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Filing Requirements for a Dormant Foreign
Corporation or Trust
QUESTION: I established a Family Foundation and IBC in Panama in 2006. I have the legal incorporation documents sent to me by the company I
worked with in Panama City. I have not placed even one dollar into assets for either corporation. I only paid to have the corporations
formed. I have not done any business in either. Do I have to disclose the foundation and IBC to the IRS, and if so, why?
REPLY: The tax law permits the IRS to impose a penalty of $10,000 for a mere failure to file a return for a controlled foreign corporation.
If the family foundation is functionally like a trust, the penalties for non-filing or late filing of the Forms 3520 and 3520-A are based
on the amount of asset owned by the trust or transferred to the trust. If the foundation is functionally like a corporation, it would be
subject to the same penalty that applies to a controlled foreign corporation. As far as I can determine, these penalties can also be
imposed for a delinquent filing. That's the bad news and the best reason I can think of for filing the required returns.
I have not found any clear answer as to whether it is necessary to file any returns for a foreign corporation or foreign trust when there
are no assets within the entity. An argument could be made by the IRS that the cost of forming a corporation is an asset that would be
called "organization costs". However, the instructions for the Form 5471 include a provision for an abbreviated filing procedure for a
dormant foreign corporation as detailed in Revenue Procedure 92-70. Only the information on page one of the form is required if the
corporation has less than $100,000 in assets and less than $5,000 in income and less than $5,000 of expenses and no transactions involving
the stock of the corporation. If the foundation is deemed to be functionally equivalent to a corporation it would be subject to the same filing rules.
If the IBC is owned by the foundation and if the foundation is deemed to be a trust, then the cost of forming the corporation would be
deemed to be an asset of the trust. I have not been able to find any exception or abbreviated filing procedure for filing the foreign trust
returns (Form 3520 and 3520-A), but as mentioned above, the penalties for non filing are based on the value of the assets in the trust.
If the foundation is treated as a trust and does not own the stock of the IBC, then it would have no assets and would not be subject to any
penalties for non-filing. Whether the foundation is deemed to be a trust or a corporation will depend on its structure and purpose.
Vern
http://www.offshorepress.com/vkjcpa/penalties.htm