Increase Enforcement of IRC Section 6038B Disclosure Requirements

The IRS Large Business and International (LB&I) division publicly announced that it will increase enforcement of IRC section 6038B disclosure requirement. A formal training material has been distributed to field agents, and each entity needs to ensure that it is in compliance of the disclosure requirement. https://www.irs.gov/pub/int_practice_units/fen9433_01_12r.pdf

Here is a quick summary of IRC section 6038B.

Under IRC section 6038B, a disclosure must be made with annual return when:

(1) US person (i.e. individuals, corporations, estates and trusts) transfer property to a foreign corporation in exchange for sections 332, 351, 354, 355, 356 or 361 (mainly stock related exchanges – see additional info below);
(2) US person contributes property to a foreign partnership; or
(3) US person makes a distribution under 336 to a person who is not a US person

Failure to comply with the reporting requirement may result in a penalty equal to 10 percent of the value of transferred property up to $100,000. Please ensure that you file Form 926 to fulfill the 6038B reporting requirement when applicable.

332 – liquidation
351 - in exchange for stock
354 – Reorganization
355 – Distribution
356 – Additional consideration
361 – nontaxable distribution
721 – partnership contribution
336 – property distribution in a complete liquidation

If you have any question regarding this update, please contact our office.