By: Anthony N. Verni, Attorney at Law, Certified Public Accountant
Date: November 1, 2022
FORM 5471 FILING REQUIREMENTS FOR U.S. TAXPAYER MARRIED TO NON-RESIDENT SPOUSE
The requirements for filing Form 5471 are quite complex and confusing. The obligation to file Form 5471 depends upon the specific facts of each case. Hence, one size does not fit all.
In the context of the Form 5471 filing requirements, I have received a number of inquiries in connection with the application of the constructive ownership rules related to Foreign Corporations where ownership is shared with a non-resident alien, spouse, parent or grandchild.
The following illustration and discussion considers the specific question as to whether a taxpayer who is married to a non-resident alien or has a parent, grandchild or child that is a foreign national, who share ownership of a foreign company is required to file Form 5471. For purposes of this illustration we assume that the non-resident alien spouse or immediate family member owns 50% or more of the shares in a foreign company.
Gadson, a U.S. Citizen, is married to Athena, a Kenyan National. Athena is considered a non-resident alien for U.S. Tax Purposes. Harold and Athena jointly own and operate “Eye See You,” a foreign corporation (“ESY”) or (the “Company”) headquartered in Germany. ESY is engaged in the manufacture and sale of optical lenses. The lenses are produced in China. Gadson and Athena each own 50% of the shares of the Company’s common stock. For purposes of this example, we assume that Gadson has been filing married filing separately, and further, that Athena does not a social security number. Gadson’s obligation to file Form 5471 on behalf of ESY requires answering the following questions:
- Whether Gadson is considered a U.S. Shareholder within the meaning of 26 U.S.C. 958 (a) and (b)?
- Whether under the attribution rules Gadson is considered to constructively own Athena’s shares; and if so,
- Whether by reason of Gadson’s constructive ownership of Athena’s shares, the Company will be considered to be a Controlled Foreign Corporation.
The filing requirements for Form 5471 are dependent upon a number of factors including whether a “U.S. Person” is considered to be a “U.S. Shareholder.” Under 26 U.S.C. § 958 (a) and (b), a “U.S. Shareholder” is a U.S. Person who owns “directly or indirectly” 10% or more of the of the total combined voting power of all classes of stock of all classes of voting stock of a Section 965 Specified Foreign Corporation (“SFC”) or 10% or more of the combined voting power or value of shares of all classes of stock of a Section 965 SFC under 26 U.S.C § 965 (a) or (b).
Generally a “U.S. Person” includes a citizen or resident of the United States, a Domestic Partnership, a Domestic Corporation; and an estate or trust that is not considered a foreign estate or trust under 26 U.S.C. § 7701(a)(3). Based upon the foregoing Gadson is considered a U.S. Person, but Athena is not.
Gadson meets the first prong of Section 958 (a), in so far as; he owns 10% or more of the voting power of all classes of stock, for the Company. However, unless he is deemed to own Athena’s shares in ESY under the attribution rules, the Company will not considered a SFC under Sections 965 (a) or (b).
Under Section 965(a) and (b) a SFC is either a Controlled Foreign Corporation, as defined under section 26 U.S.C. §957 (a) (“CFC”), or any foreign corporation with respect to which one or more domestic corporations is a U.S. Shareholder. Under Section 957(a) a CFC is a foreign corporation that has U.S. Shareholders that own directly, indirectly or constructively, within the meaning of Sections 958(a) or (b) on any day of the tax year of the foreign corporation, more than 50% of either the total combined voting power of all classes of its voting stock or the total value of the stock of the corporation.
Since Gadson does not own more than 50% of either the total combined voting power of all classes of voting stock or the total value of the stock of the Company, the ESY would not be considered a CFC unless by reason of the attribution rules Gadson is deemed to constructively own Athena’s shares. If ownership of her shares is imputed to Gadson, the Company would be considered a CFC and Gadson would be required to file Form 5471.
The constructive ownership rules consider a person, in this case a Husband, to own the shares owned by someone to whom he is closely related. Section §958(b) tells us to use the default Section 318(a) constructive ownership rules to determine whether an individual is a U.S. shareholder. These rules, will determine whether Gadson is deemed to constructively own his wife’s shares under Section 958 (b), which in turn, will determine whether ESY is a CFC and whether Gadson must file Form 5471.
Section 318(a) (relating to constructive ownership of stock) applies to the extent that the effect is to treat any United States person as a United States Shareholder within the meaning of Section 951(b) and to treat a person as a related person within the meaning of section 954(d)(3). Accordingly, a U.S. Person is considered to own the stock that is owned, directly or indirectly, by the Taxpayer’s spouse, children, grandchildren and parents.
The general rule under Section 318(a) (1) (A) (i) and (ii) provides in pertinent part, that:
However, Section 958 (Rules for Determining Stock Ownership) provides an exception to the general rule under Section 318(a) (1) (A) (i) and (ii), in situations where a spouse, child, grandchild or parent is a nonresident alien.
Section 958(b) (1) entitled “Constructive Ownership” provides:
“In applying paragraph (1)(A) of section 318(a), stock owned by a nonresident alien individual (other than a foreign trust or foreign estate) shall not be considered as owned by a citizen or by a resident alien individual.”
Consequently, the default rule under Section 318 for treating a U.S. Person as the owner of the stock in a foreign company that is owned by a family member does not apply where the family member is a non-resident alien.
In conclusion, Gadson is not required to file Form 5471 on the basis of the following:
- Gadson is not considered the constructive owner of Athena’s shares in the Company, by reason of Section 958(b)(1), and Athena’s status as a non-resident alien; and
- Gadson currently does not own more than 50% of the Company’s shares, and as such, the Company is not considered to be a CFC.
- Since the foreign company is not considered a CFC, Gadson is not required to file Form 5471.
The foregoing example makes clear the need for the advice of an experienced and knowledgeable tax attorney when forming a foreign entity or when considering inbound and outbound business transactions.