Foreign-corporation reporting penalty may apply separately to each spouse

Plain-English summary

Chief Counsel considered Section 6038 penalties when one spouse is treated as constructively owning a foreign corporation through the other spouse. The IRS may assess the penalty separately against each spouse, but Exam has enforcement discretion and is not required to assert it against both. Filing a joint income tax return does not make the spouses jointly and severally liable for this penalty because Section 6013(d)(3) applies only to income taxes. Innocent-spouse relief under Section 6015 also does not apply to the Section 6038 penalty. A spouse may still seek reasonable-cause relief by making the required affirmative showing in a written statement signed under penalties of perjury.

Ruling snapshot

• Question: Must or may Exam assert a Section 6038 penalty separately against the spouse of a person with a foreign-corporation filing requirement?
• Outcome: Advice given: Exam may assess each spouse separately but is not required to do so; innocent-spouse relief does not apply, while reasonable-cause relief may.
• Key authorities: IRC §§ 318(a), 6013(d)(3), 6015, 6038(b), (c)(4)(B), (e)(2), and 7803(a)(2)(A); Wyly, 552 B.R. 338

Full text (IRS public release)

ID: CCA_2020051119464912
UILC: 6038.04-01, 6038.00-00,
6015.00-00
Number: 202129010
Release Date: 7/23/2021
From: ------------------
Sent: Monday, May 11, 2020 7:46:49 PM
To: -------------------------
Cc: ---------------------------------------------------------------------------------------------------------------------
Bcc:
Subject: RE: Results of Call with Exam's 6038(b) Experts

Hi ------------

This email addresses whether exam is required to assert the section 6038 penalty
against spouses of those who have a filing requirement under that section. I’ve copied
---------------------------------------------------------to give them the opportunity to weigh in on
whether we generally pursue penalties against the spouse in these situations.

Exam is not required to assert the penalty against the spouse because the Secretary
and his delegates have discretion under section 7803(a)(2)(A) to decide whether to
assert penalties. See Heckler v. Chaney, 470 U.S. 821, 831 (1985) (“[A]n agency’s
decision not to prosecute or enforce, whether through civil or criminal process, is a
decision generally committed to an agency’s absolute discretion.”).

As you conclude in your email, Exam is permitted to assert the penalty against the wife
as a constructive owner of the foreign corporation under the attribution rules of section
318(a) which are incorporated by section 6038(e)(2). As a result, the penalty can be
assessed separately and individually against each spouse. We also agree there is no
joint and several liability for spouses under section 6038(b), even if the spouses filed
their income tax return jointly. Section 6013(d)(3) provides for joint and several liability
for spouses who file jointly, but only for income taxes.

We also want to clarify that innocent spouse relief under section 6015 would not apply
here. As the court pointed out in Wyly, 552 B.R. 338 (Bankr. N.D. Tex. 2016), innocent
spouse relief does not apply to the penalty in section 6038 – it only applies to income
tax liability. This does not mean, however, that relief cannot be provided for reasonable
cause, which the court applied in Wyly. Section 6038(c)(4)(B) provides for reasonable
cause relief. And regulation 1.6038(2)(k)(3) requires that a person seeking reasonable
cause relief must (1) make an affirmative showing (2) in a written statement (3) and sign
it under penalties of perjury.

I hope this helps. Please let us know if you have any follow up questions.