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By Edward Tanenbaum, Esq.
Alston & Bird LLP, New York, NY
In today's times, the "F" word has taken on new meaning, what with FATCA (Foreign Account Tax Compliance Act) and FBAR permeating our lives. With the passage of the HIRE Act, the FATCA provisions now represent a call to the government and the private sector to get it right in the regulatory process that will most assuredly keep people quite busy for the next two years, if not longer.
Headlines were also made with respect to the Report of Foreign Bank and Financial Accounts, Form TD F 90-22.1, commonly referred to as the "FBAR" form. After studying the issues and feverishly internalizing the many comment letters received in the past year or so requesting clarity in the area, the Treasury Department (Financial Crimes Enforcement Network, known as "FinCEN") issued proposed regulations1 under the Bank Secrecy Act,2 and the IRS issued Notice 2010-23 and Announcement 2010-16, relating to the FBAR filing requirements.
In reality, the proposed regulations represent an expanded form of the current instructions to the FBAR form, with modifications and clarifications, of course. (Strangely, much, if not all, of the "law" in this area had previously been set out in the instructions to the FBAR form, of all places.)
As we know, the general concept is that all relevant persons who have a financial interest in, or signature or other authority over, a foreign bank, securities, or other financial account (exceeding $10,000 at any time during the year) must file the FBAR form. Prior to the UBS and LGT Group scandals, the FBAR filing requirement was not on top of the radar screen of either the government or taxpayers. Needless to say, that situation has all changed and there has now been a renewed focus on the FBAR filing requirements.
Essentially, the areas of focus have been: (a) the class of persons required to file the form; (b) the meaning of the term "financial account;" and (c) the definition of "signature or other authority." Oh, if it were that easy.
The proposed regulations do provide some clarity in these areas and, to some extent, reflect a relaxation of the rules, although not in all cases.
Class of Persons Required to File.
The Bank Secrecy Act itself calls for all U.S. persons, and persons in and doing business in the United States, to file the FBAR form. Nonetheless, for years (up until 2008), the instructions did not include categories other than U.S. persons. The FBAR form in 2008 changed that to conform to the statute, much to the dismay of practitioners who couldn't figure out the definition of "persons in and doing business in the U.S." That prompted the IRS to issue a notice last year limiting the filing requirement to the traditional U.S. person definition, at least temporarily.
The proposed regulations continue that position, requiring the FBAR form to be filed by U.S. persons, defined to include a citizen or resident of the United States, or an entity, including corporations, partnerships, trusts, or limited liability companies, formed or organized under the laws of the United States, any state, the District of Columbia, a Territory or Insular Possession of the United States, or an Indian Tribe.
Thus, so far, the class of persons remains limited to "U.S. persons," although the definition of United States has been expanded. It is also clear now that limited liability companies are picked up in the definition (regardless of whether owned by nonresident aliens or foreign corporations), and in determining who are residents of the United States, one is directed to the definition contained in §7701(b) of the Code.
Announcement 2010-16 continues this definitional approach of the class of persons required to file the FBAR form by directing that, for purposes of the FBAR form required to be filed on June 30, 2010, the old definition continues to apply for 2009 and earlier years. Thus, only U.S. persons are required to file on June 30, 2010, and, for persons who are not U.S. citizens, residents, or domestic entities, filings with respect to 2009 and earlier years are suspended.
Aside from traditional bank accounts and security accounts, there has been much discussion of the definition of "financial account." The proposed regulations make clear that a financial account includes certain life insurance and annuity accounts. However, the real controversy relates to whether mutual funds, hedge funds, and private equity funds are captured within the definition.
This was a key area significantly commented upon by those respective industries. In drawing a sensible line of demarcation, the proposed regulations establish that mutual funds and similar pooled funds of the type offered to the public and identifiable by the ability of account holders to redeem shares on a daily or otherwise regular basis would be captured within the definition of financial account.
On the other hand, other pooled investment companies, such as private equity funds, venture capital funds, and hedge funds, present different characteristics. As a result, the proposed regulations, for the moment, reserve on this issue.
The IRS contemporaneously issued Notice 2010-23, picking up on this point. Thus, for persons having either a financial interest in, or signature or other authority over, a "commingled fund that is a mutual fund," FBAR filings are required for 2009 and earlier years. However, the IRS will not interpret the term "commingled fund" as applying to funds other than mutual funds, i.e., interests in private equity funds and hedge funds will not be covered by the filing requirement.
Notice 2010-23 also provides for a deferral of the filing requirement of the FBAR due on June 30, 2010, for 2009 (and 2010) until June 30, 2011, for persons who have only signature authority over, but no financial interest in, a foreign financial account.
The Notice further directs that persons qualifying for relief under either of these two rules should check the "no" box in response to FBAR-related questions on the federal tax return for 2009 and earlier years.
Signature or Other Authority
The proposed regulations define signature or other authority to mean authority of an individual (whether alone or in conjunction with another) to control the disposition of money, funds, or other assets held in a financial account by delivery of instructions (whether communicated in writing or otherwise) directly to the person with whom the financial account is maintained.
This definition somewhat clarifies an issue that practitioners had as to whether officers and directors, who did not have actual signature authority, nonetheless possessed "other authority" over an account by virtue of their theoretical authority to direct employees to carry out transfers to or from a financial account. The prior instructions to the FBAR form were quite vague on the topic and, in fact, had language leading one to possibly conclude that such officers and directors, per se, would have such "other authority." The language of the proposed regulations would seem to suggest that simply holding an officership or directorship, without more, would not constitute other authority as long as such person lacked formal signature authority and as long as such person lacked the ability to direct the disposition of funds directly to the person with whom the account is maintained. On the other hand, if a bank officer would take instructions from that person by virtue of the person's holding any such titles, then the new definition may not be that helpful.
Over the past year or so, there have been significant comments submitted with respect to the issue of exceptions to FBAR reporting for certain persons with signature or other authority. The proposed regulations provide that exceptions will apply to certain officers and employees of financial institutions that have a federal functional regulator and of certain entities that are publicly traded in the United States or which are otherwise required to register with the SEC, but only if such persons do not also have a financial interest in the financial account.
In addition, liberal rules are proposed in connection with financial interests in multiple accounts and in connection with participants in and beneficiaries of certain retirement plans and trusts.
On balance, a lot of good has come out of the proposed regulations and accompanying Notice and Announcement. Nonetheless, there are definitely areas that can be improved upon, including, to name a few, expanding the classes of companies with respect to which employees and officers would not need to report and eliminating duplicative reporting.
This commentary also will appear in the June 2010 issue of the Tax Management International Journal. For more information, in the Tax Management Portfolios, see Blum, 947 T.M., Reporting Requirements Under the Code for International Transactions, and in Tax Practice Series, see ¶7170, U.S. International Withholding and Reporting.
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