The IRS has issued proposed regulations to modify existing rules on gain recognition agreement (GRA) reporting, apply a new standard in obtaining relief from late or otherwise deficient GRAs and require additional reporting on Form 926.
The proposed regulations would make several significant changes to the rules. First, they would require a transferor to report basis and fair market value of transferred property on Form 926, which previously was not required if the information was reported on a GRA filing. The proposed rules would also change the standard for obtaining relief under Section 367(a) for either a failure to timely file or to materially comply with a GRA. The reasonable cause standard would be removed, and instead the IRS would grant relief if the failure to file or to comply was determined not to be willful. The proposed regulations provide examples of meeting the new standard, including in one example notably indicating that willful intent would include listing "available upon request" instead of the fair market value of the transferred property.
By comparison, the reporting requirements of Section 6038B, which generally require Form 926, would still impose a penalty unless the taxpayer could demonstrate reasonable cause. Under the proposed regulations, this penalty would also apply to initial GRA filings and annual certifications. Thus, although gain recognition may be avoided because the taxpayer was deemed not willful in failure to comply, it is possible that the penalty under Section 6038B would apply if the taxpayer failed to meet the reasonable cause standard. In addition, the proposed regulations clarify that reporting for nonrecognition of liquidating distributions to foreign corporations under Section 367(e)(2) would also be required on Form 926, with similar penalty structures as for the GRA and Section 6038B requirements under Section 367(a). The proposed regulations also address filing requirements under Treas. Reg. Sec. 1.367(a)-3 regarding transfers of stock or securities to foreign corporations, again providing similar penalty rules as those proposed for sections 367(a) and 367(e)(2).
Under current regulations, taxpayers requesting reasonable-cause relief from gain recognition are deemed to have established reasonable cause unless the IRS notifies them within 120 days from the request stating that reasonable cause has not been established or additional time is needed. The proposed regulations would eliminate this deemed determination.
It should be noted that the existing IRS field directive allowing correction of deficient GRAs — including with "available upon request" language that would be considered willful noncompliance under the proposed regulations — remains available to taxpayers right now.
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