QUESTION: I'm currently dealing with a U.S. resident who owns 100% of
a passive income Canadian CFC. We have prepared the necessary Form
5471. However, the CFC owns a 25% interest in a Canadian rental
partnership. The taxpayer's three brothers each own 25% of the
partnership. My question is, do I need to make any adjustments to the
CFC's books regarding depreciation, etc., taken at the Canadian
partnership level. I've already made the required U.S. GAAP (Generally
Accepted Accounting Principles) and U.S. tax adjustments for the CFC,
but have not attempted to look-through to the partnership for further
adjustments.

REPLY: I have not encountered any discussion of the GAAP conversion
rules with respect to a non-controlled foreign entity. Logic suggests
that GAAP conversion is only possible when the taxpayer has effective
control over the foreign entity. It would therefore seem to be
unreasonable for the IRS to require a conversion for a minority
ownership interest. The attribution of ownership rules in tax code
section 318 do not include siblings -- perhaps because the government
recognizes that siblings don't always have the same priorities. And if
the brothers are not U.S. citizens or residents, they would not be
counted because the attribution rules do not apply to a non-resident
alien.

If you are concerned about potential penalties, this might be a case
where you could file a protective Form 8275 -- unless the amount
involved is negligible in relation to the total income of the client.
I think it would be huge waste of time to try to find any information
on this topic in the Regs or any rulings or notices because I strongly
suspect the subject has not been addressed.

Vern

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