Remember, Informal Voting Agreements Or Nominee Ownership Of Stock In A Foreign Corporation Is Attributed To The Beneficial Owner For Controlled Foreign Corporation Purposes

Every now and then a client may visit a lawyer or tax advisor and describe the stock ownership (of record) in a foreign corporation. Based on the stock ledgers, the foreign corporation may not meet the definition of a controlled foreign corporation or "CFC". However, in digging a little deeper, one of the shareholders is simply the "nominee" or "straw party" for the true owner or beneficial owner who just happens to be a U.S. shareholder. There could be a voting arrangement where the nominee shareholder will vote at the direction of the beneficial owner. This latter situation came to the attention of Chief Counsel's office several years ago but since we are in tax return season, tax return preparers need to exercise due diligence in determining whether a client must file one or more CFC schedules on Form 5471.

CCA 201104034 (1/28/2011) is a reminder that the Service is "on guard" for finding "nominee" type shareholders in the CFC context. The facts in the CCA involved retained ownership through an "informal voting arrangement". The question from the field was "whether a person that transfers nominal or mere title ownership of stock in a foreign corporation could nevertheless be considered under the provisions of subpart F to be a U.S. shareholder of that foreign corporation (which would then be a CFC), as well as ...... the statute of limitations and penalties that would apply for failure to file a Form 5471 for such entity.

A CFC, as we all know, is any foreign corporation with more than 50% of either the total combined voting power of all classes of stock of the corporation entitled to vote or the total value of the stock of the corporation, is owned by United States shareholders on any day during the taxable year of such foreign corporation. § 957(a). Mere title ownership is not determinative of who holds the voting power of the stock; any arrangement to shift formal voting power away from U.S. shareholders will not be given effect if, in reality, voting power is retained. Treas. Reg. § 1.957-1(b)(2).

The regulations provide examples of when voting power will be considered to have been retained which in turn could result in CFC status. Indeed, CCA 201104034 directs the reader to consider Example 5 of Treas. Reg. § 1.957-1(c) to drive home the point that a foreign corporation may qualify as a CFC solely as a result of a U.S. shareholder actually owning more than 50% of the voting power of the corporation where nominal owner ship and...