Form 8865 -Return of U.S. Persons With respect to Certain Foreign Partnerships

Purpose of Form - 8865: -

When a U.S. person has ownership in a foreign partnership, they may have reporting requirements on Form 8865, it is an international information reporting form required by U.S. persons who qualifies as one of the categories of filers with ownerships in a foreign partnership, similar to Form 5471.

U.S. Person: -

• Citizen or Residence of the U.S.,
• Domestic Partnership,
• Domestic Corporation,
• Domestic Estate or Trust.

Partnership - A partnership is a relation between two or more persons, who come together to carry on a trade or business, with each person contributing money, property, labor, or skill and each expecting to share in the profits and losses of the business whether or not a formal partnership agreement is made.

Foreign Partnership - A foreign partnership is a partnership that is not created or organized in the United States or under the law of the United States or of any state or the District of Columbia.

Filling Requirement: -

A person will file form 8865 when they qualify as one of the four (4) categories of filers, depending on which category a person falls into. Form 8865 may be required to file along with certain schedules detailing more information about the foreign partnership.

Exceptions to Filing: -

• If more than one U.S. person falls in category 1 only one of them is required to file Form 8865.
• A U.S. person with controlling interest with losses or deductions of the partnership isn't permitted to be filer of Form 8865 instead another person controlling interest in capital or profits may file the return.
• Constructive owners - A Category 1 or 2 filer that doesn’t own a direct interest in the partnership and that is required to file this form solely because of constructive ownership from a U.S. person(s) isn’t required to file Form 8865 if:

1. Indirect partner constructively owns an interest in the foreign partnership through U.S. person,
2. Indirect partner constructively owns an interest in the foreign partnership through the U.S. person is also a constructive owner and meets all the requirements of constructive ownership filling exceptions, or
3. Form 8865 is filed be another category 1 filer in case of multiple category 1 filer exception.

Note: The indirect partner must attach a statement stating "Controlled Foreign Partnership" with its income tax return in order to qualify for the constructive ownership filing exception.

• Members of an affiliated group of corporations filing a consolidated return - If one or more members of an affiliated group filing a consolidated return who qualify as category 1 or 2 filer for particular foreign partnership, parent corporation may file one Form 8865 on behalf of the group members.
• Exception for certain trusts - Trusts relating to state and local government employee retirement plans aren’t required to file Form 8865.
• Exception for certain Category 4 filers - If you qualify for category 3 & 4 filer, you don't have to report under both categories, if you properly report the contribution of property under category 3.
• When Foreign Partnership Files Form 1065 - Category 1 & 2 filers may use a copy of the completed Form 1065 schedules in place of the equivalent schedules of Form 8865.

Form 8865 Required Schedule: -

1. Schedule A — Constructive Ownership of Partnership Interest: Completed by category 1, 2, 3, & 4 filers.
2. Schedule A-1 — Certain Partners of Foreign Partnership: Completed by category 1, & 3 filers.
3. Schedule A-3 — Affiliation Schedule: Completed by category 1, 2, 3, & 4 filers.
4. Schedule B — Income Statement-Trade or Business Income: Completed by category 1 filers.
5. Schedule G — Statement of Application of the Gain Deferral Method Under Section 721: Completed by category 1, 3, & 4 filers.
6. Schedule H — Acceleration Events and Exceptions Reporting Relating to Gain Deferral Method Under Section 721(c): Completed by category 1, 3, & 4 filers.
7. Schedule K — Partners' Distributive Share Items: Completed by category 1 filers.
8. Schedule K-2 — Partners’ Distributive Share Items-International: Completed by category 1 filers.
9. Schedule K-3 — Partner’s Share of Income, Deductions, Credits, etc.-International: Completed by category 1, & 2 filers.
10. Schedule L — Balance Sheets per Books: Completed by category 1 filers.
11. Schedule M — Balance Sheets for Interest Allocation: Completed by category 1 filers.
12. Schedule M-1 — Reconciliation of Income (Loss) per Books with Income (Loss) per Return: Completed by category 1 filers.
13. Schedule M-2 — Analysis of Partners' Capital Accounts: Completed by category 1 filers.
14. Schedule N — Transactions Between Controlled Foreign Partnership and Partners or Other Related Entities: Completed by category 1, & 2 filers.
15. Schedule D — Schedule D (Form 1065), Capital Gains and Losses: Completed by category 1 filers.
16. Schedule K-1 (Form 8865) — Partner's Share of Income, Deductions, Credits, etc. (direct partners only): Completed by category 1, & 2 filers.
17. Schedule O (Form 8865) — Transfer of Property to a Foreign Partnership: Completed by category 3 filers.
18. Schedule P (Form 8865) — Acquisitions, Dispositions, and Changes of Interests in a Foreign Partnership: Completed by category 4 filers.

Categories of Filers: -

1. Category 1 filer - A U.S. person who controlled foreign partnership at any time during partnership's tax year, control of partnership means having more than 50% interest in a foreign partnership, falls in category 1.
2. Category 2 filer - If a U.S. person owned at least 10% or more interest at any time during the partnership's tax year in a foreign partnership while the partnership was controlled by the U.S. person each having at least 10% interest, falls in category 2.
3. Category 3 filer - If a U.S. person contributes property in a foreign partnership during that person's tax year and in exchange receives an interest in the partnership, they will also have to file this form when the person either owns directly or constructively 10% or more interest in the partnership immediately after contribution or, when the value of the property contributed (along with any other property attributed by the individual or related person during the 12 month period ending on the transfer) exceeds more than $100,000.
4. Category 4 filer - If a U.S. person had a reportable event under section 6046A during that person's tax year then the person falls in category 4.

There are three categories of reportable events under section 6046A:

Acquisitions - A U.S. person that acquires a foreign partnership interest has a reportable event if:

• The person didn’t own a 10% or greater direct interest in the partnership and, as a result of the acquisition, the person owns a 10% or greater direct interest in the partnership (for example, from 9% to 10%); or
• Compared to the person's direct interest when the person last had a reportable event, after the acquisition the person's direct interest has increased by at least a 10% interest (for example, from 11% to 21%).

Dispositions - A U.S. person that disposes of a foreign partnership interest has a reportable event if:

• The person owned a 10% or greater direct interest in the partnership before the disposition and, as a result of the disposition, the person owns less than a 10% direct interest (for example, from 10% to 8%); or
• Compared to the person's direct interest when the person last had a reportable event, after the disposition the person's direct interest has decreased by at least a 10% interest (for example, from 21% to 11%).

Changes in proportional interests - A U.S. person has a reportable event, compared to the person's direct proportional interest the last time the person had a reportable event, the person's direct proportional interest has increased or decreased by at least the equivalent of a 10% interest in the partnership.

50% Interest: -

• A 50% interest in a partnership is an interest equal to:

1. 50% of the capital,
2. 50% of the profits, or
3. 50% of the deductions or losses.

10% Interest: -

• A 10% interest in a partnership is an interest equal to:

1. 10% of the capital,
2. 10% of the profits, or
3. 10% of the deductions or losses.

Constructive ownership: -

Generally, an interest owned directly or indirectly by or for a corporation, partnership, estate, or trust shall be considered as being owned proportionately by its owners, partners, or beneficiaries. Also, an individual is considered to own an interest, owned directly or indirectly by or for their family.

Form 8865 Penalties: -

Failure to timely submit all information required of category 1 and 2 filers:

• For failure to furnish required information, 1$10,000 will be imposed for each tax year of each foreign partnership.
• An additional $10,000 penalty will be imposed for each 30-day period, if the required information isn't furnished to the IRS within 90 days after notice from IRS, if failure continues after 90-day period has expired. Additional penalty is limited to a maximum of $50,000.
• Any persons fail to furnish information on time will be subject to 10% reduction of the foreign taxes available for credit, if failure continues 90 days after or more after the date you receive notice from IRS, an additional 5% reduction is made for each 30-day period.

Failure to file information required of Category 3 filers:

• Any person fails to report contributions to foreign partnership is subject to a penalty equal to 10% of the FMV of the property at the time of contribution.
• This penalty is subject to a $100,000 limit, unless the failure is due to the international disregard.

Failure to file information required of Category 4 filers:

• Any person who fails to furnish requested information is subject to $10,000 penalty, in addition to criminal penalties, unless the failure is due to reasonable cause.
• Additional $10,000 penalty will apply for each 30-day period, if the failure continues for more than 90 days.
• Additional $50,000 penalty will be imposed, if the failure continues after the 90-day period has expired.

Section 6662(j): -

• Penalties may be imposed for underpayment attributable to undisclosed foreign financial asset understatements.
• The term “undisclosed foreign financial asset” with respect to any tax year includes any asset with respect to which required information was not provided.
• An “undisclosed foreign financial asset understatement” means for any tax year, the portion of the understatement for that tax year which is attributable to any transaction involving an undisclosed foreign financial asset.
• No penalty will be imposed with respect to any portion of an underpayment if the taxpayer can demonstrate that the failure to comply was due to reasonable cause with respect to such portion of the underpayment and the taxpayer acted in good faith with respect to such portion of the underpayment.

Treaty-based return positions - File Form 8833, Treaty-Based Return Position Disclosure to report a return position that a treaty of the United States.