Form 8865: Categories of Required Filers

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For taxpayers who are required to file IRS Form 8865 (“Return of U.S. Persons with Respect to Certain Foreign partnerships”) is used to report required information under IRC section 6038 (reporting with respect to controlled foreign partnerships), IRC section 6038B (reporting of transfers to foreign partnerships), and IRC section 6046A (reporting of acquisitions, dispositions, and changes in foreign partnership interests). For purposes of these requirements, a “foreign partnership” is defined to be a partnership that is not created or organized in the United States or under the law of the United States or of any state.

Since the penalties for the failure to accurately file Form 8865 can be severe, it is important to recognize who is required to file the Form. This article examines which taxpayers are generally required to file the Form, and explores the four categories of filers who must report the required information.

Who Must File Form 8865

U.S. persons who meet one or more of the four categories of filers (explained below) must complete and file Form 8865. It is important to remember that the Form may require the taxpayer to file additional schedules and other information (the additional filing information will usually depend upon the taxpayer’s filing category). You should consult an international tax attorney on what information should be disclosed on Form 8865, including additional schedules and attachments.

Four Categories of Filers

Category 1 Filers

A category 1 filer is a U.S. person who controls a foreign partnership at any time during the partnership’s tax year. “Control” of a partnership is defined to be ownership of more than a 50% interest in the partnership. Under IRS rules, a 50% interest in a partnership is an interest equal to 50% of the capital, 50% of the profits, or 50% of the deductions or losses. Additionally, for purposes of determining a 50% interest, highly complex IRS indirect and constructive ownership rules may apply.

The various partnership control interest rules mean that it is possible to have multiple Category 1 filer in a foreign partnership.

Category 2 Filers

A category 2 filer is a U.S. person, who at any time during the foreign partnership’s tax-year, owned a 10% or greater interest in the partnership while the partnership was controlled by U.S. persons each owning at least 10% interests. A 10% interest in a partnership is an interest equal to 10% of the capital, 10% of the profits, or 10% of the deductions or losses. In addition, indirect and constructive ownership rules also apply to determining whether there is a 10% interest.

An interesting exception may apply where a partnership has a category 1 filer at any time during a tax year. You will need to consult an international tax attorney on whether such exception applies in your case and what are the consequences.

Category 3 Filers

A Category 3 filer is defined to be a U.S. person, who in exchange for an interest in the partnership, contributed property during that person’s tax year to a foreign partnership (an IRC section 721 transfer), if that person meets one of two requirements: 1) The taxpayer either owned, directly or constructively, at least a 10% interest in the foreign partnership immediately after the transfer, or 2) The value of the property contributed, when added to the value of any other property contributed to the partnership by such person (or related persons under IRS rules), during the 12-month period ending on the date of transfer, exceeded $100,000.

Additionally, U.S. persons who previously transferred appreciated property to the partnership (and were required to report that contribution under section 6038B) will qualify as category 3 filers if the foreign partnership disposed of such property while the U.S. person remained a direct or indirect partner in the partnership.

Furthermore, if a domestic (US) partnership contributes property to a foreign partnership, the domestic partnership’s partners are deemed to have transferred a proportionate share of the contributed property to the foreign partnership. The domestic partners, however, are not likely to be required to report the transfer provided that the domestic partnership files Form 8865 and properly reports all the required information with respect to the contribution.

Category 4 Filers

A Category 4 filer is a U.S. person who has a reportable event under IRC section 6046A during that person’s tax year. Under section 6046A, there are three categories of reportable events: acquisitions, changes in proportional interests, and dispositions.

A. Acquisitions

A U.S. person who acquires a foreign partnership interest has a reportable event if: 1) That person did not previously own a 10% or greater direct interest in the partnership and as a result of the acquisition, the person now owns a 10% or greater direct interest in the partnership (for example, from 8% to 10%). For purposes of this rule, an acquisition includes an increase in a person’s “direct proportional interest” (defined below); or 2) Compared to the person’s direct interest when the person last had a reportable event, after the acquisition, the person’s direct interest has now increased by at least 10% (for example, from a 13% interest to a 23% interest).

B. Changes in a Proportional Interest

A partner’s proportional interest in a foreign partnership can change as a result of changes in other partners’ interests. Some examples include when another partner withdraws from a partnership, or by operation of the partnership agreement (i.e., a partnership agreement may state that a partner’s interest in profits will change on a set date or when the partnership has earned a specified amount of profits, thus changing the proportional interest in the partnership).

C. Dispositions

A U.S. person who disposes of a foreign partnership interest has a reportable event if: 1) The person previously owned a 10% or greater direct interest in the partnership before a disposition, and as a result of the disposition, the person now owns less than a 10% direct interest (for example, from 10% to 9%). (A disposition also includes a decrease in a person’s direct proportional interest for purposes of this rule); or 2) Compared to the person’s direct interest when the person last had a reportable event, after the disposition the person’s direct interest has now decreased by at least 10% (for example, from a 22% interest to a 12% interest).

Exemptions

While this is outside of the scope of this essay, I want to mention that there are certain exemptions from Form 8865 filing requirements may be applicable depending upon the facts of a US person’s case. You need to consult an international tax attorney to determine whether your situation is compatible with any of the exemption categories.

Contact Sherayzen Law Office for Legal Help With Form 8865

The filing of Form 8865 involves complex legal and tax issues, and this article only attempts to provide a very general background information that should not be relied upon in making the determination of your specific situation. Rather, you should contact Sherayzen Law Office for legal help with this issue. Our experienced international tax firm will help you determine whether you need to file Form 8865, and help you to properly draft and file the Form. We can also help you with any voluntary disclosure matters involving Form 8865.

Limited Liability Limited Partnerships

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A Limited Liability Limited Partnership (LLLP) is a relatively recent modification of a traditional limited partnership, and about half of the states in the U.S. have adopted statutes for their formation. In this article, I will highlight some of the most prominent features of the LLLPs.

As I already mentioned above, LLLPs are a modification of limited partnerships. By definition, limited partnerships consist of one or more general partners, and one or more limited partners. In a standard limited partnership, the general partners have joint and several liability for the debts and obligations of the limited partnership, whereas limited partners will not have such liability for these debts and obligations beyond any amount of their capital contributions.

In contrast, in an LLLP, general partners will also have limited liability for the debts and obligations of the limited partnership that arise during the time that the LLLP form is elected. Thus, general partners in an LLLP may have significantly less liability, and are not likely to be personally liable for the debts and obligations of the partnership; rather, the liability of a general partner is limited to the amount of his capital contribution.

Despite the differences in the liability, LLLPs are usually managed in a manner similar to the LPs – in an LLLP, general partners usually manage the partnership, while limited partners only have a financial interest. Similarly, tax-wise, an LLLP election has no effect on the pass-through taxation aspects of a partnership.

As noted above, only about half the states allow for an LLLP form; therefore, you need to check your local statutes to see if you have an option to make such an election. In practice, LLLPs are often formed by converting existing limited partnerships into such a form (in order to take advantage of the benefits of an LLLP).

Contact Sherayzen Law Office NOW For Legal and Tax Help With Partnerships

Forming partnerships, LLPs, LLLPs, and other similar business entities involve complex issues, and often legal issues arise that necessitate experienced planning beyond merely the formation of an entity. This article only attempts to provide a general background information that should not be relied upon in making the determination of your specific situation. Please contact Sherayzen Law Office for legal help with this issue. Our experienced business firm will guide you through the complex web of rules concerning business partnerships and their various forms (general, LPs, LLLPs, et cetera).

Underpayment and Overpayment Interest Rates for the First Quarter of 2012

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On November 29, 2011, the Internal Revenue Service announced that underpayment and overpayment interest rates will remain the same for the calendar quarter beginning January 1, 2012. The rates will be:

  • three (3) percent for overpayments (two (2) percent in the case of a corporation)
  • three (3) percent for underpayments
  • five (5) percent for large corporate underpayments
  • one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points. Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points.

The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.

Notice 88-59, 1988-1 C.B. 546, announced that, in determining the quarterly interest rates to be used for overpayments and underpayments of tax under section 6621, the Internal Revenue Service will use the federal short-term rate based on daily compounding because that rate is most consistent with section 6621 which, pursuant to section 6622, is subject to daily compounding.

Interest factors for daily compound interest for annual rates of 0.5 percent are published in Appendix A of Revenue Ruling 2011-32. Interest factors for daily compound interest for annual rates of 2 percent, 3 percent and 5 percent are published in Tables 7, 9, 11, and 15 of Rev. Proc. 95-17, 1995-1 C.B. 561, 563, 565, and 569.

Form 8938 New Foreign Asset Reporting Requirements: Introduction

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In its continuous efforts to combat tax evasion, the IRS imposed a brand-new foreign asset reporting requirements on U.S. persons.  For the very first time, starting tax year 2011 (with certain exceptions), certain individuals must file the new Form 8938 to report the ownership of specified foreign financial assets if the total value of those assets exceeds an applicable threshold amount.

This threshold amount differs depending on the particular situation of a U.S. person – whether an individual lives in the United States, is married and filing a joint income tax return, et cetera.

The “specified foreign financial assets” include any financial account maintained by foreign financial institution and certain investment assets such as stock, securities or any other interest in a foreign entity and any financial instrument or contract with an issuer or counterparty who is not a U.S. person.

Based on this description alone, it becomes obvious that the new Form is likely to impose a higher reporting burden than the famous FBARs.   Note that Form 8938 does not replace the FBAR reporting requirements – i.e. the FBARs must still be filed by June 30 (former FBAR due date) of a relevant year in addition to Form 8938.

Unlike the FBAR, Form 8938 is attached to the filer’s annual tax return and must be filed by the due date (including extensions) for that return.  An annual return includes the following forms: Form 1040, Form 1120, Form 1065, Form 1120-F, Form 1120-S, and Form 1040NR (of a nonresident alien who is a bona fide resident of Puerto Rico or American Samoa).

Note that Form 8938 imposes new failure-to-file and accuracy-related penalties, which are very severe and may be combined with other penalties.  Moreover, failure to file an accurate Form 8938 may extend the statute of limitations for all or a part of your income tax return until three years after the date on which you file Form 8938.

Note that, pursuant to Notice 2011-55, the IRS provides for a transitional rule for the year 2011 which may defer your obligation to file Form 8938 until the tax year 2012 as long as you satisfy all of the three requirements of the transitional rule.

Contact Sherayzen Law Office For Legal Help With Form 8938

This article highlights a few features of the new Form 8938 and it should not be relied upon in determining whether you are obligated to file Form 8938.  Form 8938 is fairly complex and you need professional help to determine how to comply with the Form’s requirements.

If you have any questions with respect to Form 8938, please contact Sherayzen Law Office.  Our experienced international tax firm will help you determine whether you must file Form 8938 and help you draft and file the form with your tax return in order to avoid the heavy IRS penalties for non-compliance.

Limited Liability Partnerships (LLPs)

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The term limited liability partnership (“LLP”) is often used in public discourse- often erroneously. What exactly is an LLP, and what are its features compared to a traditional, general partnership? This article will attempt to answer that question and provide you with some basic understanding of LLPs.

Please note that this article is intended to only cover the general aspects of LLPs- the majority of states currently allow for the LLP form, and state laws vary widely, so applicable state laws for specifics relating to your particular situation will need to be consulted.

Advantages of an LLP

In general, an LLP is a type of partnership in which some or all partners may have limited liability, meaning that partners are not liable for damages resulting from negligence, fraud, malpractice or similar misconduct committed by another partner. This is an essential difference between LLPs and general (unlimited) partnerships. This feature thus provides an important advantage that the corporate form provides for shareholders.

It should be noted, partners in an LLP are still personally liable for any negligence, fraud, malpractice or similar misconduct that they themselves commit.

Another advantage of an LLP is that LLP profits are distributed among the partners for taxation purposes under pass-through rules, and thus are not subject to double-taxation.

Finally, an advantage of LLPs compared to LLCs is that in states that impose franchise taxes on operations, LLPs will not have to pay such taxes, whereas LLCs may have to, depending upon state law.

Remember, whether an LLP is an advantageous form of business for you will depend on your particular circumstances. What appears to be an advantage in one situation may actually become a disadvantage in another. Therefore, you need to consult with a business and tax attorney before deciding whether an LLP is the most convenient form for your particular business.

Certain Aspects of LLPs

LLPs are often utilized by service providers, such as physicians, attorneys, architects, accountants and similar professionals. Articles of LLP must be filed with the Secretary of State of applicable states that allow for LLP formation.

When an LLP is formed, states either require the firm’s name to include the term “limited liability partnership” or “registered limited liability partnership”, or applicable abbreviations, in order to properly inform the public as to its business form.

Some Aspects of Various LLP Statutes

As noted above, statutes differ widely, and should be examined for your particular situation.

Despite the general LLP limited liability rule, certain states may scale back this feature to some degree. For example, in some states, LLP partners may still be jointly and severally liable for matters relating to contractual liability of the LLP.

In general, some states provide for transformation of an unlimited partnership into an LLP. A number of states also allow for only majority- and not unanimous consent- of partners of a general partnerships to become an LLP.

Contact Sherayzen Law Office NOW for Legal and Tax Help For Your Business

The formation of partnerships, limited liability partnerships and other business and tax matters can involve complex issues and knowledge of applicable state and Federal laws, and this article only attempts to provide a very general background information that should not be relied upon in making the determination of your specific situation. Rather, you should contact Sherayzen Law Office for legal help with this issue. Our experienced business and tax firm will guide you through the complex web of rules concerning partnership, LLP, LLC, corporate formation and taxation matters.