On-Demand | Form 5471 Playbook

Some of the major differences that have changed in the past year from 2017 to 2018 was that the IRS added a new category of file or category number one, which always used to be that by that was repealed many years ago and now they finally found a use for it yet again. Category one filer, which we'll get into a little bit in the next slides is specifically talking about a specified foreign corporation or a controlled foreign corporation.

Some of the other changes between old law and new law is that to qualify for CFC status or controlled foreign corporation status, they removed what used to be this 30-day holding requirement for the US shareholders. They expanded it further to have the ownership looking at not only vote, but also value. And, the new schedules that are on the forum are schedule B, there's a part two, there's an expanded Schedule E-1, there's a new schedule I-1 which might be one of the most important schedules that we'll talk about and deal with, and a new schedule P.

In addition, schedule J has been expanded, and there are now more previously tax income baskets or PTI that become ever more relevant now with regards to the transition tax that happened at the end of 2017, and now going forward on a yearly basis. Also, there are new separate categories of incomes, and one in particular which many of you might know, global intangible low-taxed income or GILTI, which is now reportable on the Form 8992.

Also, with the major overhaul and the change of the forms, the IRS has expanded their initiatives in the LB&I Division, which is the Large Business and International Division for failures to follow the form, inconsistencies with following the form, or maybe not full completion of the form. The reason being is if you look at the third bullet point, there's a $10,000 penalty per form, per year for the noncompliance. Even if it's somewhat complete, they might still issue a penalty if you don't have enough information on the form. That's what we're talking about substantially complete and incomplete returns.

The use of these forms is to disclose foreign corporation and financial information to the IRS so that the IRS can make certain determinations and ensure that based on the new rules, they're getting a share of the tax based on the income that should be picked up and reportable in the US. So, to the fact that you have a substantially incomplete form where the IRS cannot make a reasonable determination, it's possible that they may still issue some form of the penalty based on that form.

What many people have done is, they've submitted Form 5471 without piggybacking a tax return and if there's no signature line on the form, you cannot submit it separately, which is a little bit different because there is a foreign partnership form, the 8865, which you can actually sign and submit to the IRS separately from the tax return. They've expanded the initiatives to make sure that you're not missing these new required schedules, and that's where the categories of filer come into play the most. They want to make sure that if you're a certain category, you're completing the proper schedules, and that's the first place they're going to look. You don't want to make sure that those are missing.

Other little errors that have come out that they've seen is schedules are not tying from one to the other, you're not converting from functional currency to US dollars. Or in many cases, people do not file any form at all, simply because they thought the company was inactive and dormant and that there was no filing requirement. There is still a filing requirement. And then again overall, what's the magnitude of the admission?

Point of the matter being is, you definitely want to review your organization structures. You want to ensure that to the extent you have any legal entity set up in a foreign country, to some extent it's being reported. Now, it might not necessarily be on a 5471, it could be on an 8865, it could be on an 8858. There are other forms out there but the point being, if there is a foreign legal entity owned by US person, there is some form of a disclosure. With that, we have our first polling question.

Moderator: Polling Question

Matthew Halpern: Okay, 10-plus, wow. This is just a way to gauge to see from our level of attendees, how many forms you're dealing with. We have some people that have yet to deal with it, some people that have maybe dealt with it somewhat and many people that have actually dealt with it on a much greater basis. Then we have polling question number two.
Moderator: To the extent you have a Form 5471 reporting obligation, are you A, an individual, B, a corporation, C, a partnership or D, not applicable? And again, please remember that in order to receive your CPE certificate, you must remain logged on for at least 100 minutes and respond to at least six polling questions. Again, a few more seconds in order for everyone to respond. Okay, I am now going to close the poll and share the results.
Matthew Halpern: Okay, maybe one individual, 1%, many corporations, a couple partnerships, not applicable is probably the people that didn't have any final requirement yet. Now that you can see and gauge the type of US people we're dealing with, a lot of them are corporations. Some are individuals, some are partnerships. One thing to keep in mind in the back of your head is that each one of these types of US persons, and I know I didn't really mention trusts or estates, but each type of these people will be treated slightly different. Not necessarily how the reporting of the form might be, but when it comes to recognizing certain income, whether it be Subpart F or GILTI, the tax treatment in the US will be different.

Starting with the first page of the Form 5471, this is where the bulk of the basic information comes from. This is where the IRS can identify what the tax year of the filer is, which is the US person, what the tax year of the foreign corporation is, the categories of filers, names, the addresses. What your total voting percentage is to ensure that it correlates maybe back with the category of filer. Whether or not there's other people that have the same or similar filing requirements and if you're filing on their behalf, which is one way to alleviate duplicate filings. It's definitely helpful and beneficial to tiered structures where maybe in a lower tier, you want to file this form behalf on your holding companies and your holding corps, and maybe even your shareholders to the extent they to have a filer requirement.

When you get to the second half, the bottom half of the form, that's specifically where the name and address of the foreign corporation is, whether or not they have an employer identification number. Keys or reference numbers in such instances when there's no EIN. The country where they're incorporated, what their principal business activities are, their functional currencies, date of incorporation.

Then going down to number two, information about who's the registered agent in the country of incorporation? Who's the holder of the books and records if it's different from that agent? One little issue that I see sometimes is people putting a name and address of a branch office or agent in the US, which could be the case sometimes but then when you start with A, are you thinking now the IRS in number B is looking for a US tax return? Are you indicating to them that you potentially do have some agent working on behalf of the foreign corp in the US, and therefore maybe bringing US taxation in directly with the foreign corp via an 1120-F, as opposed to through the 5471? Something just to be a little wary of.

Going through some of the categories of filers again, category one which is new for 2018 has to deal with US shareholders of a foreign corporation, that will be considered a specified foreign corp at any time during any tax year of the foreign corporation. So again, in 2017, a category one filer was not available as a checkbox yet, even though the term specified foreign corp was out, and that was used to determine the 965 inclusions or the transition tax inclusions.

Now, the IRS I think did not have enough time to update the forms based on when the law had changed, and that's why a lot of practitioners went through haywire trying to figure out how to report some of the information and the IRS just came out with some statements and attachments basically to the tax return. Now in 2018, there's some actual more formal forms, there's actually a 965-A, 965-B Form to the extent that you have the transition tax and 2018 still, to the extent you have different tax liabilities that are going over the eight year period, or to the extent that you're a shareholder of an S corporation that has the potential indefinite deferral until a triggering event.

Then continuing on, what's a specified foreign corporation? Well, that can be any controlled foreign corporation, or any foreign corporation with respect to which you have a domestic corp that is a US shareholder. We'll get into what's the US shareholder. Category two is a transactional type of filer. What I like to say is, you will not have a category two filer unless you have a category three filer. Category two is very specific to the US citizens or residents who are also officers or directors of the foreign corporation.

You will be the category two only in the year in which you have a transaction event, and that's where category three comes in, where you're meeting these 10% stock ownerships or maybe additional stock ownership percentages. The big category three, again, a transactional category is when a US person acquires stock in a foreign corporation, either for the first time or maybe now they're acquiring additional stock and now meet the 10% stock ownership requirement. Again, the key number here is 10%.

It could also fall under US, well, foreign people let's say, that become US people, or in some cases you might have foreign corporations domesticating to become US corporations that continue to own foreign corporations. Now you've created more filing requirements if they were not already there previously. Then it also comes down to US people who dispose of enough stock in the foreign corporation to reduce their interest to less than the 10% ownership requirement.

We're not looking at 10% increments, but we're looking at going over or under the 10% threshold. That's mostly what category three is and that's why it's a transactional type category. If in year one is the year when you acquired a new foreign corporation and that's when you acquire let's say 100%, in year two, unless there's a change and you went and you sold it and now you're less, you would not be category three again in year two.

This is slightly different from category four filer which can be an every year type of filing. Category four has to deal with a US person who had control of the foreign corp during the annual accounting period of it. And again, who's the US person? It could be a citizen or resident of the US, nonresidents who make the 6013(g) or 1613(h) elections, domestic partnerships, domestic corporations, or domestic estates and trusts that are not considered foreign.

And what is control? Well, control is defined as having at any time during that US person's tax year, more than 50% of either the total combined voting power of all classes of stock of the foreign corp, or the total value of all of the shares of the classes of stock. Again, one thing maybe to be wary about is when you have different classes of stock, how is class A treated, and how is it different from class B? Or, if you have common and you have preferred, is one voting and one equity?

Frankly I've seen situations where the US person owns only 1% of a foreign corporation, but they control 90% of the vote, and therefore making it disfavorable for maybe some of the other shareholders who don't have any vote, but have all the ownership. And frankly when you own it via the value, those are the people that are going to be picking up the income, not the people that have the vote. So, having the vote could make a problem for the people that actually have the value and the interests in those foreign corporations.

A little caveat that comes down with constructive ownership, when you have a person in control of another corporation that owns more than 50% of another foreign corp, that's also treated as being in control. You will look at the constructive ownership rules when you're going over the 50% ownership.

Category five filer. Now, this is a US person who owns stock and a foreign corp that is a CFC at any time during any tax year of the foreign corp, and who owned that stock on the last day in that year in which it was a CFC. To clarify, what is a controlled foreign corporation or a CFC? It's a foreign corporation that had US shareholders that own directly, indirectly or constructively on any day of the tax year, more than 50% of the total voting power, or the total value of the stock of the corporation. Note how now it says on any day of the tax year. Again, one of the big changes was that there using to be a 30-day holding requirement to create a CFC. They removed the 30-day holding requirement to make it one day. So any day of the tax year, you could have the CFC even if it's for one day.

Going back to the definition of US person, a citizen or resident of the US. We said domestic partnerships, domestic corps, and estates or trusts that are not foreign. You can have a situation where you are not a category four filer, but you are a category five filer, because you plus somebody else creates a controlled foreign corporation, but neither one of you, or maybe you in particular do not control that yourself. Going back on the difference, category four is when you control the foreign corporation, where category five is you are a US shareholder in a controlled incorporation.

Throwing on the definition of voting power, I have seen some instances where it's not quite clear in certain situations of what is vote. Voting power is if the US person has the power to elect, appoint, or replace the majority of that body of people exercising with respect to the corp, the powers that they would ordinarily exercise by the board of directors of the domestic corp. They're saying you can control what the company is doing if you have to say in how they operate, you have that vote.

It goes on, if any person's elected by the shareholders and you have that power to elect at least half of the members of the governing body, which could include the board of directors to either cast the votes and deciding of the votes of that body. So, whether or not even if you're not on the board itself, if you have a say in who gets on the board of at least half of the members, you can it consider to have voting power.

Then finally, if the powers which would ordinarily be exercised by the board of such directors of a domestic corp are exercised with respect to such a foreign corp by a person from whom such shareholders have the power to elect, appoint or replace. Again, it's definitely looking at the board of directors, it's looking at who can control the board of directors, who has the power to elect and appoint or replace the board of directors, or maybe some of the officers of the company. If you have some form of say, you might have some voting power.

One of the other big issues that came out with the Tax Reform Act was the modification of the attribution rules, and specifically the repeal of this Section 958(b)(4), which is what's called downward attribution. In a situation, and we have an example below that says, due to the downward attribution of this foreign parent owning both a US subsidiary and the foreign subsidiary, you're able to look back up. So, from the US, back up to the foreign parent and back down to the foreign sub, therefore creating foreign sub as a CFC.

Now, if you look at this simple structure, who are the owners of this new CFC foreign subsidiary? Well, its a foreign parent. So, to the extent that you might have created a controlled foreign corporation, who would be recognizing any income from the controlled foreign corporation? A foreign parent, and therefore there really is no income to be recognized in this particular case. However, there are other instances where maybe you have a US sub that would own a piece of a foreign subsidiary is well that's not owned by the foreign parent. Where previously you didn't have the CFC, now you do and if there's just a third party investor that has, let's say, 10% of the foreign sub, well now they're a US shareholder and have to pick up the income.

They did say that in the situation like this you didn't have to file the form 5471, which relieved a lot of taxpayers from the compliance burden. Frankly, a lot of structures are like this in where the taxpayers were not ready to file 5471 for a number of foreign subs that were never a CFC to begin with.

Then just to show the filing requirements for each category of filer. Again, this is where we were going back to what the IRS is going to look at. If you're checking a box that you're a category four, you'd better have every single schedule basically under the sun attached to that 5471. Which might require playing around with your tax softwares, because they still are not up-to-date with the new IRS filing requirements in having all these forms as part of your electronic filings. Even getting them to print sometimes can be a hassle and difficult. Even if one of the schedules is going to be blank, it should still be included and part of your filing. The point is that if there's a checkbox, you should see that schedule there. Again, even if you think that it's not relevant, or that there's nothing to be reported, it should still be included. Now we get to our third polling question.

Moderator: Polling Question

Matthew Halpern: I'm happy that 91% of you were listening and realize that there are five categories of filer now. The couple of people that said there's four I think are still looking at the 2017 rules. Okay, so to continue a little bit more with regards to the form. Bottom of page one of the 5471 Schedule A, this is listing the different classes of stock in the foreign corporation. Again, we were saying so you have common? Do you have preferred? Do you have a class A, a class B, ordinary? And the beginning of the period, how many shares were issued and outstanding? And the end of the period, how many are issued and outstanding?

I think going through this, if you have a brand new corporation generally speaking first time it's out there, I don't see that there's stock at the beginning of the year. You want to show that this was created, not necessarily in existence prior if it truly was a new corporation. So, generally to show none for the beginning, and then what it was by the end of the year.

In a situation in which you've acquired a company that's already been in existence, then definitely you're going to have a beginning of the year stock amount, and an end of the year stock amount. It goes back to saying well, if you're disposing or really if you're closing down a foreign corp, you wouldn't have an end of the year stock amount. But if you're just disposing of it, there would still be stock at the end of the foreign corporation's year, just you don't own it anymore.

Which then goes into page two Schedule B, which now we're really talking about, who are the US shareholders of the foreign corporation? Now where you're listing all the US shareholders and again, a US shareholder has to have 10% or more of the vote or value in the foreign corp. What's their name? What's their address? What type of stock does each one own? Again, one shareholder might own the common or class A, and the shareholder might own the preferred or class B. How many shares they had in the beginning and the end of the year? And also, what would be their pro rata share of Subpart F income, even if there's no Subpart F income?

I always do recommend putting down what percent they would pick up. That can also help decipher class A or class B, or your common and preferred. Which one owns it? Does the common shares actually own it and they're going to be picking up the income so that's why they have the percentage, and the preferred just have the vote and that's why they wouldn't actually pick up any Subpart F income to the extent that there was any?

Then it expanded the form, now we go to Schedule B Part Two, which now looks for all the direct shareholders of the CFC. If you have a simple structure, the US person owns 100% of the foreign corporation, part one, part two will look the same. But to the extent that you have a tiered structure or even a foreign corporation that you do not own 100%, you now have to start listing who the other direct owners are.

In many cases, it is a local foreigner, or a local foreign person, or a local foreign corporation that owns a piece of that foreign corporation, mostly due to local country rules, which require a resident to own maybe a piece. I think a big one that I typically see is in India. I think India requires you to have a local resident shareholder own part of that foreign corporation. Now if you didn't have that information on the form before, you'll have it now going forward. Now we're getting to our fourth polling question.

Moderator: Polling Question

Matthew Halpern: Do all direct shareholders of the foreign corp have to be reported? The answer now is yes. schedule B Part Two is where you would report all of the direct shareholders. Now to just maybe elaborate more on question number five.
Moderator: Are you a direct or indirect shareholder? A direct, B indirect, or C, neither? Please remember that in order to receive your CPE certificate, you must remain logged on for at least 100 minutes and respond to at least six polling questions. We're going to give our audience 10 more seconds to respond. Okay, I am now closing the poll and sharing the results.
Matthew Halpern: We have definitely a lot of people that are the direct shareholders, a couple or indirect, a couple neither, might be the non-filers. After Schedule B logically comes schedule C. Now, Schedule C has always been scheduled C, which is the income statement of the foreign corporation. Now they have this nice big important note at the top that says you have to report all the information in the functional currency, and in accordance with US GAAP. Many foreign corporations are not using the US GAAP. Many foreign corporations are using IFRS. To some extent, you might have to make adjustments to conform from IFRS reporting standards to US General Accounting Principles standards.

In some cases, your functional currency might be the US dollar. It might not necessarily be the local currency, but maybe for your reporting purposes whether it's for financial statements, you're using the US dollar already as the functional currency. Therefore, if your functional currency is the US dollar, the functional currency column will not be completed, but the US dollar would be completed. To the extent the functional currency is anything but the US dollar, then obviously you will be completing both columns.

One issue that I tend to see from time to time is what foreign exchange rate or FX rate are you using to convert the income statement? Many times I see people using the same FX rate to convert the income statement and the balance sheet together because they want their, when their trial balance converts from foreign to US, they want it to tie. Well, that's not generally the case. When you prepare your income statement, well, this is income earned over a period of time.

Many cases it's a calendar year, in some cases it's a fiscal year. You have to be aware of that time period and use a corresponding average exchange rate for that time period. To the extent that you have a brand new foreign corporation that might've been organized in the middle of the year, well, your average exchange rate wouldn't be for the calendar year or that fiscal year, but from the date of incorporation to the end of their tax year. Just something to think about with regards to what FX rates to use.

They've elaborated some of the sections a little bit more under the net income section lines 19 to 22. They've added new lines that show the income tax expense, current and deferred income taxes, so something that you did not have to normally break out before. Then they added other comprehensive income, which could be your foreign currency translation adjustments, maybe other income tax expenses. Just a couple of new lines to be wary of that might've been group somewhere else, are now out here. Even to point out lines eight A and B, you have your foreign currency transactions gain and losses for unrealized and realized transactions. A little bit more detail is coming out on this form now.

And again, showing the notes that I've already talked about in accordance with US GAAP, what the functional currency might be, using the average exchange rate for the period. Maybe looking at E&P adjustments. Depreciation might be one depending on how it's reported in the local country or how it should be reported under US GAAP principles. Then, also income tax expenses, the benefits or the deferred, and how that's going to be more broken out on the new schedule E-1, or actually E and then E-1.

Now getting to schedule E, if any of you are familiar with the 2017 Form 5471, it was much simpler. You had a little line that showed the country, maybe the FX rate and how much taxes were paid. Now it's elaborating a little bit more. You can have separate categories here, a little A on the top depending if it falls under passive, general, Subpart F which could be general, GILTI income, now the new 951(a). So, you might potentially have multiple Schedule Es depending on the categories of income.

They want to ask for, who's the name of the paying entity for which taxes or which the credit would be allowed? They're asking for their EINs and their reference numbers again, the countries that they will be paying taxes to, maybe it's more than one, what the tax periods are that they're reporting. Then they're looking at, well, what's the actual income that they're paying tax on? Maybe now you have the work to the local tax return in that foreign country and say, okay, what's my net income and does it correlate back to my schedule C, or is there other adjustments in that country that I'm not taking into account?

Maybe they have net operating losses that I can't see from this form that they're benefiting from, and therefore maybe they're not paying tax in that country due to losses in the prior years. They're asking for, what's the currency in which the tax is payable< which the way that I've been seeing it is, what's the actual local currency number, not the type of currency that it's being paid in. Because, then they're going to convert it to us dollars and show that in the next column's little I and little J.

They've also added part three, taxes for which a foreign tax credit is disallowed. To the extent maybe you were working in a boycott country, you might still have this filing requirement, but boycott income, boycott taxes are generally not being allowed as credits here. Now they have a new section to show, maybe if you had total $100 of tax, maybe $20 is to a boycott country that you're not allowed to deduct, any other AD you can.

Going back to the different notes, seeing where you can have maybe more than one Schedule E based on the categories of income that are below. The reason being is that these categories of incomes specifically tie back into the 1118 and the 1116 Forms, of which if anyone's familiar with the foreign tax credits, you are only allowed to take a credit in that particular basket correlating to that income. You cannot take a credit that's paid in one basket because you have income and another, or cross crediting. They're really trying to I think, identify specifically which basket the tax is related to, so that they can even look back and see how you're getting the credits in the US.

You can see a 951(a) category income, that's the new GILTI. You have foreign branch category income, which is now separate. Your passive category, your 901(j), your resourced taxes, your income resource by treaties if you have income tax treaties with those countries, and then your general category income.

Now, this was the new schedule that they came out with Schedule E-1, which now is looking at those particular taxes and reconciling, or keeping more of a record of the accumulated taxes. It's funny, because this is something that they probably could've used in all the prior years leading up to 2017, especially with this transition tax that we had coming in at the end of '17 where now you're picking up all your accumulated profits back to 1986. You were also able to get a portion of the foreign taxes since 1986, and now everyone was scrambling to figure out what are their EMP pools, what are the tax pools, when maybe had they had this form back then, you could've easily saw what your tax pools were. Even the IRS could've saw what your tax pools were over those periods of time. Now they came out with a form that relates to that.

The bottom half of this form has a new section regarding previously taxed EMP. Now to the extent that you have earnings that are being picked up in the US, these are deemed distributions under the new GILTI rules, or the prior Subpart F rules, and there were taxes associated to those categories of income. To the extent you're picking up the income now, the taxes are going to fall into these previously taxed EMP pools. Now you start reconciling that amongst the different categories of PTI, which you can see on the bottom the IRS is showing nine different categories of PTI. Where last year, even the prior years you would only see three categories, so they've tripled the amounts. You can see even specifically, they break out on the right four columns VI to IX, Subpart F, your Section 965(a) inclusions, the transition tax, your section 965(b) via negatives in the transition tax, and then you're GILTI inclusions all the way at the end in little IX.

Again, it's just reiterating here some of the notes going back to that. Maybe one point to mention is, they have these 959, which is the previously taxed income, little (c)(1), (2), and (3). We were looking at (c)(1) is relating to instances in which you have what would be 956 income or investments in US property from the foreign corporation, and therefore, you can have it in that category. And, where (c)(2) may be attributable to Subpart F income or the GILTI income. The reason being that they have (c)(1), (c)(2) and (c)(3) comes down to the ordering rules for when distributions have to come out. Maybe we'll get into a little bit more when we reach Schedule J.

Now we're up to schedule F, which is the balance sheet. Again, nice big important note at the top that says to be prepared in accordance with US GAAP principles unless you have DASTM corporations, which could be in certain particular countries that you have this hyper-inflated currencies. Again, not going to get into that here. The balance sheet itself, I don't believe that they've really added too many more new wines. I think from the past years to the new years, it is relatively straightforward.

Obviously, the big points is making sure that if it's a continuation of a filing, something that you've done in the past, your ending balance from the last year should tie to the beginning balance of this year, unless there might've been some audit adjustments or maybe last minute adjustments that you had to make. Definitely with regards to your total assets, your total liabilities and equity, they should tie, right? Assets equals liabilities and equity.

It's funny how you might look at a form like this and see a simple issue where 14 and 24 don't tie to one another, and your balance sheet is out of balance. To note, it really should not be out of balance because again, how you convert from foreign currency to US is based on the date that you're recognizing the balance sheet. So, based on the ending date of that fiscal year or that calendar year. These two columns as you see are just the beginning and ending. You're not seeing a conversion from functional currency to US dollars like you did on Schedule C. Reason being is that on Schedule C with the income statement, you're trying to track earnings and profits, and you're tracking earnings in profits in the functional currency, not in US dollars. The balance sheet again, is a point in time so they can do that in US dollars and you just can follow along with it.

Here, I'm just reiterating the points that I've been talking about with the different notes. One big thing, note three, to the extent that you have the information and you probably should, your assets or your depletable assets should be broken out by gross costs and accumulated depreciation. This might come even more into account now going forward, because you have to calculate your QBAI, or your qualified business asset investment. Because hey, the more QBAI you have, the bigger of a deduction you get against your GILTI income. It's important that to the extent you have these fixed tangible assets used for producing the GILTI, you want to make note of them. You want to make sure you have the proper adjusted basis to take a deduction on that. And to that, we're coming up with polling question number six.

Moderator: Polling Question

Matthew Halpern: I'm glad to see that most of you are answering correctly with Schedule C, and that's correct. Schedule C is the income statement. That's where you're reporting the foreign corp's income. Now as you continue through the form, you get two pages four and five, which is Schedule G. Again, Schedule G has always been around. It's been the questions to figure out what the ownership might be below the foreign corporation, and they're asking ... They've actually expanded it a lot further, and we'll go through maybe some particular questions.

Obviously you want to make sure that you answer all of the questions to the extent it asks you for an answer yes or no. Only one question might say, skip this question because you answered no, or if yes, and because the question above was no, then you can skip that question. But again, you want to make sure everything is answered. Not only has this schedule doubled in size, but there's another question that we'll get to. I think it's number 19, which just leads you back into the instructions, which there might be 20 more questions to go look at.

Big key points here. Again, if the foreign corp owned any other foreign partnerships 10% or more, you might have to include statements. If they own any foreign disregarded entities, you might have include statements. You might have to attach the actual 8858 behind the 5471 in showing how the disregarded entity's income is flowing into the foreign corporation's income. The first couple questions, that's where we went through number one, you know, do they own an interest in any trusts, disregarded entities, any base erosion payments now?

Now we're getting into B, whether or not they paid or accrued any of those payments and if so, how much were the payments? How much would the tax benefits? Pay or accrue any interest and royalties, for which there's no deductions under 267A? Now we're getting into this new question number six, which is claiming a foreign-derived intangible income deduction or FDII. FDII was another new export incentive basically, that came out with regards to USC corporations that could take benefit of a reduced tax rate on their net foreign income that meets certain documentation requirements and other qualifications.

It even goes a little bit further because it if you think about it, to the extent you're a US domestic C corporation owning a foreign corporation and it's controlled, it's a real way to party. They go on that you are still allowed an FDII deduction with transactions to related parties, but they have to meet further tests and further rules and further documentation requirements. What they did is, they added a couple of questions to find out a little bit more about that, and also how much of a deduction you might be claiming.

You might not be able to complete these questions right away. To the extent you're taking benefit of FDII, you might have to wait until all your calculations are done. Then they ask about any cost sharing arrangements, that can be very applicable. Transfer pricing, things of that nature. Then where we said see instructions to complete question 19, these questions are specifically asking when you're taking certain exceptions to Subpart F income and they relate to the various worksheets that you can find in the instructions to the form.

To just show at the top six, A, B, C and D, are you ... Is the US filer claiming any FDII deduction and if so, what was the amount of the sales, the services or the license income so that they could potentially track it and see whether or not you should be getting it deductions, see whether or not you're meeting the documentation requirements. There's a lot more disclosure here on this forum. That's what the IRS is going to use to evaluate whether or not they should audit the US filer in the forms.

Making sure the questions are complete, that they're accurate and that you have your support, and then you have your backup are ever more prevalent and ever more key now with regards to these files and these disclosures. Again, the IRS is very happy to issue these $10,000 civil penalties for failing to complete substantial portions of the form, which could be not answering any of the questions, because then they can't make their determination.

Going all the way down to the bottom, there was question 19. They're specifically asking for these corresponding codes now, to the extent that you're excluding Subpart F income. Whether it's under the high-tax exception, or if it's a de minimis exception. When you go to the instructions and you see for line 19, it's another two or three pages that gives you all the various things to look at and very specifically to even say well, does your worksheet number line 12 equal this, or is it more than that? If you're using those worksheets, it might be easier to see those questions when you're in a situation where you're trying to exclude Subpart F income.

Schedule H is used to report the current earnings and profits. And again, it's going really from book income or loss to E&P. Here is where you can put your E&P adjustments, your earnings and profits adjustments. They give you some lines for some that are more popular; capital gains and losses, depreciation, amortization, depletion, inventory adjustments, earned income taxes, foreign currency gains and losses and how you get from your book numbers to your actual E&P.

Again, they have these separate categories for each codes, so you could potentially have multiple Schedule E which you would hope if you summed up all the schedule ... Sorry, Schedule Hs. So, you have sum of multiple Schedule Hs, they would tie to what your E&P would be at 100%. Then at the very bottom, they want you to convert your E&P from functional currency to US dollar. A lot of time I see where the people were not converting it to US dollars.

Again, here's just going back to some of the notes, reiterating what the different categories of filers are, what some of the most common E&P adjustments might be. Big one at the bottom, 338(g) elections and types of purchase accounting when you're buying these new entities and these certain elections are put into place. That might be one of the bigger E&P adjustments that you see. And again, just making sure that you use the average rate because again, this is piggybacking the income, which was earned over a period of time in how you convert to US dollar.

Schedule I, which has always been around is looking for who are the US shareholders, their ID information, and how much Subpart F income have they received? How much 956 income, earnings invested in US property? Was there any dividends? Was there any exchange gains or losses that they have to pick out on previously taxed income? That's a big one this year, line six. Reason being is, again with the huge transition tax in 2017, a lot of companies, a lot of people have recognized income in 2017, but did not pay a dividend or pay a distribution yet to pay the tax on that income or even to recoup some of the money that they had to pay.

Now 2018 comes around, 2019 comes around, now is when some companies are paying out their distributions, they start pulling cash from the corporations to reimburse and repay the US shareholders. To the extent that the currency translations or the FX rates have changed that dramatically or that significantly over a year or two years, you could have some substantial exchange gains and losses. Case and point being, let's try something simple, US and UK. To the extent that you had a UK entity, the rate was maybe around 0.75 to one.

So, if the UK had $75 of income, you have $100 in the US and you're recognizing $100 in the US. So, let's say a year later, two years later you want to pay back those earnings and the same £75 that you picked up or recognized in '17, now the rate is one to one. Instead of it going from 75 to one, £75 equals $75 and even though you recognized $100 of income last year, well, you're only getting $75 of actual cash. Now you have a foreign currency translation loss of $25, right? You recognized $100 in 2017, but now you're only getting $75 in 2018, or 2019. To the extent you have that loss, well, you have an ordinary loss.

Maybe go on the flip side and you recognized $100 of income and '17, and now you're getting the cash and it's coming out in 2018 or 2019, and maybe now you're picking up $125. Well, now you have a $25 FX gain, which is treated as ordinary income. Maybe to a corporation it doesn't make a difference because you don't have different tax rates, you're all taxed at 21% now. But to an individual, to a partnership that's coming through, that maybe has some more substantial issues to you, you're paying graduated tax rate. You might pay up to 37% tax on that FX gain or loss.

Now it's really coming down to tracking one, the income that you recognized at some point in time, which could've been even Subpart F previously a long time ago. More importantly, it became transition tax now in 2017, and now what are you getting the actual distributions, and what's that worth in the later year? Again, this is some big thing to think about, and here is maybe where you would be putting that.

Now Schedule I-1 one came out, which is another separate schedule. This is the information for your global intangible low-taxed income. Everybody calls it your GILTI income. It's funny because they call it low-taxed income, yet it doesn't really matter what country you're working in even if it's a high-tax country, even like India, which might be in the 30% range, you have to recognize that income.

Obviously the IRS is not ... It's funny how they come up with these names, but then the actual rules and the regs don't really follow the name that they came out with. At least very recently in the last two to three weeks, the IRS did come out with some proposed regulations with regards to the GILTI, which might now allow what's called a high-tax exception on all of you are GILTI income, to the extent it exceeds 90% of the US corporate rate. The US corporations dropped from 35% to 21%, 90% of that is 18.9% so Hey, you got a whole bunch of countries now with effective tax rates in excess of 18.9%.

Maybe now all of a sudden we can get out of this GILTI income because it's not low-taxed, but it's really high-taxed. Therefore, it piggybacks now where only when you are operating in a country with a very low tax rate, one that's lower than the US's rate or 90% of the US's rate, That's the income that the IRS is looking for. That's what they want to tax. They don't want you to operate in a foreign country that has a 0% tax rate or a 5% tax rate, they say that's unfair. That's why they have this GILTI regime, they're trying to pick that up.

I have to admit, it does boggle me a little bit why there's a separate category considering that GILTI income is GILTI income, which is 951(a), and it cannot be anything else. My understanding with talks in the IRS is that even though they have these separate category codes, it was really not the intention of the IRS to have multiple schedules for each category. Even going back to Schedule H, Schedule E where they had those separate categories and frankly when you look at Schedule E, they have all the categories already on there. So, why do you need multiple schedules? Why do you make need to make it even worse?

That might be something that comes out in the future. Maybe in next year's release of the forums they get rid of the separate category. Right now that's just the word on the street, but who knows what'll happen next year? Ultimately what we're doing here is, on this Schedule I-1, we're going to be reporting in functional currency what our gross income is of the foreign corporation, and certain exclusions. Because, there are certain types of income that are not GILTI income.

ECI, Effectively Connected Income with the US trader business is not GILTI, because frankly they're paying tax in the US on that. Subpart F income is not GILTI income. Why? Well, you have the ordering rules. Subpart F income comes first, and then GILTI income. That's why it's excluded. High-tax exception income, which now might come in more prevalence if these proposed regs get finalized. Related party dividends, because those are excluded from GILTI. And, foreign oil and gas extraction income.

Then you're coming down to, what are your deductions allocable to your gross income? So again, going to just the GILTI. You're not going to take the deductions that are allocable to ECI, or the deductions that are allocable to Subpart F, or to the high-tax exception. You're really going to come down to what's called your net tested income, or your tested loss. That's going to be your gross income less the exclusions, less the deductions allocable to just the GILTI, and you're coming down to your net tested income or loss.

Lines seven, eight and nine, you're going to be listing out your tested for an income taxes so again, the income taxes specifically assigned to the GILTI income. Here's your qualified business asset investment or your QBAI. Again, here it will be reported at 100%. This is just going to be your average net basis of all the tangible fixed assets used in the production of the tested income.

Then you have a line for your interest expense. A big thing with regards to interest expense is again because of the tax reform, they changed the rules under 163(j) and not only do US corporations have to file it, but foreign corporations have to file it. So, to the extent that you're not a small tax payers, a small business payer, you might have to rely on the new 163(j) rules, and you might have a disallowance of interest expense. Another little monkey wrench to throw into everything, right?

Just reiterating some of the notes and some of the points, going back to the forms. Again, at the time that I had made this is where I was talking about the separate categories and why, that's why the IRS had it out there. Again, this is a little bit more recent that I'm here that wasn't really their intention to have all the separate categories. It might be something where you're really not going to see multiple Schedule I-1s or Schedule Es or Hs. I think having one across the line and showing all of the different categories on the one schedule would be sufficient. I think that's disclosing it in each basket basically.

Just before I get into the QBAI, one thing I did want to point out with regard to calculating your tested income here is, now what you have to do is, you have to basically perform a book to tax adjustment to come up with your tested income. Where previously you weren't doing an M-1, an M-3 to come up with your book-to-tax numbers, you were just going from book to E&P. Not only do you still have to go from book to E&P, but now you also have to go from book to tested income.

Therefore, now you might be looking at meals and entertainment and what's disallowed. Your accruals and making sure that they're paid within the certain time frame and any of the other items that you can think about. Basically what the IRS said is, you're going to treat the foreign corporation as if it's domestic, and therefore you basically do everything that a domestic corporation does.

There can be instances where your Schedule H, which is showing your earnings and profits will not tie to your schedule I-1, which is showing your tested income. Now that I'm even going through it more and more, I've seen issues where I've had negative E&P become positive tested income, again, due to certain accruals, and meals and entertainment expenses that aren't allowed or only 50% allowed. You might've been thinking, "Hey, I've got a loss on my books, I'm not going to have any tested income." The next thing you know, you start making these books tax adjustments, and now you have income to recognize. Uh-oh, maybe I wasn't planning for that.

Now I'll elaborate a little bit more on what QBAI is, again, you're qualified business asset investment. It's the average of the CFC's aggregate adjusted basis as of the close of each quarter of its taxable year in specified tangible property used in its trader business in the production of the tested income, and for which a deduction for depreciation is allowed under Section 167. Again, what's specified tangible property? Any tangible property used in the production of tested income.

If such property was used in both tested income and other income, the property must be prorated based on the income it generates. So, you can have assets, tangible assets that maybe helped produce Subpart F income and GILTI income, and therefore you have to prorate it 50:50 or whatever the rate amount would be to have the QBAI applied to the tested income. Or, maybe it's generating effectively connected income in the US and it's not included at all.

Furthermore, the depreciation is not necessarily going to follow what US makers rules are, but it will work under 168(g), which says using the alternative depreciation system or ADS, again, because ... And that's most of the time, maybe not every time because if you do have a foreign corp doing a lot of business in the US, it might not fall under the ADS system. ADS specifically says for companies in which are operating outside of the US and most of their property is outside of the US. So, it might come down to, where is your actual fixed assets? Where's the actual property?

Now, why is all of this support important? Well, you have to populate now this form 8992, your US shareholder calculation of GILTI, which is again 951(a). How do you populate the form 8992? Well, you need to either have the Schedule I-1 want completed, or you need to have enough information from the Schedule I-1 to prepare the 8992. You're going to use this form to calculate your GILTI income for each taxpayer that is a US shareholder of the CFC.

If a Form 5471 is filed on behalf of the taxpayer, such taxpayer should still request a copy of the Schedule I-1 in order to complete their Form 8992. Now, that might come into a situation in which you have multiple US shareholders but not one of them controls it, or maybe one of them controls it, but that's it. In that case, one person is filing on behalf of everybody else and you might not have it in front of you, and you'll need the information still to prepare your 8992 personally.

Now, just to show you here the 8992, this is the first page. At the top, it's going to show who's the person filing it or who's the shareholder. The sum of your pro rata share of tested income, the sum of your pro rata share of tested losses and what your net CFC tested income is, because the US shareholder is able to aggregate all of the tested income and all the tested of losses together, to come up with a net CFC tested income.

Then in part two, you're coming up with your net deemed intangible income return, which is going to be your net tested income, less 10% of the QBAI because the IRS said, "Well, of all of your assets, we're only going to let you take 10% of that as a deduction. But Furthermore, to the extent you have this thing called specified interest expense, we're going to reduce your QBAI, your 10% QBAI by the specified interest expense, come out with what your net deemed tangible income return is, and then ultimately subtract that to come up with your GILTI.

This is where the fun is where everything sums together, but further on Schedule A which is the second page is where you're really going to see all the different CFCs. If you have more than one and their basic information, their tested income, their tested losses, what your ... That's at 100%, then you get to little E, which is your pro rata share of the income or of the loss, your pro rata share of the QBAI, which is then 10% of that, your pro rata share of the interest expense and the specified interest expense. Then what it's going to do is aggregate the QBAI across all of the companies.

Now, one thing that you're looking at is anytime where you have a CFC with a tested boss, you will not have QBAI. The IRS basically said that if you have a loss, well, you're not going to get a QBAI deduction. So if you see a tested loss, I would not expect you to see any QBAI. With that being said, the QBAI from another corporation, maybe it's a very large manufacturing corporation that has a lot of tangible fixed assets, that QBAI can be used to aggregate all the other companies and overall reduce everything. I think the even give you a continuation sheet. This is just going back to some of the notes that were on the forum.

Just before we get to the seventh polling question, I did see a couple questions come through. Maybe try to answer them. I think I'm still doing good on time. The first question was, is the high-tax election can be made for all CFCs that are in the high-tax exception? To the extent that foreign corporation is in the high-tax exceptions, meaning their effective tax rate is going to be in excess of 18.9%, the US shareholder is the one that's actually making the election.

So, because the US shareholder is making the election for that foreign corporation, they actually have to attach a statement to the US tax return for, I believe it's for each entity that they're doing the election for. I don't believe, I'm going to say, I'm not sure off the top of my head if it's you do it once and it applies for everyone, or if it's on a CFC by CFC standpoint. My gut feeling right now is that you do it and it does apply for everyone, the reason being is again, because it's not at the US shareholder level and not at the CFC level.

And, I believe that when they came out now with these new proposed regulations with regards to the GILTI income, that is why they didn't just say, "Okay, let's have the high-tax exception across the board," because it might be detrimental to some people. Wherein some cases, you do the high-tax exception and it applies to everyone. You might have some high-tax companies and low tax companies and where you could've maybe utilized some of the low-taxed companies attributes against some of the high-taxed ones or vice versa, might not be as favorable anymore.

You might be losing out on some of the foreign taxes in those high-tax countries that you wanted to use because again, when you're taking the foreign tax credits, all of your GILTI income is going to be in one basket. You're not going to have Subpart F and GILTI together but to the extent that you do have a CFC in a very low tax jurisdiction and now you have to pick up that GILTI income but you have no taxes, well, now you're going to pay that in the US. So, maybe you want to take the CFC that's in a higher tax jurisdiction and you want to utilize their foreign taxes to help negate the CFC that pays very little to no taxes.

How long is this election for? Prior, I think under Subpart, for the Subpart rules, the election was a yearly election. You could make it one year and not the next. Again, in my readings in the new proposed regulations for GILTI, the high-tax election once it's elected, it remains in effect every single year. I think you can revoke and then once you revoke it, which you are able to do, you are not able to make the election again for five years without approval from the commissioner. That's also why you really want to think about if these proposed regs come into play, is it worth it to make the high-tax exception, because there is a five year rule if you were to negate it, and you don't want to make it again.

There was another question. I think we've already answered that. There was one more I'll go through, and then we'll continue on. Can tested losses be generated due to QBAI? For example, a CFC that has tested income, but QBAI creates a tested loss. As you can see if we go back to the schedule, even first, you start with the Schedule I-1, QBAI is below your income. Your tested income is line six, and then they specifically separate that out to show what your other amounts are, which are your income taxes and your QBAI.
Once you get to the 8992 and you start summing everything together, you have your income, then your losses to come up with your net CFC tested income. So, to the extent you do have a lot of QBAI and maybe no specified interest expense, you could have no GILTI inclusion, but it's not going to reduce what your net CFC tested income is. It's not an above the line deduction, it's more of a below the line type of deduction. All right, with that being said, we are now up the polling question number seven.

Moderator: Polling Question

Matthew Halpern: Yes and no. I might not have clearly stated it but, the 8992 is actually not part of the 5471. It's a completely separate form, clearly because it's a Form 8992 as opposed to a Form 5471. And while one is part of the other, it's usually a schedule or a sub schedule, not a whole new form.

Okay, now we're up to Schedule J. This is the accumulated earnings and profits of the controlled foreign corporation. This schedule has expanded tremendously. It used to be one page, now it's two pages. This was very big, again with the transition tax, because in many cases you saw a very large E&P number that's been carrying over from yesterday year and all US shareholders were thinking, "Oh boy, I have to bring that back now? What are you talking about?"

So, many practitioners, many clients, many companies started doing E&P studies, they started scrubbing their E&P going back to whether it be 1986 or going back to inception and seeing, okay, well is this E&P correct? Should it have been different? Has there been any distributions that we picked up previously and were they just not accounted for on the form? And, what's the right number? Also, because many people wanted to reduce their E&P or maybe have losses, because then there wouldn't be any income inclusion.

Now hopefully all those people have scrubbed their E&P, they know what it was at the end of '17 and now going forward, they'll make sure they pay a little bit more attention to it when they were completing this schedule when they're going forward. Because again, now the IRS, they have the E&P, they have the accumulated taxes, they know what the numbers are, they know what you're going to be picking up. So, they're making us give them the information.

They broke out, on here you have your 959(c)(3) balances. That's the first three columns, and then you'll go over to your previously taxed E&P which people used to call PTI, now the IRS is calling PTEP, PTEP. You'll start with your beginning balances to the extent you have any. Now, if you had a transition tax, if you had the 965 in 2017, I wouldn't expect you to have a beginning balance in columns A to D because you now would've picked it up, and it now became PTEP. It now became the PTI amounts.

Going forward, they broke it out. You have little A, post 2017 E&P and again, that's because of the '17 reformat. Where note two is, line three, what's your current year E&P or deficit? They have a lot more lines for different adjustments to your E&P, what's attributable to distributions? What's from lower tier foreign corps? Are there adjustments? And now, these reclassifications.

Now they're really showing more of a line, row eight, amounts that are being reclassified to 959(c)(2) two from (c)(3). And again, this is the ordering rules that I was talking about previously, is the way that you're classifying your income is that it starts in (c)(3), goes to (c)(2), and then it goes to (c)(1. But the way that distributions come out, is one, two, three. It goes into the buckets three, two one, but when you make the distributions, it comes out one, two, three.

Again, just reiterating some of the points. Going back to note six here and as you can see, it's making more sense, why have multiple categories, multiple schedules when they're all listed out? You see them specifically here on the second page. Here's all your previously taxed E&P. The first page under 959 (c)(1) talked about your earnings in US property, then you had your 965(a), your 965 (b), here's your GILTI under (c)(1), excess invested earnings in excess passive assets. Then you get to (c)(2), your Subpart F income, your gross 965(a), your loss 965(b), and you're GILTI 951(a). Again, you're already showing all the breakouts of the different PTIs and the totals.

One of the other changes when they came out with the 959 final proposed and final regulations is, there were the original ordering rules of how you take distributions like I said, one, two, three. Well, the only exception is that due to the whole transition tax, they said, "Well, 965 comes first above anything else. So, because we had this whole big transition tax period and this whole area, now we're going to make you take ... When you take distributions, it's going to come out of your 965 PTI buckets first. And, only once you exhaust those buckets, can you then go into the other buckets, whether it be Subpart F income or the GILTI income."

Just breaking out again, showing what your beginning amount PTI balances are. Again, to the extent you had transition tax, I would really expect to see them. If it wasn't 956 income, so in US property, I'd probably expect to see them in column seven, VII or column eight, VIII, Those would be your beginning balances. Now you're having new additions into nine little IX for your GILTI, or even if you had Subpart F in column six or VI.

So again, they have the different baskets on their 959(c)(1), which has to deal with the 956 rules, then you have only the four baskets under (c)(2), which is just dealing with income that's been previously included in the US shareholder's taxable income. Again, that's what PTI is, previously tax income. It means you picked up the income and you paid tax on it. Makes sense, right? The whole point is that now because when you're taking these distributions, you don't want to pay tax on the distributions again. That's why it becomes PTI.

Unfortunately, you have these other nuances that you have to look into such as foreign currency translation gains and losses, and potentially foreign tax withholdings. Now you're dealing with dividend distributions from a local countries perspective which is saying, "Well, I'm paying the US company a dividend," and maybe there's a withholding tax on that. Well, one thing is, how do I even take credit for that if I'm not picking up the income again? Again, a little bit too complex for this training. Look at 960. I'm going to say, look at the 960 rules. That will tell you what to do with the withholding taxes on previously taxed income.

Schedule M, this is a big important schedule. This deals with all the related party transactions. If you know what Subpart F income is, generally speaking it's when you have related party sales, related party service income, things of that nature and they're typically done outside of the country that the foreign corp is incorporated in. Again, putting all these transactions down between the foreign corp and the US filer or the US shareholder, maybe between other domestic corporations or partnerships that filer owns, or other foreign corps or partnerships owned by the filer, or other shareholders, or how the different columns go.

At the top are more of the income items, the sales of stock, the cost sharing, compensation received. That's the income coming in to the foreign corporations, where down below is more of the expenses from the foreign corp, which could be the income to the US shareholder or the income to the other foreign corp. That's why you have to disclose all these transactions because again, the IRS is trying to see, well did you have a related party transaction that could've been Subpart F? And if you did, are you taking an exception to it? Could it be the active trader business exception, something to that nature?

They expanded the bottom to include accounts payable and accounts receivable between the entities. That was not really there prior. They always had the amounts borrowed and the amounts loan. And again, they say put the maximum amount of those amounts borrowed or amount loaned during the year which again, things can go up, they can go down, there's payments and repayments. So, it might not necessarily tie to your balance sheet unless let's say at 1231 was when the loan was the highest, or when the borrowing was the highest. It doesn't necessarily need to tie.

Why do I say the balance sheet? Because Schedule M is reported US dollar. It's funny because this schedule will go back and forth where you have basic information and then you start with Schedule C, which has both functional currency and US dollar, and then you go to schedule F, which has just US dollar, but then Schedule E has both functional currency and US dollar. Schedule H has both, Schedule J is in functional currency, it's not in US dollar Schedule J, that's in functional currency. I want to point that out. But then schedule M is in US dollar again. You go back to the top it says, what's the exchange rate that you used to convert? and again, that should be the average exchange rate.

Other things to point out is that if you start seeing amounts borrowed or amounts loaned and they've been around year after year, and it doesn't look like they're getting paid or they keep going up, potentially is their interest being accrued? Is their interest being paid on those loans? Maybe they're not true loans. Maybe the debt is really equity, because you don't have stated documents, stated terms, repayment. That' something to think about, something to look at. Again, even the IRS might look and see, well, if you have these amounts borrowed and loaned and there's no interest received and interest paid, is it really a liability? Is it really debt? They might want to come back and say no, it's equity in therefore it shouldn't be the liability. That's just something to think about.

Schedule O. If you go all the way back to the categories of filer and the different schedules that are required with each, Schedule O is only for category two and category three. And again, what's two and three? Those are a transactional categories. They're used to report the acquisitions, the dispositions, the organization, reorgs of those foreign corporations. The way I like to say it is, Schedule O kind of tells the story of how the US person acquired or disposed of their interest, or how they became subject to the 5471 filing in the first place.

Going down to just my example, A acquired 100% interest in a CFC during November of 2018, but the fiscal year end of the CFC is April 2019. The third bullet point which is saying, when is the Schedule O required? It's required in the year of the acquisition, or the disposition. In the example, we said they acquired it in '18, but the fiscal year's in 19. So, typically you wouldn't report the 5471 until 2019, because that's the year ending in the US shareholder's year if they're both, if it's calendar. I've had instances where people have missed doing a 5471, simply because they had a Schedule O filing requirement due to the acquisition or disposition of the entity. Something to be wary about. That's where a lot of penalties might come out.

It's just showing at the top again, name, people, what's the foreign corp? Part one is used by the US officers or directors so again, part one is only used for category two filers. And that's again, who are the US officers or directors of the foreign corp? And, this is only disclosed when you have a category three filer, which could be somebody else that's the category three filer. Maybe your US officer or director doesn't even know it. There's got to be some line of communication in there when you have new people coming in to ensure that the US officers and directors are covered, at least that you're reporting on their behalf.

Part two is only required for category three filers. Again, a US person could be both a two and a three if they're an officer or director, it generally comes down to individuals. And again, who can be an officer or a director. Well, it can't be a corporation, right? It has to be an individual. They're the only ones that can be an officer or a director. You can't have a corp be a director. It could appoint someone but again, it becomes a specific person.

In part two they're asking for who's the general shareholder, their name, their address, the type of return, form number they file, when they filed it? That's for the last US income tax return. So, if they fall one in 2017, because we're doing 2018 now. What's the last return that they filed? Where did they file it? At what IRS service center? And then, C is asking the date if any, that the shareholder last filed an information return under Section 6046 for the foreign corp.

That question is basically asking, when is the last time you follow a 5471 if at all, or if any? Point being is if you have a category three filer that only acquired 12% interest but it's not a CFC, you don't have an every year filer, but you had that filing maybe 10 years ago. So, 10 years ago was the last time they filed a 5471. Now 2018, they disposed of it. They said, "You know what? I don't want to deal with GILTI anymore, I want to sell my foreign corp." You're going to tell them, "Okay, 10 years ago was the last time I filed. I only had 10%, now I'm getting rid of my 10% and you're seeing it here."

They list on the bottom again, who are the US people that are officers or directors? Sometimes this schedule can be more repetitive, you keep disclosing the same kind of information over and over again. Section C is, how did you acquire the stock, class, date, method, number of shares and are you direct, indirect, or is it through constructive ownership? The second part is, how much did you pay? How much was given? Who did you buy it from? Did you buy it directly from the corp because it's brand new, or did you buy it from somebody else that was selling their share? Section D is for the dispositions, looking at the same aspects as acquisitions.

One thing to note and think about, if you're doing a 5471 because you acquired a company and you exchanged cash or property in exchange for stock and now you own more than 10%, you might have a 926 filing requirement as well, transfers to a foreign corp. That's also something that they're going to look at, the IRS. If you had this Schedule O because you acquired a company and you're a US corporation, do you have a 926 also? That also comes with a 10% penalty of the amount transferred. Again, another point to just think about.

With regards to indirect acquisitions, you want to state how the direct person acquired the stock, but ultimately you're putting your indirect portion of that. So, if the direct person acquired it for $10 million but you only own 10%, then I only paid $1 million technically for it and I only got 10% of the stock, even though you weren't maybe specifically the one transferring the cash. Section E is for organizations and reorganizations of the foreign corp. Just be wary of Section F with the additional information. Maybe if there was other reorganizations in the last four years, you have to add more details or maybe attach an org chart as in little C. Again, just reiterating it, reporting any transfers of property to the foreign corp. If it gets organized, you might have a 926.

This was one of the last new schedules that they came out with, which was Schedule P. Schedule P, I think is, it basically piggybacks Schedule J, but just the previously taxed E&P part. So, just Schedule J(e) is basically what schedule P is. It's going to look very similar and the same if you have one shareholder. The difference is if you have multiple shareholders of the foreign corp, you're going to have a Schedule P for each US shareholder. Again, it really mimics the Schedule J and has all the P-type accounts on there. Schedule J is 100%, that's at the foreign corp level, Schedule P is basically at the US shareholder level. Now we're up to our last polling question, number eight.

Moderator: Polling Question

Matthew Halpern: I have to admit, I'm not surprised that some people would say that they're not comfortable at all. I'm happy that some people are somewhat comfortable and a few are a little bit more, you know, very comfortable at it. Overall, I know that this was a high level explanation of going through the preparation of the form. I'm not getting into all the little nitty gritty, especially in the amount of allotted time that we had.

I'm hoping that you definitely got a little bit more of an understanding of the form and can see how complex it is, how much information is required and needed to file and complete the form. And ultimately, help to make sure that one, you're not going to get hit with those $10,000 penalties by the IRS and two, the more you do it, the better it will become, the fresher it will be in your head and overall, you'll get a better comfort level with it.

Frankly, I do this for a living so I get very comfortable with doing the forms and getting a full understanding of them. Even with the Tax Reform Act and the change, there are still nuances and little items that we're dealing with that are unanswered. It's still going to take time, whether it be a year, two years, three years for the IRS to come out with all the final regulations. They've been doing a better job issuing more proposed and then finalizing the regs in the last year, but there's been a ton of changes.

With that being said, I just want to see if anybody else has any questions. I do you see two more that did come through. One, does the Subpart F income recapture include it in the GILTI? Again going back to the Schedule J, there are specific ordering rules when it comes to the recapture of income. I'm not sure if it's from the ... you're talking about the dividend distributions, but you would have one, you're looking at (c)(1). So, to the extent you have 956 income, there is no Subpart F in that section and that either of those baskets under E-1 E-2, it's talking strictly about earnings and property, and then 965, which comes first.

To the extent that you're then (c)(2) and you have the Subpart F income, again, first you have to deal with 965 and recapture that, then you would go, then I believe it's Subpart F income, and then last would be GILTI income as far as how the ordering rules go. With regards to the previously taxed income, I know they came out with proposed regulations. I don't recall if they finalize those yet, but they did come out with more information on the specific ordering rules. I definitely say go take a look at that.

Another question came through about the amounts borrowed, then the amounts loaned. What if the loan is settled at the end of the year? Does the balance need to be report on Schedule M when the loan existed during the year? The answer is yes, it still needs to be reported. As you can see, it's hidden by my notes but in parentheses it says, enter the maximum amount, maximum loan balance during the year, during the year. It's not looking for an end of the year balance, it's not looking for a beginning of the year balance, it's looking for what was the maximum balance during the year? It is very possible that you had the loan, they they operated, they generated income and they paid it back by the end of the year, what was the highest balance? That's what you're disclosing.

I'll just leave it open to see if anybody else has any other questions. So, another question came through. Does a 2018 Schedule I-1 need to be filed for a CFC? With an 11/30 year end, they are not subject to GILTI until 2019. My feeling is that we have somewhat of a trick question here. These are my thoughts, but there's a code, there's a proposed regulation out there. It's been out there for a very long time and I don't think it's ever been finalized yet. But the statute is out there, and it's under 898.

What 898 says is when you have a US shareholder with one tax year and a foreign corporation with a different tax year, once you have a 951(a) inclusion, Subpart F, you have to conform the foreign corporation's tax year to the majority US shareholder's tax year. Now, a specific situation that I've been seeing is US calendar year C corporation with a 100% owned foreign India subsidiary with a March 31 year end. I would agree that they do not have to pick up the transition tax in 2017 because they would pick it up in 2018, but now that they've had this 951(a) inclusion, which 965 is an increase in your 951(a) amount, so an increasing your Subpart F income.

What the transition tax did is, it basically said, "Well, now we're giving you a Subpart F inclusion, and now per the rules of 898, now you have to conform your foreign corporation to the US corporation's tax year." Okay great, so what does that mean? Now I get to 2018, now I have my 965 inclusion, and now I have to conform it to a 2018 calendar year and therefore, I now have a GILTI inclusion in the same year. You can take it a little bit at face value again, because there's a proposed reg out there. It's never been finalized but what the statute says, is you have to conform the company's year. What we've been dealing with, with some of our clients is not only having a transition tax inclusion, but also having a GILTI inclusion and now going forward, you have both. So, yes you would have to then complete the Schedule I-1 going forward.

Another question came in that said, if you had used the higher 965 E&P balance on November 2nd from last year, what would the beginning of the year E&P for 2018 show? Would you have a negative balance on Schedule J? I would say that you would have a ... From last year, you would've had two balances. You probably would've had a higher balance from the 965 amount and then you had the loss of E&P for the last two months of the year. So going forward, and I think it's part of the reason, this is why they still have the post 1986 column on Schedule J. Then, yes I would see a negative amount in the beginning column, it was B or C. I'll pull it up, little B, post 1986 undistributed earnings. I can see your two month period of the loss of E&P being there, while the higher E&P being in the (c)(2) column under 965(a) because then when you net it across, you're going to come up with what your net E&P was at the end of the year.

One question came up with line 20 of Schedule C. [inaudible 01:53:59] go back and see which line this is. Unusual, or infrequently occurring items. Yes, I do have clients that use the unusual or infrequently occurring items. I don't recall off the top of my head what those items are unfortunately, but I have seen people use them when there's these one time events that are affecting or changing what their book income might be. It could maybe even be a reconciliation. In the past, maybe last year you had disclosed what your book income was and then you made a prior period adjustment, where do you want to put the prior period adjustment? Maybe in unusual or infrequently occurring items? I could see that as being one.

Then there was a further clarification on the conformity under Section 898. Once they conform to the US shareholder's tax year end, does it need to complete Schedule I for 2018? Again, if you are a certain category of filer, you do want to make sure that every schedule is included in the tax return, even if it may be blank. When we were doing the transition tax last year, we weren't showing that as Subpart F income on Schedule I because we felt that it wasn't true Subpart F income. Yes the code said it was an increase in your 951(a) but because there are differences between Subpart F and 965, and again, Subpart F income came before 965 and it was also in existence prior to 965. We didn't use that on the Schedule I as the line. Again, it should always still be completed. You should always list your category four and five shareholders, the EIN numbers and answer the questions that are applicable.

And just to let anybody know, these slides are available. I believe if you look to the right bar of the WebEx, there's a tab called handouts. There is where you can download a PDF of the slides that we've gone through today, so that they can be very helpful once you get to actually preparing, or reviewing, or looking at the forms. With that being said, we've used up all of our time.

^{Transcribed by Rev.com}