Daily Tax Update - February 22, 2016: Treasury, IRS Issue Final Regulations on the Reporting of Specified Foreign Financial Assets

Treasury, IRS Issue Final Regulations on the Reporting of Specified Foreign Financial Assets:  Today, Treasury and the IRS published final regulations (TD 9752) under section 6038D that provide guidance regarding the requirements for certain domestic entities to report specified foreign financial assets to the IRS.  The final regulations adopt, with some changes, the provisions of proposed regulations (REG-130302-10) issued in December 2011.  In particular, the final regulations eliminate the principal purpose test for determining whether a corporation or partnership is a specified domestic entity and adopt several modifications to the term “passive income.”  With respect to the elimination of the principal purpose test, according to the preamble, Treasury and the IRS believe that a 50% passive assets or income threshold appropriately captures situations in which specified individuals may use a domestic corporation or partnership to circumvent the reporting requirements of section 6038D.  Treasury and the IRS will, nevertheless, continue to monitor whether domestic corporations and partnerships not required to report under these final regulations are being used inappropriately by specified individuals to avoid reporting under section 6038D.  The final regulations are effective February 23.

Treasury, IRS Issue Proposed Regulations Regarding the Definition of Political Subdivision:  Today, Treasury and the IRS released proposed regulations (REG-129067-15) under section 103 that provide guidance regarding the definition of “political subdivision” for purposes of tax-exempt bonds.  Section 103 generally provides that, with certain exceptions, gross income does not include interest on any obligation of a state or political subdivision thereof.  The proposed regulations clarify and further develop, for purposes of section 103, the eligibility requirements for a political subdivision.  More specifically, to qualify as a political subdivision under the proposed regulations, an entity must meet certain requirements in three areas: sovereign powers, governmental purpose, and governmental control.  The definition of political subdivision in the proposed regulations does not apply in determining whether an entity is treated as a political subdivision of a state for purposes of section 414(d).  Comments and requests to speak at the June 6 public hearing must be received by May 23.