Form 926: Return by a U.S. Transferor of Property to a Foreign Corporation

Mitchell Sorkin, CPA, MBA, PFS
Published Date:
Aug 1, 2016

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

Form 926 is used to report a transfer of property to a foreign corporation. Many tax practitioners first prepare and file Form 926 when recording partnership K-1s for clients that may have foreign investments. This form applies to both domestic corporations as well as U.S. citizens, resident individuals, and trusts. The covered transfers are described in IRC section 6038B(a)(1)(A) and IRC sections 367(d) and 367(e). Spouses may file Form 926 jointly, but only if they file a joint income tax return.

The form generally reports transfers of cash if (a) immediately after the transfer the person directly or indirectly holds at least 10% of the total voting power or the total value of the foreign corporation or (b) the amount of the cash transferred during the 12-month period ending on the date of transfer exceeds $100,000. 

Form 926 also is used to report transfers of stock or securities for which a gain recognition agreement (GRA) is filed. A GRA is used to report a transfer of U.S. stock to a foreign corporation.

The form is also used to report a domestic corporation that is liquidating and distributes property in complete liquidation under IRC section 332 to a foreign corporation that meets the stock requirement of IRC section 332(b).

These are the following exceptions to filing:

-- Exchanges described in IRC sections 354 and 356 if (a) the U.S. person exchanges stock of a foreign corporation in a recapitalization described in IRC section 368(1)(E) or (b) the U.S. person exchanges stock of a domestic or foreign corporation for stock of a foreign corporation under an asset reorganization described in IRC section 368(a)(1) that is not treated as an indirect stock transfer under Treasury Regulations section 1.367(a)-3(d)

-- A domestic corporation that distributes stock or securities of a domestic corporation under IRC section 355

-- A U.S. person that transfers stock or securities under IRC section 367(a) if the U.S. transferor owned less than 5% of both the total voting power and the total value of the transferee foreign corporation and the fair market value of the property transferred did not exceed $100,000, among other qualifications

Form 926 is filed with the taxpayer’s income tax return for the tax year that includes the date of the transfer.

Tax practitioners need to be cognizant of the form and its filing requirements because the penalties can be onerous: 10% of the fair market value of the property at the time of the transfer, which is limited to $100,000 unless the failure to comply was due to intentional disregard of the rules. The statute to assess the penalties is extended to the date that is three years after the date on which the information required to be reported is provided. The penalty, however, will not apply if the failure to comply is due to reasonable cause and not to willful neglect. A 40% penalty may also be imposed on any underpayment resulting from an undisclosed foreign financial asset understatement, unless due to reasonable cause or actions taken in good faith. 

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, has written articles, lectured, and chaired previous seminars.

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