For Tax Professionals  
REG-118926-97 September 24, 1998

Notice of Certain Transfers to
Foreign Partnerships & Foreign Corporations

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [REG-118926-97] RIN 1545-AV70

TITLE: Notice of Certain Transfers to Foreign Partnerships and
Foreign Corporations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public public
hearing.

SUMMARY: This document contains proposed regulations under section
6038B of the Internal Revenue Code on information reporting
requirements for certain transfers by United States persons to
foreign partnerships. The proposed regulations would implement the
amendments made by the Taxpayer Relief Act of 1997 that require a
United States person who transfers property to a foreign partnership
to furnish certain information with respect to such transfers. This
document also contains proposed regulations that would amend the
information reporting requirements for certain transfers by United
States persons to foreign corporations to require the reporting of
the transfer of cash. The proposed regulations would provide
guidance to United States persons who must furnish this information.
This document also provides notice of a public hearing on these
proposed regulations.

DATES: Written comments must be received by November 9, 1998.

Outlines of topics to be discussed at the public hearing scheduled
for November 10, 1998, at 10 a.m., must be received by October 20,
1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-118926-97), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered between the
hours of 8 a.m. and 5 p.m. to CC:DOM:CORP:R (REG-118926-97),
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue
NW., Washington, DC. Alternatively, taxpayers may submit comments
electronically via the Internet by selecting the "Tax Regs" option
of the IRS Home Page, or by submitting comments directly to the IRS
Internet site at:
http://www.irs.ustreas.gov/prod/tax_regs/comments.html.

A public hearing has been scheduled to be held in room 2615,
Internal Revenue Building, 1111 Constitution Avenue NW., Washington,
DC.

FOR FURTHER INFORMATION CONTACT: Concerning transfers of cash to
foreign corporations, Philip L. Tretiak, and concerning transfers to
foreign partnerships, Christopher Kelley, 202-622-3860; concerning
the hearing and submissions of written comments, Michael Slaughter,
202-622-7190 (not toll-free calls).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995
(44 U.S.C. 3507(d)). Comments on the collection of information
should be sent to the Office of Management and Budget, Attention:
Desk Officer for the Department of the Treasury, Office of
Information and Regulatory Affairs, Washington, DC 20503, with
copies to the Internal Revenue Service, Attention: IRS Reports
Clearance Officer OP:FS:FP, Washington, DC 20224. Comments on the
collection of information must be received by November 9, 1998.
Comments are specifically requested on:

Whether the proposed collection of information is necessary for the
proper performance of the functions of the IRS, including whether
the information will have practical utility;

The accuracy of the estimated burden associated with the proposed
collection of information (see below);

How the quality, utility, and clarity of the information to be
collected may be enhanced;

How the burden of complying with the proposed collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and Estimates of the capital or start-up costs of
operation, maintenance, and purchase of services to provide
information.

The collection of information in these regulations is in
1.6038B-1(b) and 1.6038B-2. This information is required by the
IRS to identify United States persons who contribute property to
foreign partnerships and to ensure the correct reporting of items
with respect to those partnerships. The collection of information is
mandatory. The likely respondents will be individuals and businesses
or other for-profit organizations.

The burden of complying with the proposed collection of information
required to be reported on Form 8865 is reflected in the burden for
Form 8865.

The burden of complying with the proposed collection of information
required to be reported on Form 926 is reflected in the burden for
Form 926.

The burden of complying with the proposed collection of information
in 1.6038B-2(f)(2) is as follows:

Estimated total annual reporting burden: 250 hoU.S.
Estimated annual burden per respondent: 0.25 hours to 1 hour, with
an average of 0.5 hoU.S.
Estimated number of respondents: 500.

Estimated frequency of responses: Once per year.

An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
valid control number assigned by the Office of Management and
Budget.

Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns
and tax return information are confidential, as required by 26
U.S.C. 6103.

Background

Taxpayer Relief Act of 1997

In the Taxpayer Relief Act of 1997 (TRA 1997), Public Law 105-34
(111 Stat. 983 (1997)), Congress significantly modified the
information reporting requirements with respect to foreign
partnerships under sections 6038, 6038B and 6046A (and also amended
section 6501(c)(8) to provide that the statute of limitations on the
assessment of tax under section 6038, 6038B and 6046A does not
expire until three years after the information required under those
sections is reported). Certain of these modifications also affect
reporting requirements with respect to foreign corporations. These
regulations under section 6038B are being proposed along with
regulations under sections 6038 (reporting with respect to certain
foreign partnerships) and 6046A (reporting of certain ownership
interests in foreign partnerships). The IRS is also developing a
comprehensive form (Form 8865) for reporting under all of these
provisions. A draft version of the form will be issued for public
comment while the proposed regulations are outstanding.

Section 6038B and Transfers to Foreign Corporations

Section 6038B, as enacted in 1984, provided that United States
persons that made certain transfers of property to foreign
corporations were required to report those transfers in the manner
prescribed by regulations. Prior to the enactment of TRA 1997,
section 6038B imposed a penalty for failure to comply with the
regulations equal to 25 percent of the gain realized on the
exchange, unless the failure was due to reasonable cause and not to
willful neglect. Thus, in the case of a transfer of cash or other
unappreciated property to a foreign corporation, no penalty was
imposed under section 6038B if the transfer was not reported.

Section 1144(c) of TRA 1997 modified the penalty applicable to the
failure to furnish information required to be reported under section
6038B. The modified penalty is equal to 10 percent of the fair
market value of the property at the time of the transfer.

In response to TRA 1997, Treasury and the IRS issued final
regulations under section 6038B (TD 8770 at 63 FR 33568; June 19,
1998), in conjunction with regulations under section 367(a), to
clarify that transfers to corporations of unappreciated property
other than cash that occur on or after July 20, 1998, generally are
required to be reported in accordance with 1.6038B-1(b).

The preamble to the final regulations stated that rules regarding
transfers of cash to foreign corporations would be provided in
future regulations.

Section 6038B and Transfers to Foreign Partnerships

Prior to the enactment of TRA 1997, section 1491 imposed an excise
tax on certain transfers of property by United States persons to
foreign corporations, partnerships, estates, or trusts. The tax was
equal to 35 percent of the fair market value of the property
transferred in excess of adjusted basis and any gain recognized on
the transfer (built-in gain). Section 1494(c), effective for
transfers made after August 20, 1996, imposed a further penalty for
a failure to report.

Section 1131(a) of TRA 1997 repealed sections 1491 through 1494.

Section 1144 of TRA 1997 amended section 6038B to require a United
States person who transfers property to a foreign partnership to
report the transfer in the time and manner provided in regulations.
The 1997 amendments apply to transfers of property made after August
5, 1997. Notice 98-17 (1998-11 C.B. 6) provided the manner of
reporting a transfer under section 6038B made after August 5, 1997,
and before January 1, 1998.

Explanation of Provisions

Reporting of Cash Transfers to Foreign Corporations These proposed
regulations provide that transfers of cash to foreign corporations
are required to be reported if the U.S.
transferor holds, immediately after the transfer, directly or
indirectly, a 10-percent interest in the foreign corporation, or the
amount of the cash transferred by the transferor or any related
person to such foreign corporation or a related foreign corporation
during the 12-month period ending on the date of the transfer
exceeds $100,000. The transfer of cash to a foreign corporation will
not be required to be reported unless made in a taxable year
beginning after the date that final regulations requiring reporting
are published in the Federal Register.

The IRS and Treasury invite comments on these requirements and the
corresponding requirement for foreign partnerships, including a
description of the types of transfers which could appropriately be
excepted (for example, capital contributions and returns of cash
made as part of the normal course of business operations).

Reporting of Transfers to Foreign Partnerships

The proposed regulations would implement the rules of section 6038B
by generally requiring that a United States person that transfers
property (including cash) to a foreign partnership in a contribution
described in section 721 in exchange for a partnership interest,
file a return on Form 8865 A Information Return of U.S. Persons With
Respect To Certain Foreign Partnerships @ , reporting the transfer.
Under the statutory exceptions in section 6038B(b)(1), a United
States person must report such a contribution only if (1) the United
States person holds (immediately after the transfer), directly or
indirectly, at least a 10-percent interest in the partnership, or
(2) the value of the property transferred (when added to the value
of the property transferred by such person to the partnership within
the preceding 12 months) exceeds $100,000 (including the value of
property transferred in any transfer not described in section 721, a
principal purpose of which is the avoidance of the reporting
requirements of these regulations). The proposed regulations would
also require a transferor, if still a partner, to notify the IRS
when a foreign partnership disposes of appreciated property
contributed by the transferor. This information will help in
determining whether built-in gain has been properly allocated to and
recognized by the U.S. transferor.

The proposed regulations provide that certain indirect transferors
need not report under this section if certain conditions are met. A
10-percent interest is defined by cross-reference to section
6046A(d), which in turn cross-references section 6038(e)(3)(C) and
regulations issued under that provision. The term means direct or
indirect ownership of an interest equal to 10 percent of the capital
interest or profits interest in a partnership, and an interest to
which 10 percent of the deductions or losses of a partnership are
allocated.

Partnerships Excluded From Application of Subchapter K The reporting
requirements of this section shall not apply in respect of any
foreign partnership which is an eligible partnership described in
1.761-2(a) that has validly elected pursuant to 1.761-2(b)(2)(i)
to be wholly excluded from the application of subchapter K. Nor
shall the reporting requirements of these proposed regulations apply
to any foreign partnership validly deemed to have wholly elected out
of the provisions of subchapter K as specified in 1.761-2(b)(2)
(ii).

Taxpayers are reminded, however, that a precondition to being an
"electing-out" partnership is that, as provided in 1.761-2(a)(1),
"[t]he members of such organization must be able to compute their
income without the necessity of computing partnership taxable
income." The IRS and Treasury are concerned that in certain cases
the necessary books and records are not being maintained to allow
verification that such computations can indeed be made without
regard to the partnership. If it appears that, in the absence of a
reporting requirement under this section, the members of the
"electing-out" partnership cannot make such separate computations,
this exception to the reporting requirements will be reconsidered.

Reporting of Cash Transfers to Foreign Partnerships The proposed
regulations require the reporting of a cash transfer to a foreign
partnership in a contribution otherwise required to be reported
under section 6038B and these regulations. Such transfers were
required to be reported under Notice 98-17. Reporting of cash
transfers will help to ensure that any earnings and appreciation
attributable to the cash are reported by the U.S. transferor, and
help to prevent United States persons from avoiding the rules
applicable to foreign trusts. As noted above with respect to cash
contributions to foreign corporations, Treasury and the IRS are
interested in receiving comments on specific issues in addition to
general comments on this requirement.

Information Required

The proposed regulations would require a United States person to
provide certain information with respect to property transferred in
a reportable contribution. Appreciated property and intangible
property must be listed item by item on the Form 8865. Other items
of property may be aggregated and listed according to the following
categories: (1) inventory; (2) other tangible trade or business
property; (3) cash; (4) securities; and (5) other property.

The proposed regulations provide that a United States person
reporting a transfer to a foreign partnership under section 6038B
must identify the other partners in the partnership. This allows the
IRS, for example, to determine whether built-in gain is being
properly allocated to and recognized by the U.S. transferor under
section 704(c). The proposed regulations except from this rule a
United States person only required to report because of a transfer
of cash, if the transferor holds less than a 10-percent interest in
the partnership immediately following the transfer.

Time and Place for Filing

The proposed regulations would require Form 8865 to be filed with
the United States person's income tax return (including a
partnership return of income) for the year in which the reportable
contribution occurs. However, if the transferor is also required to
report under proposed regulation 1.6038-3(a), then the transfer
must be reported on the Form 8865 (and filed in accordance with
1.6038-3(e) and (h)) for the foreign partnership's taxable year in
which the reportable contribution occurs. Additionally, if required
by the instructions to Form 8865, a duplicate Form 8865 must also be
filed. The proposed regulations would provide alternative filing
deadlines with respect to reportable contributions that occur on or
before the date final regulations on this subject are published in
the Federal Register (see Effective Dates portion of this preamble).

Failure to Provide Information

Section 6038B(c)(1) and the proposed regulations provide that a
failure by the transferor to properly report a transfer that is
required to be reported under section 6038B and these regulations is
subject to a penalty equal to 10 percent of the fair market value of
the property transferred. This penalty is subject to a $100,000
limit under section 6038B(c)(3), unless the failure is due to
intentional disregard. In addition, the transferor must recognize
gain (reduced by gain recognized, with respect to that property, by
the transferor after the transfer) as if the property had been sold
for its fair market value at the time of the transfer. In addition,
section 6501(c)(8) keeps the statute of limitations open with
respect to the transferor in the case of a failure to report. Any
adjustments to the basis of the partnership or any partner (direct
or indirect) as a result of the gain recognized under this
provision, shall be made as though the gain was recognized in the
year in which the failure to report was finally determined. Section
6038B(c)(2) and the proposed regulations provide a reasonable cause
exception to the penalty and gain recognition provisions.

Effective Dates

The amendments to the regulations on the reporting of cash transfers
to foreign corporations apply to taxable years beginning after these
regulations are published as final regulations in the Federal
Register.

The proposed regulations on the reporting of transfers to foreign
partnerships apply to transfers made on or after January 1, 1998.
Notice 98-17 (1998-11 I.R.B. 6) provides reporting requirements for
transfers made after August 5, 1997, and before January 1, 1998. The
proposed regulations would permit United States persons who made
transfers in that period to rely on either Notice 98-17 or the final
regulations.

Special Analyses

It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in EO 12866.
Therefore, a regulatory assessment is not required.

It has also been determined that section 553(b) of the
Administrative Procedure Act (5 U.S.C. chapter 5) does not apply to
these proposed regulations. It is hereby certified that the
collection of information contained in these proposed regulations
will not have a significant economic impact on a substantial number
of small entities. This certification is based on the fact that the
amount of time required to complete the form and file the
information required under these regulations is brief and will not
have a significant impact on those small entities that are required
to provide notification. Furthermore, the number of small entities
that will be required to file the form is not significant.
Accordingly, a Regulatory Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to
section 7805(f) of the Internal Revenue Code, these regulations will
be submitted to the Chief Counsel for Advocacy of the Small Business
Administration for comment on their impact on small business.

Comments and Public Hearing

Before these proposed regulations are adopted as final regulations,
consideration will be give to any written comments ( preferably a
signed original and eight (8) copies) that are submitted timely to
the IRS. All comments will be made available for public inspection
and copying.

A public hearing has been scheduled for Tuesday, November 10, 1998,
at 10 a.m., in room 2615, Internal Revenue Building, 1111
Constitution Avenue NW., Washington, DC. Because of access
restrictions, visitors will not be admitted beyond the Internal
Revenue Building lobby more than 15 minutes before the hearing
starts.

The rules of 26 CFR 601.601(a)(3) apply to the hearing.

Persons that wish to present oral comments at the hearing must
submit written comments and an outline of the topics to be discussed
(preferably a signed original and eight (8) copies) by October 20,
1998.

A period of 10 minutes will be allotted for each person making
comments.

An agenda showing the scheduling of the speakers will be prepared
after the deadline for receiving outlines has passed.

Copies of the agenda will be available free of charge at the
hearing.

Drafting Information

The principal authors of these proposed regulations are Christopher
Kelley and Philip Tretiak of the Office of Associate Chief Counsel
(International). However, other personnel from the IRS and Treasury
Department participated in their development.

List of Subjects in 26 CFR Part 1 Income taxes, Reporting and
recordkeeping requirements.

Proposed Amendments to the Regulations Accordingly, 26 CFR part 1 is
proposed to be amended as follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Section 1.6038B-1 also issued under 26 U.S.C. 6038B.

Section 1.6038B-2 also issued under 26 U.S.C. 6038B. * * *

Par. 2. Section 1.6038B-1 is amended as follows:

1. The section heading is revised.

2. Paragraph (b)(1)(i), first sentence, is revised.

3. The text of paragraph (b)(3) is added.

4. Paragraph (c), first sentence, is revised 5. Paragraph (g) is
revised.

The additions and revisions read as follows:

1.6038B-1 Reporting of certain transfers to foreign corporations.

* * * * *

(b) Time and manner of reporting--(1) In general--(i) Reporting
procedure. Except for stock or securities qualifying under the
special reporting rule of paragraph (b)(2) of this section, or cash,
which is subject to special rules contained in paragraph (b)(3) of
this section, any U.S. person that makes a transfer described in
section 6038B(a)(1)(A), 367(d) or (e)(1) is required to report
pursuant to section 6038B and the rules of this section and must
attach the required information to Form 926 A Return by Transferor
of Property to a Foreign Corporation @ .* * *

* * * * *

(3) Special rule for transfers of cash. A U.S. person that transfers
cash must report the transfer of cash to a foreign corporation if--

(i) Such U.S. person holds (immediately after the transfer) directly
or indirectly (determined under the rules of sections 318(a) and
6038(e)(2)) at least 10 percent of the total voting power or the
total value of the foreign corporation; or

(ii) The amount of cash transferred by such person or any related
person (determined under section 267(b)) to such foreign corporation
or a related foreign corporation during the 12-month period ending
on the date of the transfer exceeds $100,000.

* * * * *

(c) Information required with respect to transfers described in
section 6038B(a)(1)(A). A U.S. person that transfers property to a
foreign corporation in an exchange described in section 6038B(a)(1)
(A) (including cash and other unappreciated property) must provide
the following information, in paragraphs labeled to correspond with
the number or letter set forth in this paragraph (c) and
1.6038B-1T(c)(1) through (5). * * *

* * * * *

(g) Effective dates. This section applies to transfers occurring on
or after July 20, 1998, except the first sentence of paragraph (b)
(1)(i), paragraph (b)(3), and the first sentence of paragraph (c)
apply to taxable years beginning after the date that final
regulations are published in the Federal Register. See 1.6038B-1T
for transfers occurring prior to July 20, 1998.

Par. 6. Section 1.6038B-2 is added to read as follows:

1.6038B-2 Reporting of certain transfers to foreign partnerships.

(a) Reporting requirements--(1) Requirement to report transfers. Any
United States person that makes a transfer to a foreign partnership
in a contribution described in section 721 is required to report
pursuant to section 6038B and the rules of this section by filing
Form 8865 A Information Return of U.S.
Persons With Respect To Certain Foreign Partnerships @ attached to
the transferor's income tax return (including a partnership return
of income) for the taxable year that includes the date of the
transfer by the due date (including extensions) for that return,
if--

(i) The United States person holds (immediately after the transfer)
directly or indirectly at least a 10-percent interest in the
partnership; or

(ii) The value of the property transferred, when added to the value
of the property transferred by such person or any related person
(described in section 267(b) or 707(b)(1)) to such partnership or a
related partnership (described in section 707(b)(1)(B)) during the
12-month period ending on the date of the transfer, exceeds
$100,000. For purposes of determining the relevant amounts, there
shall also be taken into account the value of any property
transferred in a transfer not subject to section 721, where a
principal purpose of such transfer was the avoidance of these
reporting requirements.

(2) Requirement to report dispositions--(i) In general. If a United
States person was required to report a transfer to a foreign
partnership under paragraph (b)(1) of property with a fair market
value in excess of basis (built-in gain property), and the
partnership disposes of the property while such United States person
remains a 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 transferor's
income tax return for the year in which the disposition occurred.

(ii) Disposition of property in nonrecognition transaction.

If a foreign partnership disposes of contributed built-in gain
property in a nonrecognition transaction and substituted basis
property is received in exchange, and the substituted basis property
has built-in gain under 1.704-3(a)(8), the transferor must report
the disposition of the substituted basis property in the same manner
as provided for the contributed property.

(3) Returns to be made--(i) Separate returns for each partnership.
If a United States person transfers property to more than one
foreign partnership in a taxable year, a separate return must be
made by the United States for each partnership. ( ii) Duplicate form
to be filed. If required by the instructions to Form 8865, a
duplicate Form 8865 (including attachments and schedules) must also
be filed.

(4) Time for filing when transferor also required to report under
1.6038-3(a). If the United States person required to file under
this section is also required to file under 1.6038-3(a) for the
period in which the transfer occurs, then the United States person
must report under this section on the Form 8865 for the foreign
partnership's annual accounting period in which the transfer
occurred (not its own taxable year) and file with its income tax
return for that year as provided in 1.6038-3(e) and (h).

(b) Relief for indirect transferors--(1) Requirements. A United
States person otherwise required to file a return under this section
with respect to a transfer to a foreign partnership need not file a
return if all of the following conditions are met

B-(i) The person does not directly own an interest in the foreign
partnership;

(ii) The person is required to file a return solely by reason of
attribution of ownership from a United States person (as determined
under the rules of section 6038(e)(3) and the regulations
thereunder); and

(iii) A United States person from whom the ownership is attributed
files all of the information required under section 6038B and this
section with respect to the transfer. ( 2) Statement required. A
United States person who does not furnish an information return
under the provisions of paragraph (b)(1) of this section must file a
statement with the person's income tax return--

(i) Indicating that the filing requirement has been or will be
satisfied;

(ii) Identifying the person who has or will file the return;

(iii) Identifying the IRS Service Center where the return was or
will be filed; and

(iv) Providing any additional information as Form 8865 and the
accompanying instructions may require.

(c) Information required with respect to transfers of property. In
respect of transfers described in section 6038B(a)(1)(B), the return
must contain information in such form or manner as Form 8865 (and
its accompanying instructions) prescribes with respect to reportable
events, including

B-(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;

(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 10-percent interest in the transferee
foreign partnership immediately after the transfer;

(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.

(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, the return must contain information in
such form or manner as Form 8865 (and its accompanying instructions)
prescribes with respect to reportable events, including

B-(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 1.761-2(a) in which that United States
person is a partner, 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 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 1.761-2(a) in which that United States
person is a partner, 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 1.761-2(b)(2)(ii).

(g) Deemed contributions. If by reason of an adjustment under
section 482 or otherwise, a contribution required to be reported
under section 6038B(a)(1)(B) and this section is deemed to have been
made, the information required to be reported will be furnished
timely if filed by the due date (including extensions) of, the
taxable year during which the adjustment is made.

(h) Failure to comply with reporting requirements--(1) Consequences
of failure. If a United States person is required to file a return
under paragraph (a) of this section and fails to comply with the
reporting requirements of section 6038B and this section, then--

(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;

(ii) The United States person will 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; and

(iii) Adjustments to the basis of the partnership and any relevant
partner 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)(3) 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 facts and
circumstances.

(4) Limitation on penalties. The penalty under paragraph (h)(1)(i)
of this section with respect to any transfer cannot exceed $100,000,
unless the failure to comply with respect to such transfer was due
to intentional disregard.

(5) Statute of limitations. For exceptions to the limitations on
assessment and collection in the event of a failure to provide
information under section 6038B, see section 6501(c)(8).

(i) Definitions--(1) 10-percent interest. 10-percent interest is
defined in sections 6046A(d) and 6038(e)(3)(C) and the regulations
thereunder.

(2) United States person. United States person is defined in section
7701(a)(30).

(3) Foreign partnership. Foreign partnership is defined in section
7701(a)(2) and (5).

(4) Substituted basis property. Substituted basis property is
defined in section 7701(a)(42).

(5) Value of the property transferred. Under section 6038B and this
section, the value of the property transferred is the fair market
value of the property at the time of its transfer.

(j) Effective dates--(1) In general. This section applies to
transfers made on or after January 1, 1998. However, for a transfer
made prior to the date final regulations are published in the
Federal Register, Form 8865 will be considered timely filed with
respect to a transfer if filed with the taxpayer's income tax return
for the first taxable year beginning after the date that final
regulations are published in the Federal Register.

(2) Transfers after August 5, 1997 and before January 1, 1998. A
United States person who made a transfer of property required to be
reported under section 6038B prior to the effective date of these
regulations may satisfy its reporting requirements by reporting in
accordance with the provisions of this section.

Michael P. Dolan
Deputy Commissioner of Internal Revenue


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