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Specified Domestic Entity: Passive Test | FATCA Form 8938 Lawyer & Attorney

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This article is published as part of a long series of articles on the Specified Domestic Entity (“SDE”) Definition. In a previous article, I stated that the term “formed or availed of” consists of two legal tests: the Closely-Held Test and the Passive Test. Since I already explained the general requirements of the Closely-Held Test in another article, I would like to focus today on the Passive Test.

The Passive Test: Background Information

Starting tax year 2016, business entities classified as SDEs may be required to attach Form 8938 to their US tax returns. What entity is considered to be SDE? The answer is found in Treas. Reg. §1.6038D-6(a): “a specified domestic entity is a domestic corporation, a domestic partnership, or a trust described in IRC Section 7701(a)(30)(E), if such corporation, partnership, or trust is formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets.”

I already explained in a previous article that “formed or availed of” is a term of art and a requirement that an entity meets two legal tests: the Closely-Held Test and the Passive Test.

The Passive Test: General Requirements

The Passive Test consists of two threshold requirements: the Passive Income Threshold and the Passive Assets Threshold. If one of these Thresholds is satisfied, the Passive Test is met and a business entity would be considered as formed or availed of for the purposes of holding specified foreign financial assets. Let’s explore these two requirements in more detail.

The Passive Test: the Passive Income Threshold

The Passive Income Threshold is satisfied if “at least 50 percent of a corporation’s or a partnership’s gross income for the taxable year is passive income.” Treas. Reg. §1.6038D-6(b)(1)(ii). The definition of passive income includes:

“(A) Dividends,

(B) Interest;

(C) Income equivalent to interest, including substitute interest;

(D) Rents and royalties, other than rents and royalties derived in the active conduct of a trade or business conducted, at least in part, by employees of the corporation or partnership;

(E) Annuities;

(F) The excess of gains over losses from the sale or exchange of property that gives rise to passive income described in paragraphs (b)(3)(i)(A) through (b)(3)(i)(E) of this section;

(G) The excess of gains over losses from transactions (including futures, forwards, and similar transactions) in any commodity, but not including –

(1) Any commodity hedging transaction described in section 954(c)(5)(A), determined by treating the corporation or partnership as a controlled foreign corporation; or

(2) Active business gains or losses from the sale of commodities, but only if substantially all the corporation or partnership’s commodities are property described in paragraph (1), (2), or (8) of section 1221(a);

(H) The excess of foreign currency gains over foreign currency losses (as defined in section 988(b)) attributable to any section 988 transaction; and

(I) Net income from notional principal contracts as defined in § 1.446-3(c)(1).” Treas. Reg. §1.6038D-6(b)(3).

The Treasury Regulations also contain certain exceptions to the definition of passive income (for example, for dealers).

The Passive Test: the Passive Assets Threshold

The Passive Assets Threshold is satisfied if at least 50 percent of the assets held by a corporation or a partnership for the taxable year “are assets that produce or are held for the production of passive income.” Treas. Reg. §1.6038D-6(b)(1)(ii). Such assets are called “passive assets”. Id.

The percentage of passive assets held by a corporation or a partnership during a taxable year is determined based on “the weighted average percentage of passive assets (weighted by total assets and measured quarterly).” Id. This is very similar to the PFIC test.

The regulations allow for two different methods of valuation of the assets for the purpose of the Passive Asset Threshold. The first method is Fair Market Value of the assets. The second method is valuation of assets based on the “book value of the assets that is reflected on the corporation’s or partnership’s balance sheet.” Id. Surprisingly, both US and an international financial accounting standard are permitted for the purpose of the valuation of assets (usually, only US GAAP is allowed).

Contact Sherayzen Law Office for Professional Help with FATCA Form 8938 Compliance

If you are concerned about whether your entity is required to file Form 8938 or you have any other FATCA-related questions, please contact Sherayzen Law Office for professional help. Sherayzen Law Office is an international tax law firm that specializes in the US international tax compliance, including FATCA Form 8938 compliance. We have helped hundreds of US taxpayers with their FATCA requirements and We can help You!

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Form 8938 Filing Thresholds | FATCA Tax Lawyer and Attorney Update

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Form 8938 is one of the most important US international tax forms with its own sophisticated penalty structure. Hence, taxpayers should strive to understand when they are required to file the form. In this context, I would like to focus in this essay on the Form 8938 Filing Thresholds.

General Relevant Criteria in the Determination of the Form 8938 Filing Thresholds

There are three most relevant criteria for determining the Form 8938 filing threshold that may apply to a taxpayer: (1) whether the taxpayer is a Specified Individual or a Specified Domestic Entity; (2) the taxpayer’s tax return filing status; and (3) whether the taxpayer resides in the United States or outside of the United States.

I have already described in other articles the criteria for determining whether a taxpayer is a Specified Individual or a Specified Domestic Entity. Hence, for the purposes of this essay, I will assume that the taxpayer satisfies the requirements of one of these categories. Therefore, I will focus solely on the Form 8938 filing thresholds based the filing status and the place of residence.

Form 8938 Filing Thresholds for Unmarried Taxpayers

If a taxpayer files his US tax returns with an unmarried filing status (i.e. “single” or “head of household”) and resides in the United States, he will satisfy the Form 8938 reporting threshold if the total value of the taxpayer’s Specified Foreign Financial Assets (“SFFA”) is more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

If the unmarried taxpayer resides outside of the United States, then the values would go up to more than $200,000 on the last day of the tax year or more than $300,000 at any time during the tax year.

Form 8938 Filing Thresholds for Taxpayers Whose Filing Status is “Married Filing Jointly”

If a taxpayer files his US tax returns as “married filing jointly” and resides in the United States, he will satisfy the Form 8938 reporting threshold if the total value of his SFFA exceeds $100,000 on the last day of the tax year or more than $150,000 at any time during the tax year. If this taxpayer resides outside of the United States, then the Form 8938 reporting thresholds will increase to more than $400,000 on the last day of the tax year or more than $600,000 at any time during the tax year.

Form 8938 Filing Thresholds for Taxpayers Whose Filing Status is “Married Filing Separately”

If a taxpayer files his US tax returns as “married filing separately”, then his Form 8938 reporting thresholds are going to be the same as those of an unmarried taxpayer.

Form 8938 Filing Thresholds for Specified Domestic Entities

Finally, a Specified Domestic Entity has the same Form 8938 Filing Thresholds as those of an unmarried taxpayer who resides in the United States – i.e. SFFA value must be more than $50,000 on the last day of the tax year or more than $75,000 at any time during the tax year.

Contact Sherayzen Law Office for Professional Help With Form 8938

If you were required to file Forms 8938 in the previous years and you have not done so, you may be subject to Form 8938 penalties. In order to avoid or mitigate your Form 8938 penalties, you need to explore your offshore voluntary disclosure options as soon as possible.

Sherayzen Law Office can help You! We are an international tax law firm that specializes in offshore voluntary disclosures of unreported foreign assets and foreign income. We have successfully helped clients from close to 70 countries. You can be next!

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Specified Domestic Entity: Domestic Entity | FATCA Lawyer & Attorney

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This is the second article from the series of articles concerning the definition of a Specified Domestic Entity. Today, I will explore what business entities are considered to be “Domestic”.

Specified Domestic Entity Background Information

Specified Domestic Entity is a new category of FATCA Form 8938 filers. Under FATCA, Form 8938 has to be filed with a US taxpayer’s tax return in order to report his Specified Foreign Financial Assets (“SFFA”). Prior to tax year 2016, Form 8938 was applicable only to individual US taxpayers. Starting tax year 2016, however, Specified Domestic Entities are required to file Form 8938 as long as the total value of their SFFA meets the filing threshold.

Definition of a Domestic Entity for the Purposes of FATCA Form 8938

For the purposes of FATCA Form 8938, whether a corporation or a partnership is considered “domestic” is determined under the general definition found in 26 U.S.C. §7701(a)(4): “the term ‘domestic’ when applied to a corporation or partnership means created or organized in the United States or under the law of the United States or of any State unless, in the case of a partnership, the Secretary provides otherwise by regulations.” Thus, while the definition of a domestic corporation is fairly straightforward, it is not always the case with respect to domestic partnerships.

It should also be remembered that an LLC is never taxed as an LLC under the US tax law. Rather, LLC can be taxed either as a partnership or a corporation; it can also be treated as a disregarded entity if there is only one owner of the LLC and the LLC never elected to be taxed as a corporation.

A trust is considered to be a “domestic trust” if it meets the 26 U.S.C. §7701(a)(30)(E). The tests under this section of the Internal Revenue Code (IRC) can be fairly complex and may require additional analysis (see this article for further analysis).

Contact Sherayzen Law Office for Professional Help With FATCA Form 8938

If you need help with the FATCA Form 8938 compliance (including the definition of a Specified Domestic Entity), contact Sherayzen Law Office for professional help. Our experienced international tax team, headed by international tax attorney Eugene Sherayzen, Esq., will thoroughly analyze your case, determine whether you need to file Form 8938 and any other US international information returns, and prepare these forms for you. We can also help you with the voluntary disclosure of any of your offshore assets if you did not timely comply with your US tax obligations with respect to these assets.

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FATCA Form 8938 Foreign Life Insurance Reporting | FATCA Lawyers

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FATCA Form 8938 Foreign Life Insurance Policy reporting is one of the most obscure US tax requirements with which many US taxpayers fail to comply. In this article, I would like to explore FATCA Form 8938 foreign life insurance policy reporting.

FATCA Form 8938 Foreign Life Insurance Reporting: Types of Foreign Life Insurance Policies

In a previous article, I already described the three main types of foreign life insurance policies: traditional policies, cash-surrender non-investment policies and investment policies. The traditional policies refer to straightforward life insurance policies with no cash-surrender value; in essence, this is the traditional understanding of what a life insurance policy should be – a sum of money paid out at death to a policy beneficiary.

The cash-surrender non-investment policies are foreign life insurance policies that have cash-surrender value which, usually, can be obtained at any point prior to the maturity of the policy. There is usually no income associated with a policy, but this is not always the case. The cash-surrender value grows over time mostly through premiums, automatic increases in value and a system of bonuses.

Finally, the investment policies are foreign life insurance policies with a cash-surrender value which largely depends on the growth in investments which underlie the policy. While there might be a death benefit to the policy, the investment life insurance policies are usually simply investment accounts wrapped into a life insurance format. Assurance Vie policies in France are a typical example of such a foreign life insurance policy.

FATCA Form 8938 Foreign Life Insurance Reporting: What is Form 8938

FATCA Form 8938 is a relatively recent addition to the already large list of the U.S. international tax forms; yet, it is already the most comprehensive form in the IRS arsenal. FATCA Form 8938 was born out of the feared Foreign Account Tax Compliance Act (FATCA) and it was first due with the 2011 tax return.

FATCA Form 8938 basically requires the reporting of three types of assets. First, it almost duplicates FBAR with respect to reporting foreign bank and financial accounts (with important exceptions, such as signatory authority accounts); more information with respect to these accounts, however, must be supplied by the reporting taxpayer. Second, FATCA Form 8938 introduces the requirement to disclose the ownership of a whole new class of assets which normally would not be reported on any tax form (e.g. paper stock certificates). These are so-called “Other Specified Foreign Assets”. Finally, FATCA Form 8938 requires the taxpayer to report whether he disclosed any assets on Forms 5471, 8865, 8621, 3520 and 3520-A.

FATCA Form 8938 has its own set of independent penalties associated with Form 8938 noncompliance.

FATCA Form 8938 Foreign Life Insurance Policy Reporting Requirements

FATCA Form 8938 Foreign Life Insurance Policy reporting is very similar to the FBAR Foreign Life Insurance Policy reporting. In general, the traditional life insurance policies with no cash-surrender values are ordinarily not reportable (although, there are exceptions). On the other hand, cash-surrender non-investment policies and investment policies should be reported on FATCA Form 8938.

This is just the general guidance. The determination of whether your specific foreign life insurance policies should be reported on FATCA From 8938 must be left to an international tax attorney; I strongly discourage any attempt by US taxpayers to make this determination without professional legal assistance.

Contact Sherayzen Law Office for Help With FATCA Form 8938 Foreign Life Insurance Policy Reporting

Contact the experienced international tax law firm of Sherayzen Law Office for any legal help with your FATCA Form 8938 Foreign Life Insurance Policy reporting. Foreign life insurance policies can be extremely complex and the US reporting requirements associated with them vary from country to country. Sherayzen Law Office has accumulated tremendous experience in dealing with foreign life insurance policies from Australia, Canada, New Zealand, Europe and Asia.

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