U.S. Citizen Married to Nonresident Alien Shareholder = Form 5471?

When does a U.S. citizen spouse have a Form 5471 filing requirement, merely by being married to a nonresident alien who owns foreign corporation stock?

That's what we're going to find out today.

Efficiency

And it hasn't escaped me that the more ahem efficiency-minded reader might well ahem more or less appropriate this analysis for a research memorandum to the tax prep file.I want you to read and understand the rules, even if this happens to be a largely pre-assembled research memorandum kit you found on the internet.

The Conclusions

Just so I don't hide the ball:

• Category 2. Don't be an officer or director, OK? I didn't analyze this question because I see officer/director status as a footgun. If you unavoidably are an officer or director, watch carefully for Category 3 filing acquisitions during the year. If they exist, you almost certainly must file Form 5471 as a Category 2 filer.
• Category 3. In years of acquisition or disposition of "enough" stock by a nonresident alien spouse, the U.S. citizen spouse has a Category 3 filing requirement.
• Categories 1, 5. The law is clear: the U.S. citizen spouse does not have a filing requirement merely because his or her nonresident alien spouse owns foreign corporation stock.
• Category 4. The law is clear: the U.S. citizen spouse has a Category 4 filing requirement. But an exception relieves the U.S. citizen spouse from actually having to file Form 5471.

Or, in beautiful table format:Let's get to it, shall we?

Facts

U.S. citizen Husband is married to nonresident alien Wife. She forms a new foreign corporation in 2023 and acquires 100% of the stock.The country they live in is not a community property jurisdiction, so she is really, truly the sole shareholder of the foreign corporation.Husband is not an officer or director of the foreign corporation.

Analysis sequence

Remember to always, always analyze stock ownership for Form 5471 in two steps:

1. Is there a Form 5471 filing requirement imposed by the Internal Revenue Code?
2. If there is a filing requirement, does an exception apply to relieve you of the filing requirement?

If you do this, you will never have a problem. You will come to the correct answer for the right reason. If you skip step 1 and go straight to step 2, you might get the correct answer for the wrong reason. Getting the correct answer for the wrong reason is deadly.

Category 1, Category 5: no filing requirement

U.S. citizen Husband is not a Category 1 or Category 5 filer. The reason: he is not a United States shareholder of the foreign corporation owned by his nonresident alien Wife.

Twin conditions for filing Category 1 or Category 5

Both Category 1 and Category 5 have two requirements:

• A special kind of taxpayer; and
• A special kind of foreign corporation.

The "special kind of taxpayer" requirement is common to both categories. The type of foreign corporation is different.I will show how U.S. citizen is not a United States shareholder (a defined term from IRC §951(b)), making Category 1 and Category 5 status impossible.

Category 1: Instructions, law

A Category 1 filing obligation is imposed on any "United States shareholder" of a "section 965 specified foreign corporation." (I will ignore whether the individual falls into Category 1a, 1b, or 1c.)The Instructions for Form 5471 (rev. January 2023) explain it this way (emphasis added):

In general, a Category 1 filer is a person who was a U.S. shareholder of a foreign corporation that was a section 965 specified foreign corporation (SFC) at any time during the foreign corporation’s tax year ending with or within the U.S. shareholder’s tax year, and who owned that stock on the last day in that year in which the foreign corporation was a section 965 SFC, taking into account the regulations under section 965.

The statutory authority for the IRS to impose information filing requirements on  Category 1 filers is IRC §6038(a)(4), again with emphasis added:

Information required from certain shareholders in certain cases. If any foreign corporation is treated as a controlled foreign corporation for any purpose under subpart F of part III of subchapter N of chapter 1, the Secretary may require any United States person treated as a United States shareholder of such corporation for any purpose under subpart F to furnish the information required under paragraph (1).

Note the emphasized phrase: "United States shareholder."

Category 5: Instructions, law

The Instructions for Form 5471 (rev. January 2023) say (emphasis added):

In general, a Category 5 filer is a person who was a U.S. shareholder that owned stock in a foreign corporation that was a CFC at any time during the foreign corporation’s tax year ending with or within the U.S. shareholder’s tax year, and who owned that stock on the last day in that year in which the foreign corporation was a CFC. There are three different types of Category 5 filers, each described below: Category 5a filers, Category 5b filers, and Category 5c filers.

IRC §6038(a)(4) is the statutory authority allowing the IRS to impose the Category 5 filing requirement. It says (again, with emphasis added):

Information required from certain shareholders in certain cases. If any foreign corporation is treated as a controlled foreign corporation for any purpose under subpart F of part III of subchapter N of chapter 1, the Secretary may require any United States person treated as a United States shareholder of such corporation for any purpose under subpart F to furnish the information required under paragraph (1).

Again, status as a "United States shareholder" is required for Category 5 filing.

United States shareholder defined: IRC §951(b)

To determine whether U.S. citizen Husband is a "United States shareholder," we apply IRC §951(b). I have highlighted the important point: application of constructive ownership rules.

For purposes of this title, the term “United States shareholder” means, with respect to any foreign corporation, a United States person (as defined in section 957(c)) who owns (within the meaning of section 958(a)), or is considered as owning by applying the rules of ownership of section 958(b), 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation, or 10 percent or more of the total value of shares of all classes of stock of such foreign corporation.

In brief, there are three conditions. All of which must be true in order for U.S. citizen Husband to be a United States shareholder:

• U.S. citizen Husband is a "United States person" as that term is defined in IRC §957(c); and
• A foreign corporation exists; and
• U.S. citizen Husband owns -- as "owns" is defined in IRC §958(a) and IRC §958(b) -- 10% or more of the stock of the foreign corporation, by vote or value.

The highlighted element is the one I am going to demonstrate. U.S. citizen Husband does not "own" any foreign corporation stock. Specifically, he does not have constructive ownership of nonresident alien Wife's 100% stock ownership. The reason: IRC §958(b)(1).

IRC §958(a) applied to U.S. citizen Husband

For determining United States shareholder status, stock ownership is computed in IRC §958(a) and IRC §958(b). No other method of ownership is considered.U.S. citizen Husband owns no stock as defined in either IRC §958(a) or IRC §958(b).IRC §958(a)(1) specifies that anyone who is a direct shareholder ("your name is on the stock certificate") is an owner of foreign corporation stock. IRC §958(a)(1) does not make U.S. citizen Husband a direct shareholder of stock of the foreign corporation. Nonresident alien Wife is the 100% direct shareholder of the stock.IRC §958(a)(2) specifies that anyone who owns stock in a foreign corporation indirectly through one or more foreign entities will be classified as an "owner" of the foreign corporation stock. There is no holding structure. Therefore, U.S. citizen Husband does not own foreign corporation stock in the method defined by IRC §958(a)(2).Conclusion: U.S. citizen Husband does not own any foreign corporation stock directly or indirectly within the meaning of IRC §958(a).

IRC §958(b) applied to U.S. citizen Husband

IRC §958(b) invokes the IRC §318(a) constructive ownership rules, with modifications. U.S. citizen Husband does not have constructive ownership of his nonresident alien Wife's shares of foreign corporation stock according to IRC §958(b).

• IRC §318(a)(1)(A)(i) says that U.S. citizen Husband is treated as owning nonresident alien Wife's shares of foreign corporation stock.
• But IRC §958(b)(1) modifies the IRC §318(a) constructive ownership rules to say that constructive ownership of stock is NOT attributed from a nonresident alien shareholder to a U.S. person. Family attribution (including spouse-to-spouse) of constructive stock ownership can only happen from a U.S. person to a U.S. person.
• Therefore, U.S. citizen Husband is NOT treated as the constructive owner of his nonresident alien Wife's shares under the principles of IRC §958(b).

Specifically, IRC §958(b)(1) -- which modifies IRC §318(a)(1)(A)'s family attribution rules -- says (read it and weep):

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.

U.S. citizen Husband shall not be considered as owning stock owned by nonresident alien Wife.If you want to play propositional logic with IRC §958(b)(1):

• Symbols assigned:
• N = "Nonresident alien owns stock"
• U = "United States person is considered as owning nonresident alien's stock"
• IRC §958(b)(1) represented in symbols:
• N --> -U
• The proof:
• Premise 1: N --> -U
• Premise 2: N
• Conclusion: -U

Good times.

Summary: no Category 1 or Category 5 filing status

U.S. citizen Husband cannot be a United States shareholder because that would require him to own 10% or more of the foreign corporation's stock.Which he doesn't -- IRC §958(b)(1), modifying IRC §318(a)(1)(A)(i), says U.S. citizen Husband owns bupkis. Nothing. Zero.This means that U.S. citizen Husband cannot be a United States shareholder.And status as a United States shareholder is a requirement for Category 1 and Category 5 filing status.Therefore, U.S. citizen Husband is neither a Category 1 nor Category 5 filer of Form 5471.

Category 4: Filing is Required

Category 4 filing obligations are imposed by IRC §6038(a), and exist if a person "controls" a foreign corporation. U.S. citizen Husband controls foreign corporation even though nonresident alien spouse is the 100% shareholder.

Control means stock ownership, defined by IRC §318(a), with overrides

IRC §6038(e)(2) defines "control" as owning more than 50% of the foreign corporation's stock, and tells us to use IRC §318(a) to determine stock ownership -- with two modifications of the IRC §318(a) rules.With helpful highlighting, IRC §6038(e)(2) says:

A person is in control of a corporation if such person owns stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote, or more than 50 percent of the total value of shares of all classes of stock, of a corporation. If a person is in control (within the meaning of the preceding sentence) of a corporation which in turn owns more than 50 percent of the total combined voting power of all classes of stock entitled to vote of another corporation, or owns more than 50 percent of the total value of the shares of all classes of stock of another corporation, then such person shall be treated as in control of such other corporation. For purposes of this paragraph, the rules prescribed by section 318(a) for determining ownership of stock shall apply; except that —

(A) — subparagraphs (A), (B), and (C) of section 318(a)(3) shall not be applied so as to consider a United States person as owning stock which is owned by a person who is not a United States person, and

(B) — in applying subparagraph (C) of section 318(a)(2), the phrase “10 percent” shall be substituted for the phrase “50 percent” used in subparagraph (C).

IRC §6038(a)(2) overrides don't apply to IRC §318(a)(1)

Neither of the two overrides to the IRC §318(a) constructive ownership rules will alter the result.We don't even have to know the meaning of the exceptions. We just have to see that they apply to IRC §318(a)(2) and IRC §318(a)(3) -- not to IRC §318(a)(1).Again, because redundant repetition emphasizes the critical point: the IRC §6038(e)(2) modifications to the IRC §318(a) constructive ownership rules do not touch the family attribution rules in IRC §318(a)(1). We apply IRC §318(a)(1) as it reads, with no modifications.

Law: U.S. citizen Husband is a Category 4 filer

Nonresident alien Wife owns 100% of the stock of the foreign corporation. Therefore, U.S. citizen Husband constructively owns 100% of the stock of the foreign corporation by application of IRC §318(a)(1)(A)(i). That is enough stock to constitute "control" of the foreign corporation as that term is defined in IRC §6038(e)(2).

Filing exception: U.S. citizen Husband is excused from the Category 4 filing obligation

Fortunately, there is a filing exception that relieves Husband of the obligation to file Form 5471 as a Category 4 filer.The Instructions for Form 5471 (rev. January 2023) say:

A Category 4 filer does not have to file Form 5471 if it:1. Does not own a direct or indirect interest in the foreign corporation; and2. Is required to file Form 5471 solely because of constructive ownership from a nonresident alien.No statement is required to be attached to the tax return of a Category 4 filer claiming either constructive ownership exception. * * *

This filing exception is straight from Reg. §1.6038-2(l) (that is a lower case "L"):

Other persons excepted from filing. For tax years of foreign corporations ending on or after December 29, 1999, any person required to furnish information under this section with respect to a foreign corporation does not have to furnish that information if the following conditions are met -

(1) Such person does not own a direct or indirect interest in the foreign corporation; and

(2) Such person is required to furnish information solely by reason of attribution of stock ownership from a nonresident alien(s) under paragraph (c) of this section.

So no Category 4 filing requirement for Husband after all

The Lord Code gave (a filing obligation), and the Lord Regulations hath taken away (the filing obligation); blessed be the name of the Lord.Is this your final answer?

There is a technical Category 4 filing requirement imposed by IRC §6038(a) because U.S. citizen Husband has "control" as defined by IRC §6038(e)(2), but his filing obligation is excused by the exception at Reg. §1.6038-2(l)?

Yes. That is my final answer.

Category 2 (No) and Category 3 (Yes)

Finally, let's look at Categories 2 and 3.These are filing obligations triggered by a transaction -- the acquisition or disposition of stock in a foreign corporation by a United States person. There are a few other fiddly triggering events that I will ignore.

Reminder of the facts

Remember that nonresident alien Wife formed a foreign corporation in 2023 and acquired all of its stock. In other words, on one day she owned no stock of a foreign corporation, and the next day she owned 100% of the stock of a foreign corporation. That's an "acquisition."

Category 2: no filing requirement

Category 2 filing obligations only apply to United States persons who are officers and directors of foreign corporations. IRC §6046(a)(1)(A). These officers and directors must file Form 5471 if any United States person acquires "enough" stock of the foreign corporation:

IRC 6046(a)(1) In General — A return complying with the requirements of subsection (b) shall be made by—

(A) — each United States citizen or resident who becomes an officer or director of a foreign corporation if a United States person (as defined in section 7701(a)(30)) meets the stock ownership requirements of paragraph (2) with respect to such corporation[.]

U.S. citizen Husband is not (by assumption) an officer or director of a foreign corporation.Therefore, it is impossible for U.S. citizen Husband to have a Category 2 filing obligation. All of the "right kind" of stock acquisitions by the "right kind" of people cannot create a Category 2 filing obligation for someone who is not an officer or director of a foreign corporation.If, in a moment of weakness, U.S. citizen Husband becomes an officer or director of the foreign corporation, he will need to watch carefully for foreign corporation stock acquisitions by U.S. persons that cause filing requirements for officers and directors:

Reg. §1.6046-1(a)(2)(i) Requirement of Return. Each United States citizen or resident who is at any time after January 1, 1963, an officer or director of a foreign corporation shall make a return on Form 5471 setting forth the information described in paragraph (a)(2)(ii) of this section with respect to each United States person who, during the time such citizen or resident is such an officer or director—

(a) Acquires (whether in one or more transactions) outstanding stock of such corporation which equals, or which when added to any such stock then owned by him equals, 10 percent or more of the total combined voting power of all classes of stock of the foreign corporation entitled to vote or the total value of the stock of the foreign corporation;

(b) Acquires (whether in one or more transactions) an additional 10 percent or more of the total combined voting power of all classes of stock of the foreign corporation entitled to vote or the total value of the stock of the foreign corporation; or

(c) Is not described in paragraph (a)(2)(i)(a) or (b) of this section, and who, at any time after January 1, 1987, is treated as a United States shareholder under section 953(c) with respect to such foreign corporation.

Category 3: filing requirement exists

U.S. citizen Husband is a Category 3 filer because he constructively acquired 100% of his nonresident alien Wife's foreign corporation stock in 2023, and no filing exception exists.A U.S. person files Form 5471 as a Category 3 filer for acquisitions and dispositions of stock in a foreign corporation. The stock transactions must be of a sufficient magnitude to trigger the filing requirement.

Reg. §1.6046-1(c)(1) United States Persons Required To File. A return on Form 5471, containing the information required by paragraph (c)(4) of this section, shall be made by each United States person when at any time after January 1, 1963:

(i) Such person acquires (whether in one or more transactions) outstanding stock of such foreign corporation which equals, or which when added to any such stock then owned by him equals 10 percent or more of the total combined voting power of all classes of stock of the foreign corporation entitled to vote or the total value of the stock of the foreign corporation;

(ii) Such person, having already acquired the interest referred to in paragraph (b) of this section or in paragraph (c)(1)(i) of this section—

(a) Acquires (whether in one or more transactions) an additional 10 percent or more of the total combined voting power of all classes of stock of the foreign corporation entitled to vote or the total value of the stock of the foreign corporation;

(b) Owns 10 percent or more of the total combined voting power of all classes of stock of the foreign corporation entitled to vote or the total value of the stock of the foreign corporation when such foreign corporation is reorganized (as defined in paragraph (f)); or

(c) Disposes of sufficient stock in such foreign corporation to reduce his interest to less than 10 percent of the total combined voting power of all classes of stock of the foreign corporation entitled to vote or the total value of the stock of the foreign corporation; or

(There are other ways to create a Category 3 filing requirement that I will not address now).If U.S. citizen Husband's wife (a nonresident alien) forms a foreign corporation and receives all of its stock in 2023, that can only be an acquisition. And specifically she would have an acquisition of stock as defined in Reg. §1.6046-1(c)(1)(i):

(i) Such person acquires (whether in one or more transactions) outstanding stock of such foreign corporation which equals, or which when added to any such stock then owned by him equals 10 percent or more of the total combined voting power of all classes of stock of the foreign corporation entitled to vote or the total value of the stock of the foreign corporation[.]

Nonresident alien Wife, in a single transaction, went from owning nothing to owning 100% of the stock of the foreign corporation. That transaction soars over the 10% ownership threshold of Reg. §1.6046-1(c)(1)(i).Stock acquisition by nonresident alien Wife is "considered" to be stock acquisition by U.S. citizen Husband.The rules for family attribution are at Reg. §1.6046-1(i)(2), with the key rule for spouse-to-spouse attribution of stock ownership helpfully highlighted:

Members of Family. — An individual shall be considered as owning the stock owned directly or indirectly by or for his brothers and sisters (whether by the whole or half blood), his spouse, his ancestors, and his lineal descendants. However, when stock is treated as owned by an individual under the rule provided in this subparagraph, it shall not be treated as owned by him for the purpose of again applying such rule in order to make another the constructive owner of such stock. The provisions of this subparagraph may be illustrated by the following example[.]

When nonresident alien Wife goes from 0% to 100% stock ownership for the newly-formed foreign corporation in 2023, U.S. citizen Husband is "considered" (to use the word in the Regulations) to have gone from 0% to 100% stock ownership of the foreign corporation in 2023.For Categories 1 and 5, we had a handy rule that prevented attribution of ownership of stock from nonresident alien Wife to U.S. citizen spouse.As you also no doubt noticed above, there is no prohibition against attribution of stock ownership from a nonresident alien to a United States person.Therefore, nonresident alien Wife's stock is "considered" to be owned by U.S. citizen Husband for Category 3 (and Category 2, for that matter) purposes.Therefore, U.S. citizen Husband is "considered" to have acquired 100% of the stock of his nonresident alien Wife's foreign corporation in the year that she formed it.U.S. citizen Husband has a Category 3 filing requirement.

Category 3: no filing exception exists

Unfortunately, no filing exception exists to relieve U.S. citizen Husband from the filing requirement. The only filing exception for Category 3 is when constructive ownership is from another U.S. person, and that person files his or her own Form 5471 as a Category 3 filer. See Instructions for Form 5471 (rev. January 2023), page 4.

Conclusion: U.S. citizen Husband is a Category 3 filer

In summary, Category 3 filing status applies to U.S. citizen Husband for a stock acquisition by nonresident alien Wife. The special attribution rules of IRC §6046 say so, and no filing exception exists to excuse the filing requirement.

Announcement and Request