Form 8865: Return of U.S. Persons with Respect to Certain Foreign Partnerships

By:
Mitchell Sorkin, CPA, MBA, PFS, CEA
Published Date:
Nov 1, 2016

This article is the second in a series explaining various IRS forms that relate to the reporting of foreign transactions.

The purpose of Form 8865 is to report the information required under IRC section 6038 (reporting with respect to controlled foreign partnerships). This form also reports transfers to foreign partnerships and acquisitions, depositions, and changes in interest in foreign partnerships.

This form is similar to Form 5471, which reports similar transactions for controlled foreign corporations.

Many of the required schedules and information are similar to those required for Form 1065.

Definitions

There are many definitions, but the most important ones are:

  • Constructive ownership, defined in IRC section 267(c), excluding IRC section 267(c)(3).
  • U.S. person, defined as a citizen or resident of the United States, or a domestic partnership, a domestic corporation, and any estate or trust that is not foreign.

Who Must File

A U.S. person qualifying under one or more of the categories of filers (explained below) must complete and file Form 8865. The form must be completed for each foreign partnership and is to be filed with the U.S. person’s income tax return.

Category 1 filer: A U.S. person who controlled (having more than 50% interest) the foreign partnership at any time during the partnership’s tax year.

Category 2 filer: A U.S. person who, at any time during the foreign partnership’s tax year, owned a 10% or greater interest while the partnership was controlled by U.S. persons, each of which owned at least 10% interest. If, however, the foreign partnership had a Category 1 filer at any time during the tax year, no person will be considered a Category 2 filer. 

Category 3 filer: A U.S. person who contributed property during the tax year to a foreign partnership in exchange for an interest in the partnership if that person either (1) owned directly or constructively at least 10% interest in the foreign partnership immediately after the contribution or (2) the value of the property contributed (when added to the value of any other property contributed to the partnership by such person, or any related person, during the 12-month period ending on the date of transfer) exceeds $100,000.

As practitioners may have noticed, it is important to note that “[p]artners in partnerships are considered to have transferred a proportionate share of the contributed property to the foreign partnership.” If, however, the domestic partnership files Form 8865 and properly reports all the required information with respect to the contribution, its partners will not be required to report the transfer.

Category 4 filer: A U.S. person that had a reportable event under IRC section 6046A during the tax year. This covers acquisitions, dispositions, and changes in proportional interest. This generally relates to changes that would increase or decrease the U.S. person’s interest by 10% or more.

The category any filer falls into governs the schedules and forms that need to be completed and filed.

Exceptions

Category 1 filers: If there is more than one qualified U.S. person that is a Category 1 filer, only one of them is required to file, although the U.S. person filing must include the required information for other Category 1 filers. The non-filers also must attach a statement to their returns to disclose who is filing Form 8865 on their behalf. Unfortunately, non-filers still would have to file separate Form 8865s if they qualify under Categories 3 or 4.

Constructive Owners: A Category 1 or 2 filer that does not own a direct interest in the partnership and who is required to file this form solely due to constructive ownership from a U.S. person is not required to file Form 8865 if:

  • Form 8865 is filed by the U.S. person(s) through whom the indirect partner constructively owns an interest in the foreign partnership.
  • the U.S. person through whom the indirect partner constructively owns an interest in the foreign partnership is also a constructive owner and meets all the requirements of this constructive ownership filing exception; or
  • Form 8865 is filed for the foreign partnership by another Category 1 filer, pursuant to the first exception described above.

Once again, the non-filer needs to file a statement with the necessary disclosures along with their tax returns.

Category 4 filers:

If you are both a Category 3 and a Category 4 filer as the result of a contribution for a 10% or greater interest, you only have to report it under Category 3.

Filing of Form 1065

Many foreign partnerships actually file a U.S. Form 1065 and attach the required Form 8865 schedules.

When and Where to File

The return is due with the U.S. person’s applicable tax return by the extended due date of the return at the service center where the U.S. person files the return.


sorkinMitchell Sorkin, CPA, MBA, PFS, CEA is the tax partner of the firm Raich Ende Malter & Co. He is a member of the NYSSCPA, where he has served on several tax committees, including Relations With the IRS; New York, Multistate and Local Taxation; and Personal Financial Planning. He is currently on the International Taxation Committee and is a past chairman. He is a licensed CPA in California, holds a CEA in business valuations, and has written articles, lectured, and chaired previous seminars.

 
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