Joint Form 5471s for Multiple Category 2 Filers, Using Powers of Attorney

Legal Authority

This method of joint filing for Category 2 filers is described in Reg. §1.6046-1(e)(3).

Introduction

Start With the Filing Requirement Trigger

Start with the assumption that you have identified two Category 2 filers who have identical reporting requirements that have been triggered by Reg. §1.6046-1(a)(2):

• A United States person has acquired stock in the foreign corporation in sufficient quantities to move above the 10% stock ownership threshold [Reg. §1.6046-1(a)(2)(i)(a)];
• A United States person who already owns at least 10% of the foreign corporation stock acquires more stock that pushes total stock ownership up by at least 10 percentage points [Reg. §1.6046-1(a)(2)(i)(b)]; or
• a foreign shareholder becomes a United States person, has become a U.S. person and triggered the event described in Reg. §1.6046-1(a)(2)(i)(c). This rule has to do with captive insurance companies and I will ignore it for the rest of this write-up.

Look for the Easy Way Out

Then, let's assume that the two Category 2 filers want to cooperate to lower the overall paperwork/overhead of complying with their Form 5471 requirements.One Category 2 officer/director can give a power of attorney to another Category 2 officer/director, with authority to prepare and file Form 5471 on his/her behalf. The power of attorney can authorize the power holder to file a separate Form 5471 or a joint Form 5471 for the person granting the power.I'm not sure what makes this method better than the "normal" way of filing a joint Form 5471. The paperwork requirements are identical, whether you use the normal methodology authorized by Reg. §1.6046-1(e)(1) or you use the "power of attorney" methodology authorized by Reg. §1.6046-1(e)(3).Perhaps it could be useful in the context of filing logistics and your ability to get wet ink signatures on paper-filed tax returns. I don't know. All I can tell you is that I have never used the power of attorney method.I spent the time writing this because it can help you in one of two ways:

• You will, perhaps, see a glimmer of an inkling of a possibility of a hint that this exception might do something useful for you.
• You will realize that this exception is a dreadful waste of time and will consign it to eternal oblivion.

After writing this up, I came to the second conclusion for myself. But YOLO.

The Basics

Authority to File Joint Returns

Multiple Category 2 filers can grant powers of attorney to each other to discharge the Form 5471 filing requirement that they face.

Any two or more persons required under paragraph (a) of this section to make a return with respect to one or more shareholders of the same corporation may, by means of one or more duly executed powers of attorney, constitute one of their number as attorney in fact for the purpose of making such returns or for the purpose of making a joint return under subparagraph (1) of this paragraph. ¹

Persons "required under paragraph (a) of this section" are U.S. persons who are officers or directors of a foreign corporation when a triggering stock acquisition event occurs. If the filing obligation arises after January 1, 1963 (it's a good bet that this is true), the Form 5471 filing obligation exists because of Reg. §1.6046-1(a)(2).

Standard Paperwork Applies

If you use the "power of attorney" method for filing a Form 5471 jointly with another person, the filing requirements for the joint return are specified in Reg. §1.6046-1(e)(1), and are identical whether you use the power of attorney method or, to coin a phrase, Just Do It.The reason you know this is true is because of the reference to "subparagraph (1) of this paragraph" at the end of the quoted text, above.

The Power of Attorney

The Parties

One of the two Category 2 individuals will, in the hope that the recipient of the power will do the job correctly, give a power of attorney to the other, for the purpose of satisfying the Form 5471 filing requirement for both of them.For simplicity, let's call the person who signs the power of attorney the "principal" (because that's what Reg. §1.6046-1(e)(3) uses) and the person who receives authorization to act on behalf of the principal as the "attorney in fact" (because that's what the Regulations call this person). ²

Three Ways to Use It to File Form 5471

The attorney in fact is authorized file a Form 5471 on behalf of the principal. In the power of attorney, the principal may give the attorney in fact the power to:

• prepare, sign, and file a separate Form 5471 executed in the name of the principal; or
• prepare, sign, and file a joint Form 5471, with the principal filing Form 5471 and the attorney in fact (named in Item H) as the person on whose behalf the joint Form 5471 is filed; or
• prepare, sign, and file a joint Form 5471, with the attorney in fact filing Form 5471 and the principal (named in Item H) as the person on whose behalf the joint Form 5471 is filed.

Only for Category 2 Filers

The power of attorney must be limited to making returns required under Reg. §1.6046-1(a), so can only be used by Category 2 filers.

The power of attorney referred to in subdivision (i) of this subparagraph shall be limited to the making of returns required under paragraph (a) of this section and shall be limited to a single calendar year with respect to which such returns are required.

Category 2 filers are governed by "paragraph (a) of this section." Category 3 filers are governed by Reg. §1.6046-1(c) for everything happening after January 1, 1963. The reference to "paragraph (a)" above tells you that this joint filing process cannot be used by Category 3 filers.

One Year Per Power of Attorney

The power of attorney must be limited to a single calendar year.

The power of attorney referred to in subdivision (i) of this subparagraph shall be limited to the making of returns required under paragraph (a) of this section and shall be limited to a single calendar year with respect to which such returns are required. ³

No Magic Language Needed

No particular skill is required in preparing the power of attorney. The government does not require technical language to make the power of attorney document valid for purposes of this filing exception applicable to Category 2 filers.

The use of technical language in the preparation of the power of attorney referred to in subdivision (i) of this subparagraph is not necessary. ⁴

Under the legal theory that the specific overrides the general, this specific instruction on how to prepare a power of attorney will specifically overrides the default requirements for a valid power of attorney throughout the Internal Revenue Code, which you can find at Reg. §601.503.In short: keep it simple, and there is no need to get technical (unless that falls in your definition of "fun").

Signature on Power of Attorney: Notarized or Witnessed

The power of attorney must be signed by principal (the person with the Category 2 filing obligation who is appointing someone else to do the job) and acknowledged before a notary public or witnessed by two disinterested persons.

Such power of attorney shall be signed by the individual United States citizen or resident required to file a return or returns under paragraph (a) of this section. Such power of attorney must be acknowledged before a notary public or, in lieu thereof, witnessed by two disinterested persons. The notarial seal must be affixed unless such seal is not required under the laws of the state or country wherein such power of attorney is executed. ⁵

Using the Power of Attorney

How to Sign Form 5471 Using a Power of Attorney

Remember that there are three ways a power of attorney can be used to satisfy a Category 2 filer's requirements to file Form 5471. Two of these involve preparing the Form 5471 in the name of the principal (the person who gave the power of attorney). ⁶ The attorney in fact can either file:

• a stand-alone Form 5471 in the name of the principal, or
• a joint Form 5471 in the name of the principal, and add himself (the attorney in fact) as a joint filer on Item H.

In either event, the attorney in fact is signing someone else's Form 5471. How, exactly, does the attorney in fact apply lovely wet blue ink to paper in the approved method in order to satiate the Tax God's appetite for paper?

A return made under authority of one or more powers of attorney referred to in subdivision (i) of this subparagraph shall be signed by the attorney in fact for each principal for which such attorney in fact is acting.⁷

Traditional IRS processes for signing tax returns will presumably apply. Reg. §1.6046-1(e)(3) is silent on how to handle the signature line, but presumably the generic IRS rules for signing tax returns will apply. ⁸The attorney in fact (Barney Rubble) would sign a Form 5471 on behalf of the principal (Fred Flintstone) as follows:

Fred Flintstone, by Barney Rubble, attorney in fact.

Attach the Power of Attorney to Form 5471

You should attach a copy of the power of attorney to the Form 5471 filed. The Regulations are defective, and in the name of self-preservation you should take the appropriate defensive actions.The default rules for a tax return says that a valid return must be executed by the taxpayer.Taxpayers can authorize others to sign tax returns on their behalf. In these situations, the general rule is simple: in the case of returns executed by an agent of the taxpayer, the power of attorney must be attached to the return.

Whenever a return is made by an agent it must be accompanied by a power of attorney (or copy thereof) authorizing him to represent his principal in making, executing, or filing the return. ⁹

The specific rules for this Category 2 filing exception do not tell you to attach the power of attorney and they do not tell you to not attach the power of attorney to the Form 5471 you are filing under authority of the power of attorney. The Regulations are silent. All they tell you is to store the power of attorney in a convenient and safe location. (!)

A return made under authority of one or more powers of attorney referred to in subdivision (i) of this subparagraph shall be signed by the attorney in fact for each principal for which such attorney in fact is acting. A copy of such one or more powers of attorney shall be kept at a convenient and safe location accessible to internal revenue officers, and shall at all times be available for inspection by such officers. ¹⁰

Since the specific rule quoted above is silent (on whether to attach the power of attorney or not), the default rule applicable to all returns (with the plain command to attach a copy of the power of attorney to the tax return) will apply.Attach a copy of the power of attorney to the Form 5471 executed by the attorney in fact. This will prove that the taxpayer validly executed Form 5471 under penalty of perjury.

Storage and Access to the Power of Attorney

Be prepared to produce the power of attorney if necessary. Keep it safe, somewhere.

A copy of such one or more powers of attorney shall be kept at a convenient and safe location accessible to internal revenue officers, and shall at all times be available for inspection by such officers. ¹¹

Penalties

The use of a power of attorney does not discharge the principal's penalty risk. Put another way, you are still on the hook for Form 5471 penalties, even if you give someone else the job to file your Form 5471. If the attorney in fact you selected makes a mess of the Form 5471 filing job, the IRS sees it as your problem, not the attorney in fact's.

The fact that a return is made under authority of a power of attorney referred to in subdivision (i) of this subparagraph shall not affect the principal's liability for penalties provided for failure to file a return required under paragraph (a) of this section or for filing a false or fraudulent return. ¹²

Summary

I don't see a tremendous value to using the power of attorney method except in situations of utter trust and confidence, and where it might be hard to get wet ink signatures from someone.E.g., one officer is living abroad and one officer is in the United States. For filing logistics purposes, it will be useful to have the officer in the United States sign the joint Form 5471. Therefore, the officer living outside the United States gives a power of attorney to the officer living inside the United States.But I have not yet experienced all the wonders that this universe presents, so there might be some other reason to use these procedures.

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^{1. Reg. §1.6046-1(e)(3)(i). ↩ 2. Unfortunately, the Code and Regulations will sometimes refer to the attorney in fact as "agent" but I am going to use "attorney in fact" here because that's what Reg. §1.6046-1(e)(3) uses.↩ 3. Reg. §1.6046-1(e)(3)(ii). Emphasis added.↩ 4. Reg. §1.6046-1(e)(3)(iii). ↩ 5. Reg. §1.6046-1(e)(3)(iii). Emphasis added.↩ 6. In the third method, the attorney in fact would file his own Form 5471, and add the principal on Item H as a joint filer. But if you do this, why bother with the power of attorney?↩ 7. Reg. §1.6046-1(e)(3)(iv).↩ 8. Reg. §1.6012-1(a)(5).↩ 9. Reg. §1.6012-1(a)(5).↩ 10. Reg. §1.6046-1(e)(3)(iv).↩ 11. Reg. §1.6046-1(e)(3)(iv).↩ 12. Reg. §1.6046-1(e)(3)(v).↩}