lyons, a U.S. person, acquires a 10 percent ownership in foreign corporation F. F is the 100 percent owner of two foreign corporations, F1 and FJ. F is also a 50 percent owner of foreign corporation FK. In addition, F is 90 percent owned by foreign corporation W. Mr. Lyons does not own any of the stock of corporation W.

Mr. Lyons completes and files Form 5471 and Schedule O for the corporations in which he is a 10 percent or more shareholder.

Mr. Lyons is required to submit a chart if is a member of a chain corporation, and to indicate if he is a 10 percent or more shareholder in any of those corporations.

Mr. Lyons would prepare a list showing the corporations as follows.

Corporation W.
Corporation F.
Corporation FI.
Corporation FJ.
Corporation FK.

Then Mr. Lyons is required to indicate that he is a 10 percent or more shareholder in corporations F, FI, and FJ.

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 tax professionals.

Anthony 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 [email protected].

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.