New Proposed Treasury Regulations Will Not Affect USCs But Will Affect some LPRs

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United States Citizens (“USCs”) and lawful permanent residents (“LPRs”) who live largely outside the U.S. must generally be aware of U.S. federal tax laws and how they apply to them.  USCs and LPRs “expats” (living outside the U.S.) are of course constantly being required to understand U.S. tax law and comply with its provisions.

Recently, the U.S. Treasury proposed new regulations requiring certain foreign owned single member U.S. limited liability companies and grantor trusts to report information.

The preamble to the proposed regulations (which are titled – Treatment of Certain Domestic Entities Disregarded as Separate From Their Owners as Corporations for Purposes of Section 6038A) note that:IRS Form 5472

  • Some disregarded entities are not obligated to file a return or obtain an employer identification number (“EIN”). In the absence of a return filing obligation (and associated record maintenance requirements) or the identification of a responsible party as required in applying for an EIN, it is difficult for the United States to carry out the obligations it has undertaken in its tax treaties, tax information exchange agreements and similar international agreements to provide other jurisdictions with relevant information on U.S. entities with owners that are tax resident in the partner jurisdiction or otherwise have a tax nexus with respect to the partner jurisdiction. . . . a disregarded entity is not subject to a separate income or information return filing requirement. Its owner is treated as owning directly the entity’s assets and liabilities, and the information available with respect to the disregarded entity depends on the owner’s own return filings, if any are required. US Passport

For those LPRs residing outside the U.S. who are not U.S. taxpayers by virtue of an applicable income tax treaty (i.e., by application of the treaty tie-breaker rules, typically Article 4), it appears these newly proposed regulations could be applicable to their single member LLCs or grantor trusts.  USCs will not be effected, since the proposed regulations impose this reporting requirement when there is “(2) One foreign person [who] has direct or indirect sole ownership of the entity.”  A USC cannot be a “foreign person”; which is not a defined term in the current statute or regulation.  A “United States person” is a defined term and so is a “nonresident alien”; but not a “foreign person.”

Curiously, the Treasury is using IRC Section 6038A as the authority to issue such regulations.  That statute only references “a corporation” which is a technically defined term under IRC Section 7701(a)(3), (a)(4) and (a)(30)(C).  Section 6038A makes no reference to a”disregarded entity” a “grantor trust” or any other company or entity that are not “corporations.”  Therefore, it is difficult to imagine how the Treasury has the statutory authority to issue this proposed regulation without legislative authority?

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