Foreign shareholder's agency refusal triggers section 6038C rules

Plain-English summary

Chief Counsel considered a transaction between a foreign corporation conducting a U.S. trade or business and its related foreign shareholder. It advised that if the shareholder does not authorize the corporation to act as its agent under section 6038C(d)(1), the rules in section 6038C(d)(3) apply to certain transactions between them. The regulations treat a foreign corporation engaged in a U.S. trade or business as a reporting corporation and require agency authorization for related foreign persons. The advice also explained that the IRS generally seeks records through an applicable tax treaty or information exchange agreement before issuing a summons when the records can be obtained promptly and efficiently that way. Summonses for foreign documents require specified internal pre-issuance review.

Ruling snapshot

• Question: Does section 6038C(d) apply when a foreign shareholder transacts with its related foreign corporation engaged in a U.S. trade or business?
• Outcome: Advice given that section 6038C(d)(3) applies if the shareholder refuses the required agency authorization.
• Key authorities: IRC §§ 6038A, 6038C(d), 7602, 7603, and 7604; Treas. Reg. §§ 1.6038A-1, 1.6038A-5, and 1.6038A-6(b)

Full text (IRS public release)

ID:      CCA_2019060408545121
UILC:    6038C.00-00

Number: 201927017
Release Date: 7/5/2019
From:
Sent: Tuesday, June 04, 2019 8:54:51 AM
To:
Cc:
Bcc:
Subject: Question re 6038C


Good Morning --------

You asked whether section 6038C(d) applies with respect to a transaction between a
foreign corporation that is engaged in the conduct of a trade or business within the
United States and a shareholder of that foreign corporation, who is a related party
(within the meaning of section 6038A(c)(2)) with respect to that foreign corporation.

Yes, if the foreign shareholder does not agree to authorize the foreign corporation to act
as its agent as described in section 6038C(d)(1), then the rules of section 6038C(d)(3)
apply with respect to certain transactions between the foreign corporation and its
shareholder. See also Treas. Reg. §1.6038A-5. Treas. Reg. §1.6038A-1(a) provides
that “[t]his section and §§1.6038A-2 through 1.6038A-7 provide rules for certain foreign-
owned U.S. corporations and foreign corporations engaged in trade or business within
the United States (“reporting corporations”) relating to information that must be
furnished, records that must be maintained, and the authorization of the reporting
corporation to act as agent for related foreign persons for purposes of sections 7602,
7603, and 7604 that must be executed.” Emphasis added. Treas. Reg. §1.6038A-1(c)
confirms that the term “reporting corporation” as used in Treas. Reg. §§1.6038A-1
through 1.6038A-7 applies for purposes of section 6038C. Treas. Reg. §1.6038A-1(c)
(“After November 4, 1990, a foreign corporation engaged in a trade or business within
the United States at any time during a taxable year is a reporting corporation. See
section 6038C.”). For more information, see Form 1120-F (U.S. Income Tax Return of a
Foreign Corporation) and Form 5472 (Information Return of a 25% Foreign-Owned U.S.
Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business) and the
corresponding instructions.

Treas. Reg. §1.6038A-6(b) provides that where records are obtainable on a timely and
efficient basis under a tax treaty or information exchange agreement (TIEA), the IRS will
generally make use of the tax treaty or TIEA to obtain the records prior to issuing a
summons described in section 6038A. The Exchange of Information Program office can
provide additional information on whether a tax treaty or TIEA is in force with respect to
a particular jurisdiction and whether records would be obtainable from that jurisdiction

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on a timely and efficient basis. See IRM 4.60.1.2.1. Summonses for foreign documents
within the scope of IRC 6038A require pre-issuance review by the LB&I Technical
Specialist for the Information Gathering IPN, who will coordinate with CC:INTL. See
IRM 4.60.8.3.5.12.

Please let us know if you have any additional question.


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