What are Form 8865 Triggering Events to Be Aware Of
Form 8865 is a very complicated international tax reporting form. If Taxpayers can (legally) avoid filing the form, then they probably should. Unlike some other tax forms such as the FBAR, with Internal Revenue Service Form 8865, not all Taxpayers with foreign partnerships will have to file the form every year. While some taxpayers may have to file the form every year, other US taxpayers will only have to file the form in years that there is a triggering event. In this type of situation, the taxpayer will file Form 8865 for the year representing the triggering event and then in subsequent years usually only have to file a Form 8938 instead — if they meet the threshold requirements for filing. Let’s take a look at some of the basic form 8865 triggering events that Taxpayers should be aware of —
Category 1 (Gaining Control of the Corporation)
In a common situation, a taxpayer may have a minority interest in a foreign partnership, but due to either receiving a gift or inheritance — they suddenly become the controlling partner. This would typically make the partnership a controlled partnership — and as a result, the Taxpayer may now be required to file Form 8865 as a category 1 filer. Noting, Category 1 contains the most complicated filing requirements, so Taxpayers seeking to avoid this type of headache should be aware if they are planning on receiving an interest sufficient to put them over the 50% ownership threshold. Noting, that merely only 50% is not sufficient to be a Category 1 Filer and that it must be more than 50%.
Category 2 (Moving to the US)
In another common example, a family may have a +50% ownership of a foreign partnership. The family is comprised of non-resident aliens who relocate to the United States and become US persons – with each of them owning more than 10%. Now that they are US persons, they are typically considered to be 10% owners of the foreign partnership, and any US person who owns at least 10% of a foreign partnership controlled by US person may have to file the Form 8865 as a Category 2 Filer. It is important to note that if there is a category 1 filer during the year, then there will not be any category 2 filers in that same year — and there may be some overlap with category 4.
Category 3 (Contributing Property to the Foreign Partnership)
If a US person contributes property to a foreign partnership and receives more than 10% immediately after the contribution, then they will be considered a Category 3 Filer. Likewise, if the taxpayer contributes property over the course of a 12-month period that ends on the date of the transfer which exceeds $100,000 they would also have to file Form 8865 as a category 3 filer.
Category 4 (Reportable Event)
The category 4 Filer is more complicated and requires any US person that had a reportable event in accordance with Internal Revenue Code section 6046A to file form 8865 as a category 4 filer. Reportable transactions are broken down into three main categories, including acquisitions, dispositions, and changes in the proportional interest all hovering around the 10% mark.
26 U.S.C. 6046A
(a) Requirement of return Any United States person, except to the extent otherwise provided by regulations—
(1) who acquires any interest in a foreign partnership
(2) who disposes of any portion of his interest in a foreign partnership, or
(3) whose proportional interest in a foreign partnership changes substantially, shall file a return. Paragraphs (1) and (2) shall apply to any acquisition or disposition only if the United States person directly or indirectly holds at least a 10-percent interest in such partnership either before or after such acquisition or disposition, and paragraph (3) shall apply to any change only if the change is equivalent to at least a 10-percent interest in such partnership.
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