QUESTION: I saw your post on the Tax Almanac web site and had a
question on foreign corporations.

My client's California LLC decided to branch out into Canada. To that
end they formed a Canadian Corporation in which the LLC owns 75% with
the remaining 25% owned by a Canadian national. All profits stay in
Canada. No Inter company transactions at this time. So far I have not
been able to get any financial info out of the Canadian Corporation.

What are my filing requirements? Can you point me to a little light
reading on the subject? If this is too complex, I may pass this
client on to a larger firm with international tax experience.

Thanks for any help you can give me!!

REPLY: The lightest reading I know of on this subject is the
Controlled Foreign Corporation Tax Guide (3rd Edition) which I
co-authored with Richard Duke. It's about 180 pages and although we
wrote it for owners and advisors who are not familiar with the
subject, it's a bit a stretch to call it "light reading". Information
about the book is available at
http://www.offshorepress.com/cfc-ibc-tax.htm

The amount of time you will need to spend to get up to speed on this
subject will be far more than your client is likely to pay you for.
The International Tax Compliance Group (of which I'm a member) was
formed to provide tax preparation assistance to U.S. tax preparers who
have a very few clients with cross border companies or investments.
They assist with the preparation of various information returns about
foreign investments without interfering with the U.S. accountant's
relationship with the client. For more information see
http://www.itcgpros.com/.

Assuming the U.S. LLC did not make a timely election to treat the
Canadian corporation as a foreign partnership, the U.S. owners of the
Canadian corporation will need to file a Form 5471 and 926. The
starting point in learning about the filing requirements is the IRS
instructions to the Form 5471 and Form 926. Note that the returns are
due with the tax return for U.S. owners. Also note that there is a
$10,000 penalty for a late filing of either Form 5471 or 926. The
penalty can be imposed even if there is no taxable income.

Some limited information about each form is on my web site at
http://www.offshorepress.com/AICPA/ along with information about other
tax forms that are required for cross border investments.

As for the statement that the Canadian company isn't cooperating with
requests for information, the IRS isn't likely to be sympathetic about
not getting information from an entity that is controlled by a U.S.
taxpayer. Perhaps your client is assuming that if the Canadian company
had a loss that there wouldn't be any penalties. But that's not the
case with foreign information returns. At some point, your client may
need to fire whoever is being uncooperative. At this point, I suspect
the IRS is likely to believe that your client isn't taking this issue
very seriously.

If you have an interest in learning more about the subject, I'm
hosting a seminar in Las Vegas on Dec. 7th. There are still three
seats left with a 20% advance registration discount. For details see
http://www.offshorepress.com/cfcworkshop.htm

Vern Jacobs

IRS Regulations require that I include the following statement with
any written explanation of the tax law. The comments in this
memorandum are not intended to constitute an opinion regarding any
specific tax issues because additional tax issues may exist that could
affect the tax treatment of the tax issues addressed in this memo.
This memorandum does not consider or reach a conclusion with respect
to those additional issues and was not written and cannot be used for
the purpose of avoiding penalties under code section 6662(d). For
further details see
http://www.offshorepress.com/vkjcpa/disclosurerules.htm