CCA 1206014: Section 6501(c)(8) limitations period for an S corporation and its shareholders

Plain-English summary

This memorandum considers whether missing Form 5471 information for controlled foreign corporations extends the assessment period for an S corporation and its shareholders under IRC § 6501(c)(8). It concludes that the rule can extend the period for the S corporation and two majority shareholders, but probably not for the remaining shareholders who owned less than the stated percentage. For returns covered by the 2010 amendment, the extension generally reaches the entire return, while reasonable cause can limit the extension to items related to the missing information. The memorandum also concludes that the filing date of the original return, not an amended return, controls one of the questions presented.

Ruling snapshot

• Question: How does section 6501(c)(8) apply when an S corporation and its shareholders fail to report information required under section 6038?
• Outcome: Advice given.
• Key authorities: IRC §§ 6038 and 6501(c)(8); Bufferd v. Commissioner, 506 U.S. 523 (1993); Robinson v. Commissioner, 117 T.C. 308 (2001); the HIRE Act.

Full text (IRS public release)

       Office of Chief Counsel
       Internal Revenue Service
       Memorandum
       Number: 201206014
       Release Date: 2/10/2012
       CC:PA:02:SLahabi
       POSTF-124243-11

UILC: 6501.04-03, 6501.04-11, 6501.08-05

date: October 17, 2011

 to:Associate Area Counsel
    (-----------------------------------------------------)
    Attn: -----------------------

from: Blaise G. Dusenberry
Senior Technician Reviewer, Branch 1
(Procedure & Administration)

subject: Application of section 6501(c)(8) to an S corporation and its shareholders.

       This memorandum responds to your request for assistance. This advice may not be
       used or cited as precedent.

       LEGEND

       S corporation      =   ------------------
       Date 1             =   -----------------
       Date 2             =   --------------
       Date 3             =   ------------------
       Date 4             =   --------------------------
       Date 5             =   ---------------------
       Date 6             =   ---------------------
       Date 7             =   ---------------------
       Date 8             =   -----------------
       Date 9             =   -------------------
       Date 10            =   ---------------------------
       Date 11            =   -------------------
       Date 12            =   ---------------------------
       Date 13            =   -------------------
       Date 14            =   ----------------------
       X percent          =   ------------------
       Y percent          =   ---------------
       Z percent          =   --------------------

POSTF-124243-11 2

Year 1 = -------
Year 2 = --------
Year 3 = --------
Year 4 = --------
Year 5 = -------
Year 6 = -------
X = --------

ISSUES

(1) If an S corporation fails to report information required by section 6038, does section
6501(c)(8) apply to extend the period of limitations for assessment with respect to the
returns of the shareholders of the S corporation?

(2) If a taxpayer fails to report information required by section 6038, how does section
6501(c)(8), as amended in 2010, apply to extend the period of limitations?

(3) Does section 6501(c)(8) apply to amended returns filed on or after Date 3 for original
returns filed between Date 1 and Date 2?

(4) If reasonable cause is established for the late filing of the Form 5471, are other
items on the Form 1120S or Form 1040 available for adjustment under section
6501(c)(8)(B)?

CONCLUSIONS

(1) It depends. If an S corporation fails to report the information required by section
6038, section 6501(c)(8) extends the period of limitations for assessment with respect to
the S corporation. Under the facts below, section 6501(c)(8) also extends the period of
limitations for assessment with respect to the tax returns of the two majority
shareholders of the S corporation as they own X percent of the S corporation. Section
6501(c)(8), however, probably does not extend the period of limitations for assessment
with respect to the tax returns of the remaining thirteen shareholders who, together, own
less than Y percent of the S corporation.

(2) For returns of S corporation and the two majority shareholders that were filed after
March 18, 2010, or the returns filed on or before that date if the section 6501 period
(determined without regard to the 2010 amendments) for assessment of taxes had not
expired as of that date, section 6501(c)(8), as amended in 2010, applies to extend the
period of limitations for assessment with respect to the entire tax return, not just
adjustments related to the failure to report under section 6038.

(3) No, the applicability of section 6501(c)(8) is determined based on the date on which
the original returns were filed, not the date of the amended returns.

POSTF-124243-11 3

(4) No, if the failure to file Form 5471 with respect to S corporation’s year 5 and year 6
tax years and the two majority shareholders’ year 4–year 6 tax years was due to
reasonable cause, the extended limitations period only applies to the item or items
related to the failure and not the other items on the returns.

FACTS

Taxpayer herein, S corporation (referred to as “S corporation”), is an S corporation with
X shareholders. Two of the shareholders (referred to as “two majority shareholders”),
own X percent of S corporation. S corporation was formed as an S corporation on Date

4. Its predecessor entity was an S corporation as well. S corporation has 5 wholly-
   owned controlled foreign corporations (CFCs), which it treated as disregarded entities
   for tax years year 1–year 6. In Date 3, S corporation filed amended returns for year 1–
   year 6 recharacterizing the 5 CFCs as regarded entities. S corporation did not file
   Forms 5471 with these amended returns, and the amended returns did not report the
   information that should have been furnished on the Forms 5471. Two minority interest
   shareholders (collectively holding Z percent) also filed amended returns for year 5 and
   year 6 prior to the expiration of the statute of limitations for their year 5 taxable year but
   they too did not file Forms 5471 with their amended returns. The two majority
   shareholders did not file amended returns or Forms 5471.

Absent application of section 6501(c)(8), the normal three-year period of limitations for
S corporation’s year 1–year 4 taxable years expired on or before Date 5. The normal
three-year period of limitations for S corporation’s year 5 taxable year expired on Date

6. The normal three-year period of limitations for S corporation’s year 6 taxable year
   will expire on Date 7.

Similarly, the normal three-year period of limitations for S corporation’s shareholders for
the year 1–year 3 taxable years expired on or before Date 8. The normal three-year
period of limitations for S corporation’s shareholders for the year 4 taxable year expired
between Date 9 and Date 10. The normal three-year period of limitations for S
corporation’s shareholders for the year 5 taxable year expired between Date 11 and
Date 12. The normal three-year period of limitations for S corporation’s shareholders
for the year 6 taxable year has not yet expired, but will expire in the normal course
between Date 13 and Date 14.

LAW AND ANALYSIS

Section 6038(a)(1) imposes information reporting requirements on any United States
person who controls a foreign corporation. Pursuant to section 6038(a)(4), the
information reporting requirements prescribed in section 6038(a)(1) also are imposed on
any United States person who is treated as a United States shareholder of any foreign
corporation that is treated as a controlled foreign corporation. Section 6038(e)(2)
defines a person “in control” of a corporation as a person who owns stock possessing
more than 50 percent of the total combined voting power of all classes of stock entitled
to vote, or more than 50 percent of the total value of shares of all classes of stock of a
POSTF-124243-11 4

corporation. Section 6038(e)(2) further states that “[i]f a person is on control of a
corporation which in turn owns more than 50 percent of the total combined voting power
of all classes of stock entitled to vote for another corporation, or owns more than 50
percent of the total value of the shares of all classes of stock of another corporation,
then such person shall be treated as in control of such other corporation.” In this case,
the two majority shareholders own X percent of S corporation and are in control of S
corporation and the 5 CFCs. These two majority shareholders, therefore, are required
to file Form 5471 with respect to the CFCs. S corporation itself also has a reporting
obligation with respect to the CFCs under section 6038. From the facts provided to us,
it does not appear that the other shareholders own enough stock in the S corporation to
have an obligation to furnish information under section 6038(a)(4).

Section 6501(a) provides that the amount of any tax imposed by Title 26 shall be
assessed within three years after the return was filed. The final sentence of this
subsection defines “return” to mean “the return required to be filed by the taxpayer (and
does not include a return of any person from whom the taxpayer has received an item of
income, gain, loss, deduction, or credit).” This was a codification of the Supreme
Court‘s holding in Bufferd v. Commissioner, 506 U.S. 523 (1993). In Bufferd, the
Supreme Court clarified that section 6501 applies to the return filed by the ultimate
taxpayer and not the return filed by the taxpayer’s S corporation. The amendment of
section 6501 was understood to apply the logic of Bufferd to other flow-through entity
situations. Robinson v. Commissioner, 117 T.C. 308, 318 (2001).

Prior to March 18, 2010, section 6501(c)(8) provided, in relevant part, that in the case of
any information which is required to be reported to the Secretary under section 6038,
the time for assessment of any tax imposed with respect to any event or period to which
such information relates shall not expire before the date which is three years after the
date on which the Secretary is furnished the information required to be reported.

Section 6501(c)(8) was amended in 2010 by the Hiring Incentives to Restore
Employment Act (“HIRE”), Pub. L. No. 111-147 (124 Stat. 106), § 513, to provide, in
relevant part, that in the case of any information which is required to be reported to the
Secretary under section 6038, the time for assessment of any tax imposed with respect
to any tax return, event or period to which such information relates shall not expire
before the date which is three years after the date on which the Secretary is furnished
the information required to be reported. The amendment applies to returns filed after
March 18, 2010, or returns filed on or before that date if the section 6501 period
(determined without regard to such amendments) for assessment of such taxes had not
expired as of that date.

The HIRE Act amendment to section 6501(c)(8), therefore, clarifies that a failure to file a
Form 5471 for a particular tax year extends the time for the assessment of tax with
respect to any tax return to which the information relates. The inclusion of “tax return” in
section 6501(c)(8) means the extended period applies to all the information reported on
a tax return and is not limited to adjustments to income related to the information that

POSTF-124243-11 5

should have been reported under section 6038. See Technical Explanation of the
Revenue Provisions Contained in Senate Amendment 3310, The “Hiring Incentive to
Restore Employment Act,” Under Consideration in the Senate, JCX-4-10 (February 23,
2010). In this case, S corporation’s tax returns for the year 5 and year 6 taxable years
were filed before March 18, 2010, and the period of limitations was open as of March
18, 2010. Similarly, the tax returns of the two majority shareholders for the year 4, year
5 and year 6 taxable years were filed before March 18, 2010, and the period of
limitations was open as of March 18, 2010. Thus, the HIRE Act amendment applies to
those years and section 6501(c)(8), as amended, operates to extend the time for
assessment of tax with respect to S corporation’s entire year 5 and year 6 taxable
years, and with respect to the two majority shareholders entire year 4, year 5 and year 6
taxable years.

The HIRE Act amendment, however, does not apply to S corporation’s year 1–year 4
taxable years, or the two majority shareholders’ year 1–year 3 taxable years because
the period of limitations with respect to those years expired before the effective date of
the HIRE Act amendments. Thus, whether the section 6501 period is open for
assessment of any additional tax due to S corporation’s failure to file Form 5471 in
years year 1–year 4 or due to the two majority shareholders’ failure to file 5471 in years
year 1–year 3 would depend on whether the particular tax is related to the information
required to be reported under section 6038. Based on the facts presented to us, it is not
clear whether the two majority shareholders would owe additional tax as a result of the
change of status of the CFCs.

S corporation’s filing of amended returns in Date 3 for the year 1–year 6 taxable years
presents a question regarding whether filing amended returns after the effective date of
the HIRE Act amendments changes the application of section 6501(c)(8). As noted
above, the amended returns did not furnish the information required by a Form 5471,
and Forms 5471 were not attached to the amended returns. The two majority
shareholders did not file Forms 5471 either. Therefore, S corporation and the two
majority shareholders continue to be in noncompliance with the section 6038
requirements and the section 6501(c)(8) period could continue to apply to the relevant
taxable years. We caution, however, that for S corporation’s year 1–year 4 taxable
years, and the two majority shareholders’ year 1–year 3 taxable years, the HIRE Act
amendments do not apply, so section 6501(c)(8) only extends the assessment period
for tax imposed with respect to any event or period to which the information required to
be furnished relates, rather than the entire tax return. In contrast, S corporation’s tax
returns for the year 5 and year 6 tax years and the two majority shareholders’ tax
returns for the year 4, year 5 and year 6 tax years were filed before March 18, 2010,
and the period of limitations for assessment has not expired. Therefore, section
6501(c)(8) extends the assessment period with respect to the information on the entire
tax returns for those tax years.

Section 6501(c)(8) was further amended on August 10, 2010, to provide that if the
failure to furnish the required information is due to reasonable cause and not willful

POSTF-124243-11 6

neglect, the extended limitations period only applies to the item or items related to the
failure and not the entire tax return. Pub. L. No.111-226 (124 Stat. 2403), § 218. This
provision is effective as if included in section 513 of the HIRE Act. If S corporation’s
failure to file Forms 5471 for the year 5 and year 6 tax years, and the two majority
shareholders’ failure to file Forms 5471 for the year 4–year 6 tax years, was due to
reasonable cause, the extended limitations period would only apply to the item or items
related to the failure and not the entire tax returns. The determination of whether
reasonable cause exists depends on all the facts and circumstances. We have not
been provided with sufficient information to make that determination but we are
available to assist you with the reasonable cause an analysis should the need arise.

---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

---------------------------------------------------------------------------------------------------------------------

This writing may contain privileged information. Any unauthorized disclosure of this
writing may undermine our ability to protect the privileged information. If disclosure is
determined to be necessary, please contact this office for our views.

Please call (202) 622-4940 if you have any further questions.