What’s the Difference Between a Category 1a, 1b, and 1c 5471 Filer?

Who is a Category 1 Filer for Form 5471?

Who is a Category 1 Filer for Form 5471?

For the past several years, there have been only four main categories of filers for IRS Form 5471. Previously, the Category 1 filer existed, but it was discontinued – only to be resurrected and modified in the more recent versions of Form 5471 — in conjunction with the TCJA. The Category 1 filer has three subcategories (1a, 1b, and 1c), and it can be very complicated for many Taxpayers to discern which category they fall into — noting, that many Taxpayers will fall under multiple Categories of filers in the same year. Typically, if a Taxpayer is unsure whether they fall into a specific sub-category they may consider completing the various schedules to be on the safe side – with the problem of course being that Form 5471 schedules are very complicated and most human beings would not volunteer to complete a 5471 and the additional schedules unless they absolutely had to. Let’s focus on the basics of being a Category 1 filer to understand who may fall into this category and what schedules they must file.

*This article focuses on individuals and CFCs and not Domestic Corporate Shareholders or any potential attribution issue through foreign entities.

The Category 1 Filer in General

• • • “In general, a Category 1 filer is a person who was a U.S. shareholder of a foreign corporation that was a section 965 specified foreign corporation (SFC) at any time during the foreign corporation’s tax year ending with or within the U.S. shareholder’s tax year, and who owned that stock on the last day in that year in which the foreign corporation was a section 965 SFC, taking into account the regulations under section 965. There are three different types of Category 1 filers, each described below: Category 1a filers, Category 1b filers, and Category 1c filers.”

The Category 1 filer for Form 5471 is generally an individual who has at least 10% ownership of a CFC that was a CFC at any time during the foreign corporation’s tax year.

What is a Section 965 SFC?

• • • “Section 965 SFC. For purposes of Category 1, a section 965 SFC is: 1. A controlled foreign corporation (CFC) (see Category 5 Filers, later, for definition); or 2. Any foreign corporation with respect to which one or more domestic corporations are U.S. shareholders. However, if a passive foreign investment company (PFIC) (as defined in section 1297) with respect to the shareholder is not a CFC, then such corporation is not a section 965 SFC. See section 965 and the regulations thereunder for exceptions.”

For purposes of this introduction, the 965 SFC is a CFC. A 965 SFC can also include domestic corporation shareholders of foreign corporations when the domestic corporation is a (U.S. shareholder). And, there is also a PFIC carve-out to minimize duplicate reporting and limit issues involving Subpart F income and the Excess Distribution regime — but for purposes of this article, it is just important to know these other issues exist (and can further complicate Form 5471 filing)

What is Constructive Ownership?

Constructive ownership in the context of 5471 means a person is deemed to have to report the information on the 5471 just as if they were the direct owner – and there are multiple reference points in the code to consider when assessing constructive ownership.

• • • 958 Rules for Stock Ownership

    • 954(d)(3) Foreign base company income

    • Reference to 954(d)(3) for constructive ownership

IRC 958 Rules for Determining Stock Ownership

• • • Constructive ownership

      • For purposes of sections 951(b), 954(d)(3), 956(c)(2), and 957, section 318(a) (relating to constructive ownership of stock) shall apply to the extent that the effect is to treat any United States person as a United States shareholder within the meaning of section 951(b), to treat a person as a related person within the meaning of section 954(d)(3), to treat the stock of a domestic corporation as owned by a United States shareholder of the controlled foreign corporation for purposes of section 956(c)(2), or to treat a foreign corporation as a controlled foreign corporation under section 957, except that—

        1. In applying paragraph (1)(A) of section 318(a), stock owned by a nonresident alien individual (other than a foreign trust or foreign estate) shall not be considered as owned by a citizen or by a resident alien individual.

        2. In applying subparagraphs (A), (B), and (C) of section 318(a)(2), if a partnership, estate, trust, or corporation owns, directly or indirectly, more than 50 percent of the total combined voting power of all classes of stock entitled to vote of a corporation, it shall be considered as owning all the stock entitled to vote.

        3. In applying subparagraph (C) of section 318(a)(2), the phrase “10 percent” shall be substituted for the phrase “50 percent” used in subparagraph (C).

           • Paragraph (1) shall not apply for purposes of section 956(c)(2) to treat stock of a domestic corporation as not owned by a United States shareholder.

Section 958 involves the rules for determining stock ownership. A person may own the stock directly, indirectly, and/or through constructive ownership. This code section explains the basics of constructive ownership and identifies what is excluded from the rules (non-resident aliens). Noting, paragraph 1 is very important for individual U.S. shareholders of a CFC.

IRC 318 – Constructive ownership of stock

• • • (1) Members of family

      • (A) In general

        • An individual shall be considered as owning the stock owned, directly or indirectly, by or for— (i)his spouse (other than a spouse who is legally separated from the individual under a decree of divorce or separate maintenance), and (ii) his children, grandchildren, and parents.

      • (B) Effect of adoption

        • For purposes of subparagraph (A)(ii), a legally adopted child of an individual shall be treated as a child of such individual by blood.

Section 318 explains who is considered a member of the family for constructive ownership of stock. It is important to know which members of a family would be applied to the constructive ownership definition, especially for Taxpayers who may only be a U.S. person because they met the substantial presence test or a lawful permanent resident — and the majority if not all of their family members are non-resident aliens. For example, a spouse or children would apply to the definition of constructive ownership whereas a sibling would not.

Category 1(a) Filer (Catch-all)

• • • “Category 1a Filer A Category 1a filer is a Category 1 filer that is not a Category 1b or 1c filer.”

The Category 1a filer is a catch-all for any Category 1 filer who does not fall into either categories 1(b) or 1(c)

Who is a Category 1(b) Filer (Unrelated Section 958(A) U.S. Shareholder)

• • • “Category 1b Filer A Category 1b filer is a person who is an unrelated section 958(a) U.S. shareholder (defined below) of a foreign-controlled section 965 SFC (defined below).

    • This type of Category 1 filer extends the relief for certain Category 5 filers announced in section 8.02 of Rev. Proc. 2019-40, 2019-43 I.R.B. 982, to similarly situated Category 1 filers.

    • Unrelated section 958(a) U.S. shareholder. For purposes of Category 1b, an unrelated section 958(a) U.S. shareholder is a U.S. shareholder with respect to a foreign-controlled section 965 SFC who:

      1. 1. Owns, within the meaning of section 958(a), stock of a foreign-controlled section 965 SFC; and

         2. Is not related (using principles of section 954(d)(3)) to the foreign-controlled section 965 SFC. Foreign-controlled section 965 SFC.

         3. For purposes of Category 1b, a foreign-controlled section 965 SFC is a foreign corporation that is a section 965 SFC that would not be a section 965 SFC if the determination were made without applying subparagraphs (A), (B), and (C) of section 318(a)(3) so as to consider a U.S. person as owning stock that is owned by a foreign person.”

What is an Unrelated Constructive U.S. Shareholder?

• • • “Unrelated constructive U.S. shareholder. A Category 1 filer does not have to file Form 5471 if all of the following conditions are met. 1. The foreign corporation is a foreign-controlled section 965 SFC. 2. The Category 1 filer is a U.S. shareholder that does not own stock, within the meaning of section 958(a), in the foreign-controlled section 965 SFC. 3. The Category 1 filer is not related, using principles of section 954(d)(3), to the foreign-controlled section 965 SFC. This exception implements the relief for certain Category 5 filers announced in section 8.04 of Rev. Proc. 2019-40, 2019-43 I.R.B. 982, and extends it to Category 1 filers. Other filing exceptions. Certain other filing exceptions apply to all categories of filers. See Additional Filing Exceptions, later.”

The (1b) Category is for Taxpayers who are unrelated shareholders. Typically, it is just going to be an individual who directly owns stock as a U.S. shareholder — which means that they own at least 10% of the controlled foreign corporation. A category (1b) filer has a limited amount of reporting required to complete Form 5471.

Taxpayers can refer to page 7 of the Form 5471 instructions to get more in-depth information about the reporting requirements. 

• • • Schedules: Page 1 Identifying information; Schedule E; Schedule E-1, and Schedule P.

Category 1(c) Filer (Related Constructive U.S. Shareholder)

• • • “Category 1c Filer A Category 1c filer is a person who is a related constructive U.S. shareholder (defined below) of a foreign-controlled section 965 SFC (defined below).

    • This type of Category 1 filer extends the relief for certain Category 5 filers announced in section 8.03 of Rev. Proc. 2019-40, 2019-43 I.R.B. 982, to similarly situated Category 1 filers.

    • Related constructive U.S. shareholder. For purposes of Category 1c, a related constructive U.S. shareholder is a U.S. shareholder with respect to a foreign-controlled section 965 SFC who:

      1. Does not own, within the meaning of section 958(a), stock of the foreign-controlled section 965 SFC; and

      2. Is related (using principles of section 954(d)(3)) to the foreign-controlled section 965 SFC. Foreign-controlled section 965 SFC. For purposes of Category 1c, the term “foreign-controlled section 965 SFC” has the same meaning as provided under Category 1b Filer, earlier.”

 Who is a Related Constructive U.S. Shareholder?

• • • “Related constructive U.S. shareholder. For purposes of Category 1c, a related constructive U.S. shareholder is a U.S. shareholder with respect to a foreign-controlled section 965 SFC who:

      • Does not own, within the meaning of section 958(a), stock of the foreign-controlled section 965 SFC; and

      • Is related (using principles of section 954(d)(3)) to the foreign-controlled section 965 SFC.”

Unlike a Schedule 1b filer who is an unrelated shareholder, category 1c filers are related constructive shareholders.  To be considered related, the Taxpayer has to meet two requirements.

• • • First, the Taxpayer does not directly owned shares of stock of the foreign corporation under section 958(a).

    • Second, the Taxpayer is considered related in accordance with the principles of section 954(d)(3). (Section 958 constructive ownership, refer specifically to section 954(d)(3) and references that section 318 will should apply).

  • Schedules: Page 1 Identifying information; Schedule B; Schedule E, and Schedule G, and G-1.

Category 1 Exceptions

There are some relief procedures available for taxpayers who qualify similarly to taxpayers who are Category 5 filers and meet the exception. Specifically, it is Relief. Proc. 2019-40, 2019-43 I.R.B. 982.

When is Form 5471 No Longer Required for Category 1

Here are some scenarios in which Form 5471 is no longer required:

When Category 1 reporting is no longer required.

• • • A Category 1 filer must continue to file all information required as long as: 2 Instructions for Form 5471 (Rev. 01-2024) • The section 965 SFC (or foreign-controlled section 965 SFC) has accumulated earnings and profits (E&P) related to section 965 that is reportable on Schedule J (Form 5471), or • The Category 1 filer has previously taxed E&P related to section 965 that is reportable on Schedule P (Form 5471).

Category 1 Filers—Exceptions From Filing Certain Constructive Owners.

• • • A Category 1 filer does not have to file Form 5471 if all of the following conditions are met.  The Category 1 filer does not own a direct interest in the foreign corporation. 2. The Category 1 filer is required to furnish the information requested solely because of constructive ownership (as determined under Regulations section 1.958-2, 1.6038-2(c), or 1.6046-1(i)) from another U.S. person. 3. The U.S. person through which the Category 1 filer constructively owns an interest in the foreign corporation files Form 5471 to report all of the information required of the Category 1 filer.

A Category 1 filer does not have to file Form 5471

• • • If it does not own a direct or indirect interest in the foreign corporation, and 2. Is required to file Form 5471 solely because of constructive ownership from a nonresident alien. No statement is required to be attached to the tax return of a Category 1 filer claiming either constructive ownership exception. See Regulations section 1.6038-2(j) (2) and (3), and Regulations section 1.6038-2(l) for additional information.

No section 958(a) U.S. shareholder

• • • A Category 1 filer does not have to file Form 5471 if no U.S. shareholder (including the Category 1 filer) owns, within the meaning of section 958(a), stock in the section 965 SFC on the last day in the year of the foreign corporation in which it was a section 965 SFC and the SFC is a foreign-controlled section 965 SFC. This exception extends the relief for Category 5 filers announced in section 5.02 of Notice 2018-13, 2018-6 I.R.B. 341, to similarly situated Category 1 filers.

Unrelated constructive U.S. shareholder.

• • • “A Category 1 filer does not have to file Form 5471 if all of the following conditions are met. 1. The foreign corporation is a foreign-controlled section 965 SFC. 2. The Category 1 filer is a U.S. shareholder that does not own stock, within the meaning of section 958(a), in the foreign-controlled section 965 SFC. 3. The Category 1 filer is not related, using principles of section 954(d)(3), to the foreign-controlled section 965 SFC. This exception implements the relief for certain Category 5 filers announced in section 8.04 of Rev. Proc. 2019-40, 2019-43 I.R.B. 982, and extends it to Category 1 filers. Other filing exceptions. Certain other filing exceptions apply to all categories of filers. See A.

Additional Exceptions May Apply

• • • Other filing exceptions. Certain other filing exceptions apply to all categories of filers. 

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.