[Code of Federal Regulations]
[Title 26, Volume 13]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR]

[Page 202-206]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
Procedure and Administration--Table of Contents
 
Sec.  1.6038B-2  Reporting of certain transfers to foreign partnerships.

    (a) Reporting requirements--(1) Requirement to report transfers. A 
United States person that transfers property to a foreign partnership in 
a contribution described in section 721 (including section 721(b)) must 
report that transfer on Form 8865 ``Information Return of U.S. Persons 
With Respect to Certain Foreign Partnerships'' pursuant to section 6038B 
and the rules of this section, if--
    (i) Immediately after the transfer, the United States person owns, 
directly, indirectly, or by attribution, at least a 10-percent interest 
in the partnership, as defined in section 6038(e)(3)(C) and the 
regulations thereunder; or
    (ii) The value of the property transferred, when added to the value 
of any other property transferred in a section 721 contribution by such 
person (or any related person) to such partnership during the 12-month 
period ending on the date of the transfer, exceeds $100,000.
    (2) Indirect transfer through a domestic partnership--For purposes 
of this section, if a domestic partnership transfers property to a 
foreign partnership in a section 721 transaction, the domestic 
partnership's partners shall be considered to have transferred a 
proportionate share of the property to the foreign partnership. However, 
if the domestic partnership properly reports all of the information 
required under this section with respect to the contribution, no partner 
of the transferor partnership, whether direct or indirect (through tiers 
of partnerships), is also required to report under this section. For 
illustrations of this rule, see Examples 4 and 5 of paragraph (a)(7) of 
this section.
    (3) Indirect transfer through a foreign partnership. [Reserved]
    (4) Requirement to report dispositions--(i) In general. If a United 
States person was required to report a transfer to a foreign partnership 
of appreciated property under paragraph (a)(1) or (2) of this section, 
and the foreign partnership disposes of the property while such United 
States person remains a direct or indirect partner, that United States 
person must report the disposition by filing Form 8865. The form must be 
attached to, and filed by the due date (including extensions) of, the 
United States person's income tax return for the year in which the 
disposition occurred.
    (ii) Disposition of contributed property in nonrecognition 
transaction. If a foreign partnership disposes of contributed 
appreciated property in a nonrecognition transaction and substituted 
basis property is received in exchange, and the substituted basis 
property has built-in gain under Sec.  1.704-3(a)(8), the original 
transferor is not required to report the disposition. However, the 
transferor must report the disposition of the substituted basis property 
in the same manner as provided for the contributed property.
    (5) Time for filing Form 8865. The Form 8865 on which a transfer is 
reported must be attached to the transferor's timely filed (including 
extensions) income tax return for the tax year that includes the date of 
the transfer. If the person required to report under this section is not 
required to file an income tax return for its tax year during which the 
transfer occurred, but is required to file an information return for 
that year (for example, Form 1065, ``U.S. Partnership Return of 
Income,'' or Form 990, ``Return of Organization Exempt from Income 
Tax''), the person should attach the Form 8865 to its information 
return.

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    (6) Returns to be made--(i) Separate returns for each partnership. 
If a United States person transfers property reportable under this 
section to more than one foreign partnership in a taxable year, the 
United States person must submit a separate Form 8865 for each 
partnership.
    (ii) Duplicate form to be filed. If required by the instructions 
accompanying Form 8865, a duplicate Form 8865 (including attachments and 
schedules) must also be filed by the due date for submitting the 
original Form 8865 under paragraph (a)(5)(i) or (ii) of this section, as 
applicable.
    (7) Examples. The application of this paragraph (a) may be 
illustrated by the following examples:

    Example 1. On November 1, 2001, US, a United States person that uses 
the calendar year as its taxable year, contributes $200,000 to FP, a 
foreign partnership, in a transaction subject to section 721. After the 
contribution, US owns a 5% interest in FP. US must report the 
contribution by filing Form 8865 for its taxable year ending December 
31, 2001. On March 1, 2002, US makes a $40,000 section 721 contribution 
to FP, after which US owns a 6% interest in FP. US must report the 
$40,000 contribution by filing Form 8865 for its taxable year ending 
December 31, 2002, because the contribution, when added to the value of 
the other property contributed by US to FP during the 12-month period 
ending on the date of the transfer, exceeds $100,000.
    Example 2. F, a nonresident alien, is the brother of US, a United 
States person. F owns a 15% interest in FP, a foreign partnership. US 
contributes $99,000 to FP, in exchange for a 1-percent partnership 
interest. Under sections 6038(e)(3)(C) and 267(c)(2), US is considered 
to own at least a 10-percent interest in FP and, therefore, US must 
report the $99,000 contribution under this section.
    Example 3. US, a United States person, owns 40 percent of FC, a 
foreign corporation. FC owns a 20-percent interest in FP, a foreign 
partnership. Under section 267(c)(1), US is considered to own 8 percent 
of FP due to its ownership of FC. US contributes $50,000 to FP in 
exchange for a 5-percent partnership interest. Immediately after the 
contribution, US is considered to own at least a 10-percent interest in 
FP and, therefore, must report the $50,000 contribution under this 
section.
    Example 4. US, a United States person, owns a 60-percent interest in 
USP, a domestic partnership. On March 1, 2001, USP contributes $200,000 
to FP, a foreign partnership, in exchange for a 5-percent partnership 
interest. Under paragraph (a)(2) of this section, US is considered as 
having contributed $120,000 to FP ($200,000 x 60%). However, under 
paragraph (a)(2), if USP properly reports the contribution to FP, US is 
not required to report its $120,000 contribution. If US directly 
contributes $5,000 to FP on June 10, 2001, US must report the $5,000 
contribution because US is considered to have contributed more than 
$100,000 to FP in the 12-month period ending on the date of the $5,000 
contribution.
    Example 5.  US, a United States person, owns an 80-percent interest 
in USP, a domestic partnership. USP owns an 80-percent interest in USP1, 
a domestic partnership. On March 1, 2001, USP1 contributes $200,000 to 
FP, a foreign partnership, in exchange for a 3-percent partnership 
interest. Under paragraph (a)(2) of this section, USP is considered to 
have contributed $160,000 ($200,000 x 80%) to FP. US is considered to 
have contributed $128,000 to FP ($200,000 x 80% x 80%). However, if USP1 
reports the transfer of the $200,000 to FP, neither US nor USP are 
required to report under this section the amounts they are considered to 
have contributed. Additionally, regardless of whether USP1 reports the 
$200,000 contribution, if USP reports the $160,000 contribution it is 
considered to have made, US does not have to report under this section 
the $128,000 contribution US is considered to have made.

    (b) Transfers by trusts relating to state and local government 
employee retirement plans. Trusts relating to state and local government 
employee retirement plans are not required to report transfers under 
this section, unless otherwise specified in the instructions to Form 
8865.
    (c) Information required with respect to transfers of property. With 
respect to transfers required to be reported under paragraph (a)(1) or 
(2) of this section, the return must contain information in such form or 
manner as Form 8865 (and its accompanying instructions) prescribes with 
respect to reportable events, including--
    (1) The name, address, and U.S. taxpayer identification number of 
the United States person making the transfer;
    (2) The name, U.S. taxpayer identification number (if any), and 
address of the transferee foreign partnership, and the type of entity 
and country under whose laws the partnership was created or organized;
    (3) A general description of the transfer, and of any wider 
transaction of which it forms a part, including the date of transfer;

[[Page 204]]

    (4) The names and addresses of the other partners in the foreign 
partnership, unless the transfer is solely of cash and the transferor 
holds less than a ten-percent interest in the transferee foreign 
partnership immediately after the transfer. However, for tax years of 
U.S. persons beginning on or after January 1, 2000, the person reporting 
pursuant to section 6038B (the transferor) must provide the names and 
addresses of each United States person that owned a ten-percent or 
greater direct interest in the foreign partnership during the 
transferor's tax year in which the transfer occurred, and the names and 
addresses of any other United States or foreign persons that were direct 
partners in the foreign partnership during that tax year and that were 
related to the transferor during that tax year. See paragraph (i)(4) of 
this section for the definition of a related person;
    (5) A description of the partnership interest received by the United 
States person, including a change in partnership interest;
    (6) A separate description of each item of contributed property that 
is appreciated property subject to the allocation rules of section 
704(c)(except to the extent that the property is permitted to be 
aggregated in making allocations under section 704(c)), or is intangible 
property, including its estimated fair market value and adjusted basis; 
and
    (7) A description of other contributed property, not specified in 
paragraph (c)(6) of this section, aggregated by the following categories 
(with, in each case, a brief description of the property)--
    (i) Stock in trade of the transferor (inventory);
    (ii) Tangible property (other than stock in trade) used in a trade 
or business of the transferor;
    (iii) Cash;
    (iv) Stock, notes receivable and payable, and other securities; and
    (v) Other property.
    (d) Information required with respect to dispositions of property. 
In respect of dispositions required to be reported under paragraph 
(a)(4) of this section, the return must contain information in such form 
or manner as Form 8865 (and its accompanying instructions) prescribes 
with respect to reportable events, including--
    (1) The date and manner of disposition;
    (2) The gain and depreciation recapture amounts, if any, realized by 
the partnership; and
    (3) Any such amounts allocated to the United States person.
    (e) Method of reporting. Except as otherwise provided on Form 8865, 
or the accompanying instructions, all amounts reported as required under 
this section must be expressed in United States currency, with a 
statement of the exchange rates used. All statements required on or with 
Form 8865 pursuant to this section must be in the English language.
    (f) Reporting under this section not required of partnerships 
excluded from the application of subchapter K--(1) Election to be wholly 
excluded. The reporting requirements of this section will not apply to 
any United States person in respect of an eligible partnership as 
described in Sec.  1.761-2(a), if such partnership has validly elected 
to be excluded from all of the provisions of subchapter K of chapter 1 
of the Internal Revenue Code in the manner specified in Sec.  1.761-
2(b)(2)(i).
    (2) Deemed excluded. The reporting requirements of this section will 
not apply to any United States person in respect of an eligible 
partnership as described in Sec.  1.761-2(a), if such partnership is 
validly deemed to have elected to be excluded from all of the provisions 
of subchapter K of chapter 1 of the Internal Revenue Code in accordance 
with the provisions of Sec.  1.761-2(b)(2)(ii).
    (g) Deemed contributions. Deemed contributions resulting from IRS-
initiated section 482 adjustments are not required to be reported under 
section 6038B. However, taxpayers must report deemed contributions 
resulting from taxpayer-initiated adjustments. Such information will be 
furnished timely if filed by the due date, including extensions, for 
filing the taxpayer's income tax return for the year in which the 
adjustment is made.
    (h) Failure to comply with reporting requirements--(1) Consequences 
of failure. If a United States person is required to

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file a return under paragraph (a) of this section and fails to comply 
with the reporting requirements of section 6038B and this section, then 
such person is subject to the following penalties:
    (i) The United States person is subject to a penalty equal to 10 
percent of the fair market value of the property at the time of the 
contribution. Such penalty with respect to a particular transfer is 
limited to $100,000, unless the failure to comply with respect to such 
transfer was due to intentional disregard.
    (ii) The United States person must recognize gain (reduced by the 
amount of any gain recognized, with respect to that property, by the 
transferor after the transfer) as if the contributed property had been 
sold for fair market value at the time of the contribution. Adjustments 
to the basis of the partnership's assets and any relevant partner's 
interest as a result of gain being recognized under this provision will 
be made as though the gain was recognized in the year in which the 
failure to report was finally determined.
    (2) Failure to comply. A failure to comply with the requirements of 
section 6038B includes--
    (i) The failure to report at the proper time and in the proper 
manner any information required to be reported under the rules of this 
section; and
    (ii) The provision of false or inaccurate information in purported 
compliance with the requirements of this section.
    (3) Reasonable cause exception. Under section 6038B(c)(2) and this 
section, the provisions of paragraph (h)(1) of this section will not 
apply if the transferor shows that a failure to comply was due to 
reasonable cause and not willful neglect. The transferor may attempt to 
do so by providing a written statement to the district director having 
jurisdiction of the taxpayer's return for the year of the transfer, 
setting forth the reasons for the failure to comply. Whether a failure 
to comply was due to reasonable cause will be determined by the district 
director under all the facts and circumstances.
    (4) Statute of limitations. For exceptions to the limitations on 
assessment in the event of a failure to provide information under 
section 6038B, see section 6501(c)(8).
    (i) Definitions--(1) Appreciated property. Appreciated property is 
property that has a fair market value in excess of basis.
    (2) Domestic partnership. A domestic partnership is a partnership 
described in section 7701(a)(4).
    (3) Foreign partnership. A foreign partnership is a partnership 
described in section 7701(a)(5).
    (4) Related person. Persons are related persons if they bear a 
relationship described in section 267(b)(1) through (3) or (10) through 
(12), after application of section 267(c) (except for (c)(3)), or in 
section 707(b)(1)(B).
    (5) Substituted basis property. Substituted basis property is 
property described in section 7701(a)(42).
    (6) Taxpayer-initiated adjustment. A taxpayer-initiated adjustment 
is a section 482 adjustment that is made by the taxpayer pursuant to 
Sec.  1.482-1(a)(3).
    (7) United States person. A United States person is a person 
described in section 7701(a)(30).
    (j) Effective dates-- (1) In general. Except as otherwise provided 
in this section, this section applies to transfers made on or after 
January 1, 1998. However, for a transfer made on or after January 1, 
1998, but before January 1, 1999, the filing requirements of this 
section may be satisfied by--
    (i) Filing a Form 8865 with the taxpayer's income tax return 
(including a partnership return of income) for the first taxable year 
beginning on or after January 1, 1999; or
    (ii) Filing a Form 926 (modified to reflect that the transferee is a 
partnership, not a corporation) with the taxpayer's income tax return 
(including a partnership return of income) for the taxable year in which 
the transfer occurred.
    (2) Transfers made between August 5, 1997 and January 1, 1998. A 
United States person that made a transfer of property between August 5, 
1997, and January 1, 1998, that is required to be reported under section 
6038B may satisfy its reporting requirement by reporting in accordance 
with the provisions of this section or in accordance with the provisions 
of Notice 98-17

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(1998-11 IRB 6)(see Sec.  601.601(d)(2) of this chapter).
    (3) Special rule for transfers made before January 1, 2000. Even if 
not reported in accordance with the rules provided in paragraph (a)(5) 
of this section, or paragraph (j) (1) or (2) of this section, a transfer 
that occurred before January 1, 2000 will nevertheless be considered 
timely reported if the transferor reports it on a Form 8865 attached to 
an amended tax return for the transferor's tax year in which the 
transfer occurred, provided such amended return is filed no later than 
September 15, 2000.

[T.D. 8817, 64 FR 5715, Feb. 5, 1999; 64 FR 15686, Apr. 1, 1999; T.D. 
8850, 64 FR 72554, Dec. 28, 1999]