By Anthony Diosdi
Schedule O is used to report the organization or reorganization of a foreign corporation and the acquisition or disposition of its stock. This is the sixth of a series of articles designed to provide a basic overview of the Internal Revenue Service (“IRS”) Form 5471. This article is designed to supplement the IRS’ instructions to Schedule O of IRS Form 5471.
Who Must Complete Schedule O
Five different categories of filers of Form 5471 have been defined by the Income Tax Regulations. They are as follows:
Category 1 Filer
Category 1 (previously reserved) is now used by U.S. shareholders of a Specified Foreign Corporation (“SFC”) that is subject to the provisions of Internal Revenue Code Section 965.
Category 2 Filer
Category 2 filers are U.S. persons who are officers or directors of a foreign corporation in which, since the last Form 5471 was filed, a person has acquired a ten percent or greater ownership or acquired an additional ten percent or greater ownership.
Category 3 Filer
Category 3 filers is a U.S. person who (a) has acquired a cumulative ten percent or greater ownership in the outstanding stock of the foreign corporation, (b) since the last filing of form 5471 has acquired an additional ten percent or greater ownership in such strock, (c) owns ten percent or greater of the value of the outstanding stock of the foreign corporation when it is reorganized, or (d) disposes of sufficient stock in the foreign corporation to reduce the value of his ownership of stock in that corporation to less than ten percent, or who becomes a U.S. person while owning ten percent or greater in value of the outstanding stock of the foreign corporation.
Category 4 Filer
Category 4 filers are U.S. persons who had “control” of a foreign corporation for an uninterrupted period of at least 30 days during the foreign corporation’s annual accounting period. Control is defined as more than 50 percent of voting power or value, with Section 958 of the Internal Revenue Code attribution rules applying.
Category 5 Filer
Before the enactment of the 2017 Tax Cuts and Jobs Act, Category 5 filers were U.S. persons who are ten percent or greater shareholders in a corporation that was a controlled foreign corporation for an uninterrupted period of thirty days during its annual accounting period and who owned stock in the controlled foreign corporation on the last day of its annual accounting period. The 2017 Tax Cuts and Jobs Act removed the thirty day requirement. Now, all that is required to satisfy the requirements of being a Category 5 filer is a ten percent or greater ownership of a controlled foreign corporation at anytime during a calendar year.
Schedule O must be completed by Category 2 and Category 3 filers of the Form 5471. Category 2 filers must complete Part I of Schedule O. Category 3 filers 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 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 controlled foreign corporations (“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. So 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).