Reporting of Specified Foreign Financial Assets, 73817-73832 [2014-29125]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 79, Number 239 (Friday, December 12, 2014)]
[Rules and Regulations]
[Pages 73817-73832]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-29125]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9706]
RIN 1545-BJ69


Reporting of Specified Foreign Financial Assets

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations providing guidance 
relating to the provisions of the Hiring Incentives to Restore 
Employment (HIRE) Act that require specified foreign financial assets 
to be reported to the Internal Revenue Service for taxable years 
beginning after March 18, 2010. In particular, the final regulations 
provide guidance relating to the requirement that individuals attach a 
statement to their income tax return to provide required information 
regarding specified foreign financial assets in which they have an 
interest. The final regulations affect individuals required to file 
Form 1040, ``U.S. Individual Income Tax Return,'' or Form 1040-EZ, 
``Income Tax Return for Single and Joint Filers With No Dependents,'' 
and certain individuals required to file Form 1040-NR, ``Nonresident 
Alien Income Tax Return,'' or Form 1040NR-EZ, ``U.S. Income Tax Return 
for Certain Nonresident Aliens with No Dependents.''

DATES: Effective Date: These regulations are effective on December 12, 
2014.
    Applicability Date: For dates of applicability, see Sec. Sec.  
1.6038D-1(b), 1.6038D-2(g), 1.6038D-3(e), 1.6038D-4(b), 1.6038D-5(g), 
1.6038D-7(d), and 1.6038D-8(g).

FOR FURTHER INFORMATION CONTACT: Joseph S. Henderson or Michael 
Kaercher, (202) 317-6942 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    An agency may not conduct or sponsor, and a person is not required 
to

[[Page 73818]]

respond to, a collection of information unless the collection of 
information displays a valid control number. The collection of 
information contained in these regulations has been submitted to the 
Office of Management and Budget for review in accordance with the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3507(d)). The collection of 
information is satisfied by filing Form 8938, ``Statement of Specified 
Foreign Financial Assets,'' OMB No. 1545-2195, with the respondent's 
income tax return.
    Books and records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    On December 19, 2011, the Department of the Treasury (Treasury 
Department) and the Internal Revenue Service (IRS) published temporary 
regulations (TD 9567) (the ``2011 temporary regulations'') and a notice 
of proposed rulemaking by cross-reference to the 2011 temporary 
regulations in the Federal Register addressing the reporting 
requirements under section 6038D (76 FR 78553, TD 9567, 2012-1 IRB 
395); (76 FR 75894; REG-130302-10, 2012-1 IRB 412). The notice of 
proposed rulemaking also included Prop. Reg. Sec.  1.6038D-6, setting 
out the conditions under which a domestic entity will be considered a 
specified domestic entity and, therefore, required to report specified 
foreign financial assets in which it holds an interest. Corrections to 
the 2011 temporary regulations were published on February 21, 2012, in 
the Federal Register (77 FR 9845). Corrections to Prop. Reg. Sec.  
1.6038D-6 were published in the Federal Register on February 21, 2012 
(77 FR 9877) and February 22, 2012 (77 FR 10422).
    The Treasury Department and the IRS received written comments on 
the 2011 temporary regulations and Prop. Reg. Sec.  1.6038D-6. All 
comments are available at www.regulations.gov or upon request. Because 
no requests to speak were received, no public hearing was held. After 
consideration of the comments received, the Treasury Department and the 
IRS adopt the 2011 temporary regulations as final regulations with the 
modifications described herein. The Treasury Department and the IRS are 
not adopting Prop. Reg. Sec.  1.6038D-6 as a final regulation at this 
time. Prop. Reg. Sec.  1.6038D-6 (REG-144339-14) will be adopted as a 
final regulation at a later date.

Summary of Comments and Explanation of Revisions

I. Requirement To Report Specified Foreign Financial Assets (Sec.  
1.6038D-2)

A. Individuals Required To Report (Sec.  1.6038D-2(a))

    A number of comments were received requesting that additional 
categories of individuals be relieved of the requirement to report 
specified foreign financial assets under section 6038D.
1. Dual Resident Taxpayers
    A comment recommended an exemption from the section 6038D reporting 
requirements be included for an individual who is a dual resident 
taxpayer and who, pursuant to a provision of a treaty that provides for 
resolution of conflicting claims of residence by the United States and 
the treaty partner, claims to be treated as a resident of the treaty 
partner. In such a case, a dual resident taxpayer may claim a treaty 
benefit as a resident of the treaty partner and will be taxed as a 
nonresident for U.S. tax purposes for the taxable year (or portion of 
the taxable year) that the individual is treated as a nonresident. The 
final rule adopts this recommendation for a dual resident taxpayer who 
determines his or her U.S. tax liability as if he or she were a 
nonresident alien and claims a treaty benefit as a nonresident of the 
United States as provided in Sec.  301.7701(b)-7 by timely filing a 
Form 1040NR, ``Nonresident Alien Income Tax Return,'' (or such other 
appropriate form under that section) and attaching a Form 8833, 
``Treaty-Based Return Position Disclosure Under Section 6114 or 
7701(b).'' The Treasury Department and the IRS have concluded that 
reporting under section 6038D is closely associated with the 
determination of an individual's income tax liability. Because the 
taxpayer's filing of a Form 8833 with his or her Form 1040NR (or other 
appropriate form) will permit the IRS to identify individuals in this 
category and take follow-up tax enforcement actions when considered 
appropriate, reporting on Form 8938, ``Statement of Specified Foreign 
Financial Assets,'' is not essential to effective IRS tax enforcement 
efforts relating to this category of U.S. residents.
2. Individuals Resident in the United States Under Non-Immigrant Visas
    A number of comments requested an exemption from the section 6038D 
reporting requirements for foreign executives and employees resident in 
the United States under non-immigrant H, L, or E visas. The final rule 
does not adopt this recommendation. Section 6038D is intended to 
provide the IRS with information concerning the specified foreign 
financial assets of U.S. taxpayers to aid the IRS in enforcing tax laws 
fairly and uniformly. Because all U.S. residents are taxable on 
worldwide income, excluding categories of residents from the scope of 
section 6038D reporting is not consistent with the purposes for which 
the provision was enacted. Individuals in the United States under non-
immigrant visas often stay in the United States for years, making it 
difficult to justify treating them more favorably than other U.S. 
residents. For stays in the United States of a shorter duration, the 
Treasury Department and the IRS have determined that the distinctions 
drawn in the definition of a U.S. resident in Sec.  1.6038D-1(a)(3) 
(which cross-references section 7701(b)) best carry out the purposes of 
section 6038D.
3. Persons That Do Not Owe U.S. Tax for the Taxable Year
    Another comment requested revising Sec.  1.6038D-2(a)(7) to exempt 
from the section 6038D reporting requirements specified persons that do 
not owe U.S. taxes for the taxable year. The final rule does not adopt 
this comment. As provided in the 2011 temporary regulations, the final 
rule states that a specified person that does not have to file a tax 
return for the year does not have to file a Form 8938. See Sec.  
1.6038D-2(a)(7)(i). If the law requires the filing of a tax return, 
however, information reported on a Form 8938 concerning the taxpayer's 
specified foreign financial assets is an important component of that 
return, even if no tax liability is shown. Requiring this filing will 
aid the IRS in devising effective enforcement programs with respect to 
such returns.

B. Applicable Reporting Thresholds (Sec.  1.6038D-2(a))

    Several comments requested increases to the reporting thresholds 
provided in Sec.  1.6038D-2(a) for certain types of assets or for 
certain classes of individuals. Other comments recommended that the 
increased thresholds in the 2011 temporary regulations applicable to 
certain specified individuals living abroad be extended to additional 
categories of taxpayers.
1. Assets Received in Connection With the Performance of Personal 
Services
    Some comments requested increased reporting thresholds, or a 
complete exemption from reporting, for specified

[[Page 73819]]

foreign financial assets received in connection with an individual's 
performance of personal services as an employee of a foreign employer. 
The concerns raised in these comment letters primarily relate to the 
difficulty of valuing these types of assets. However, the 2011 
temporary regulations already broadly address valuation concerns 
relating to these assets by providing a simplified valuation rule for 
interests in foreign pension plans or foreign deferred compensation 
plans if the beneficiary does not know, or have reason to know based on 
readily accessible information, the value of the interest. In such 
cases, the value of the individual's interest in the plan is limited to 
the value of the distributions received from the plan during the year 
for purposes of both calculating the applicable reporting thresholds 
and reporting the maximum value of the interest. See Sec.  1.6038D-
5(f)(3).
    These comments are further addressed by clarifying in the final 
rule that nonvested interests in property received in connection with 
the performance of personal services are not required to be reported. 
See section I.C.1 in this preamble, which describes this clarification 
incorporated in the final rule.
    Because the Treasury Department and the IRS have determined that 
the concerns underlying these comments are best addressed by these 
rules and that the method of acquisition of a specified foreign 
financial asset should not determine an individual's section 6038D 
reporting obligations, the final rule does not adopt this request.
2. Employees Seconded to the United States
    Comments requested that higher reporting thresholds (or a reporting 
exemption) should apply in the case of certain employees seconded to 
the United States by foreign employers. For the reasons set forth in 
section I.A.2 (relating to individuals resident in the United States 
under non-immigrant visas) and in section I.B.3 (addressing U.S. 
residents who do not qualify for section 911 benefits), the final rule 
does not adopt this recommendation.
3. Non-Citizen U.S. Residents Who Do Not Qualify for Section 911 
Benefits
    A comment was received requesting that higher reporting thresholds 
apply in the case of a non-citizen resident of the United States who 
would qualify for benefits under section 911(d)(1)(A) if he or she were 
a U.S. citizen. This request has not been adopted in the final rule for 
administrability reasons. The 2011 temporary regulations tie the 
increased reporting thresholds in Sec.  1.6038D-2(a) to an individual's 
status as a qualified individual under section 911(d)(1) in order to 
allow the IRS to use the taxpayer's filing of the return required to 
claim section 911 benefits (Form 2555, ``Foreign Earned Income'', or 
Form 2555-EZ, ``Foreign Earned Income Exclusion'') as a marker to 
indicate that higher reporting thresholds may apply to the taxpayer. 
The ability to easily identify taxpayers who may be eligible for the 
increased thresholds is essential to permit the IRS to target 
appropriate enforcement programs to taxpayers subject to different 
reporting thresholds in a cost effective manner.

C. Interest in a Specified Foreign Financial Asset (Sec.  1.6038D-2(b))

    A number of comments requested that the final regulations clarify 
the reporting requirements with respect to certain interests in assets 
under Sec.  1.6038D-2(b). These clarifications have been incorporated 
in the final rule.
1. Nonvested Property Under Section 83
    A comment requested clarification regarding whether an individual 
is considered to have an interest in property transferred in connection 
with the performance of personal services during any period that the 
individual's interest in the property is not vested. The final rule in 
Sec.  1.6038D-2(b)(2) clarifies that a specified person that is 
transferred property in connection with the performance of personal 
services is first considered to have an interest in the property for 
purposes of section 6038D on the first date that the property is 
substantially vested (within the meaning of Sec.  1.83-3(b)) or, in the 
case of property with respect to which a specified person makes a valid 
election under section 83(b), on the date of transfer of the property.
2. Assets Held by a Disregarded Entity
    A number of comments requested clarification of the section 6038D 
reporting requirements with respect to specified foreign financial 
assets held by an entity disregarded as an entity separate from its 
owner under Sec.  301.7701-2 of this chapter (a disregarded entity). In 
response to these requests, and consistent with instructions to Form 
8938, the final rule provides in Sec.  1.6038D-2(b)(4)(iii) that a 
specified person that owns a foreign or domestic entity that is a 
disregarded entity is treated as having an interest in any specified 
foreign financial assets held by the disregarded entity. As a result, a 
specified person that owns a disregarded entity (whether domestic or 
foreign) that, in turn, owns specified foreign financial assets must 
include the value of those assets in determining whether the specified 
person meets the reporting thresholds in Sec.  1.6038D-2(a) and, if so, 
must report such assets on Form 8938.

D. Jointly Owned Assets (Sec.  1.6038D-2(c))

    A number of comments requested clarification of aspects of the 
rules in Sec.  1.6038D-2(c) and (d) relating to joint owners of a 
specified foreign financial asset. These comments have been adopted. 
Specifically, the final rule clarifies that each of the joint owners of 
a specified foreign financial asset who are not married to each other 
must include the full value of the asset (rather than only the value of 
the specified person's interest in the asset) in determining whether 
the aggregate value of such specified individual's specified foreign 
financial assets exceeds the applicable reporting thresholds, and each 
joint owner must report the full value of the asset on his or her Form 
8938. See Sec.  1.6038D-2(c)(1)(i) and (c)(1)(ii). In addition, the 
final rule clarifies that, in the case of joint owners who are married 
to each other and file separate returns, each joint owner of a 
specified foreign financial asset must report the full value of the 
asset (rather than only the value of the specified person's interest in 
the asset) on the individual's Form 8938, even if both spouses are 
specified individuals and only one-half of the value of the asset is 
considered in determining the applicable reporting thresholds under 
Sec.  1.6038D-2(c)(3)(i). See Sec.  1.6038D-2(d)(2).

II. Specified Foreign Financial Assets (Sec.  1.6038D-3)

A. Financial Account (Sec.  1.6038D-3(a))

1. Retirement and Pension Accounts and Certain Non-Retirement Savings 
Accounts
    The definition of a financial account in the 2011 temporary 
regulations is based on the definition of a financial account for 
chapter 4 purposes, subject to an exception for certain retirement and 
pension accounts and non-retirement savings accounts that are financial 
accounts for section 6038D purposes but that are not treated as 
financial accounts for purposes of chapter 4. See Sec. Sec.  1.6038D-
1(a)(7), 1.1471-1(b)(49), and 1.1471-5(b). These final regulations 
modify the definition of a financial account for purposes of section 
6038D in order to require consistent reporting under section 6038D with 
respect to retirement and pension accounts and certain non-

[[Page 73820]]

retirement savings accounts regardless of whether the account is 
maintained in a jurisdiction treated as having in effect a Model 1 IGA 
or Model 2 IGA. For financial accounts that are maintained by a foreign 
financial institution that is not located in a jurisdiction treated as 
having in effect a Model 1 IGA or Model 2 IGA, the definition of a 
financial account in the final rule continues to include the retirement 
and pension accounts and non-retirement savings accounts described in 
Sec.  1.1471-5(b)(2)(i), consistent with the section 6038D coordination 
rule in that section. See Sec.  1.1471-5(b)(2)(i)(D). For taxable years 
beginning after December 12, 2014, these final regulations also provide 
that retirement and pension accounts, non-retirement savings accounts, 
and accounts satisfying conditions similar to those described in Sec.  
1.1471-5(b)(2)(i) and that are excluded from the definition of a 
financial account under an applicable Model 1 IGA or Model 2 IGA (as 
provided in Sec.  1.1471-5(b)(2)(vi)) are included in the definition of 
a financial account for purposes of section 6038D. The Treasury 
Department and the IRS intend to amend the chapter 4 regulations to add 
a section 6038D coordination rule to Sec.  1.1471-5(b)(2)(vi) providing 
that such accounts are included in the definition of a financial 
account for purposes of section 6038D.
2. Short-Term Accounts
    One comment recommended the addition of an exception to the 
definition of a financial account for an account in which funds are 
held for less than 15 days, provided the income generated from the 
account does not exceed $1,000. The final rule does not incorporate 
this comment. The 2011 temporary regulations already provide relief for 
many short-term accounts through a broad exception to the definition of 
financial account for escrow accounts. See Sec. Sec.  1.6038D-1(a)(7) 
and 1.1471-5(b)(2)(iv). This exception is administrable because these 
accounts are of a type that is distinguishable from other accounts. A 
broader exception for short-term accounts could significantly 
complicate IRS efforts to devise effective enforcement programs based 
on comprehensive account reporting under section 6038D.
3. Assets Held in an Account Maintained by a Foreign Financial 
Institution
    Another comment requested clarification that specified foreign 
financial assets held in a financial account are excluded from the 
definition of specified foreign financial assets. The 2011 temporary 
regulations already provide that the foreign financial account itself, 
and not the assets held in such an account, must be reported for 
section 6038D purposes. See Sec.  1.6038D-3(a)(1). Accordingly, no 
change has been adopted in response to this comment.
4. Life Insurance With a Cash Surrender Value
    A comment requested clarification of the section 6038D reporting 
requirements applicable to a life insurance policy with a cash 
surrender value. Because the definition of financial account for 
section 6038D purposes is based on the definition of a financial 
account for chapter 4 purposes, which includes these contracts, the 
2011 temporary regulations already provide clear rules requiring a 
taxpayer to report these contracts on Form 8938. Accordingly, the final 
rule is not modified to further address this issue. See Sec. Sec.  
1.6038D-1(a)(7), 1.1471-5(b)(1)(iv), and 1.1471-5(b)(3)(vii).
5. Request for Examples of Foreign Financial Assets Not To Be Reported
    A number of comments requested examples of the types of financial 
assets that are not required to be reported under section 6038D. The 
Treasury Department and the IRS have not provided these examples in the 
final rule because the 2011 temporary regulations, as well as the 
relevant portions of the regulations under chapters 4 and 61, already 
include detailed rules to support taxpayer determinations as to whether 
an asset is a specified foreign financial asset that must be reported. 
For example, Sec.  1.6038D-3(d) includes examples of assets other than 
financial accounts that are included within the definition of specified 
foreign financial asset, and the rules in Sec.  1.6049-5(b)(5)(i) 
provide detail concerning which financial institutions are U.S. payors 
for purposes of determining that an account is maintained by such an 
institution and therefore is not required to be reported under section 
6038D.
    The Treasury Department and the IRS will continue to consider 
comments and whether additional guidance is warranted to address 
particular types of assets under section 6038D.

B. Other Specified Foreign Financial Assets (Sec.  1.6038D-3(b))

1. Assets Held for Investment and Not Used in, or Held for Use in, the 
Conduct of the Taxpayer's Trade or Business
    A number of comment letters recommended changes to the approach set 
forth in the 2011 temporary regulations for determining whether an 
asset other than a financial account is held for investment (and 
therefore may be reportable under section 6038D) or is instead excepted 
from the definition of a specified foreign financial asset because it 
is used in, or held for use in, the conduct of a trade or business 
under Sec.  1.6038D-3(b)(3), (b)(4), and (b)(5).
    Several comments requested a bright line test for distinguishing 
between non-financial account assets subject to reporting and those not 
subject to reporting. For example, one such comment recommended looking 
to whether an asset was acquired in the taxpayer's trade or business 
rather than whether the asset was used in, or held for use in, the 
conduct of the taxpayer's trade or business. Another comment suggested 
providing that contracts issued in the ordinary course of the issuer's 
(rather than the taxpayer's) trade or business should not be reportable 
by the taxpayer. The final rule does not change the definition of a 
specified foreign financial asset as suggested in these comments. The 
Treasury Department and the IRS have determined that the reporting rule 
under the 2011 temporary regulations strikes an appropriate balance 
under section 6038D by focusing on whether an asset is held for 
investment. Distinguishing assets held for investment from assets with 
a close nexus to the taxpayer's trade or business is an inherently 
factual determination that is not susceptible to a bright line test. 
The Treasury Department and the IRS have concluded that the 2011 
temporary regulations provide reasonable rules that will yield 
appropriate reporting results in a wide variety of fact patterns 
involving the taxpayer's trade or business.
    Another comment requested a rule specifying that an asset 
inadvertently acquired as a result of a corporate reorganization or an 
in-kind asset distribution not be treated as held for investment, so 
long as the asset is held by the taxpayer for only a short period of 
time. The Treasury Department and the IRS have concluded that this type 
of exception is not warranted because the general test set forth in the 
2011 temporary regulations is fair, should be uniformly applied, and 
should not be unduly burdensome to apply under these fact patterns.

[[Page 73821]]

2. Certain Hedging Transactions
    One comment recommended modifying Sec.  1.6038D-3(b) to provide 
that certain hedging transactions described in section 1221(a)(7) are 
not specified foreign financial assets. The final rule does not adopt 
the requested change. The Treasury Department and the IRS have 
concluded that taxpayers engaging in hedging transactions should 
determine whether such transactions are specified foreign financial 
assets by applying the same general test applied by other taxpayers, 
that is, by determining whether the hedging transaction is ``used in, 
or held for use in, the conduct of a trade or business and not held for 
investment.''
3. Employment Contracts
    Another comment requested that the final rule provide that 
employment contracts are not specified foreign financial assets. The 
comment did not, however, suggest a definition of an employment 
contract for this purpose. Moreover, the scope of property that could 
be covered by such a contract may vary widely among taxpayers depending 
on the industry and the location in which the taxpayer works. The 
Treasury Department and the IRS have determined that the trade or 
business test of Sec.  1.6038D-3(b)(3), (b)(4), and (b)(5) should apply 
broadly to a wide range of financial assets in order to achieve uniform 
reporting results for taxpayers with aggregate specified foreign 
financial assets of similar value, and that a broad exclusion for 
employment contracts should not be provided. Accordingly, the final 
rule does not adopt this recommendation.
4. Shares of Foreign Corporations Traded on Public Stock Exchange
    Some comments recommended that the definition of a specified 
foreign financial asset exclude stock of a foreign corporation that is 
traded on a public stock exchange (whether or not the exchange is 
located in the United States). The Treasury Department and the IRS have 
concluded that it is not appropriate to exclude stock or securities 
issued by a person other than a U.S. person from section 6038D 
reporting. If such stock or securities are held in a financial account, 
the financial account would be reported for section 6038D purposes, and 
if such stock or securities are held directly by a specified person and 
not in a financial account, based on section 6038D(b)(2), it is 
appropriate to require reporting of such stock or securities for 
section 6038D purposes. Thus, this comment is not adopted.
5. Interest in a Social Security, Social Insurance, or Similar Program
    Several comments recommended amending Sec.  1.6038D-3(b) to specify 
that an interest in a social security, social insurance, or similar 
program of a foreign government is not considered a specified foreign 
financial asset. As a general matter, the definition of a specified 
foreign financial asset already excludes these interests because they 
are not assets described in Sec.  1.6038D-3(b)(1). In addition, the 
preamble to the 2011 temporary regulations and the instructions to Form 
8938 already illustrate the application of this rule to these 
interests, stating that ``an interest in a social security, social 
insurance, or other similar program of a foreign government'' is not a 
specified foreign financial asset. A chart comparing the Form 8938 
reporting requirements to the FBAR reporting requirements, available at 
www.irs.gov/Businesses/Comparison-of-Form-8938-and-FBAR-Requirements, 
also addresses these programs. Because the Treasury Department and the 
IRS already have addressed this issue, the final rule does not adopt 
the recommendation.
6. Financial Assets Issued by a Person Organized Under the Laws of a 
U.S. Possession
    The final rule clarifies that specified foreign financial assets 
include stock, securities, financial instruments, and contracts that 
are held for investment and not held in an account maintained by a 
financial institution and are issued by a person organized under the 
laws of a U.S. possession. See Sec.  1.6038D-3(b)(1). For special rules 
applicable to bona fide residents of the U.S. possessions, see Sec.  
1.6038D-7(c).

C. Interest in a Foreign Trust or Foreign Estate (Sec.  1.6038D-3(c))

    A number of comments expressed concern that the reason to know 
standard of knowledge to report an interest in a foreign trust or 
estate could result in compliance difficulties for specified 
individuals who are aware that they have a beneficial interest in a 
trust or estate but who have not received a distribution from the trust 
or estate and do not know the value of the interest. These comments 
recommended that the final rule provide that a beneficiary of a foreign 
trust or estate should not be required to report the interest on Form 
8938 for any year in which the beneficiary did not receive a 
distribution.
    The Treasury Department and the IRS have concluded that the 
concerns expressed in these comments have already been addressed 
comprehensively in the 2011 temporary regulations, including by the 
adoption of simple valuation rules that substantially ease the 
reporting burdens of beneficiaries. In the case of a foreign trust, for 
a year in which the beneficiary does not know, or have reason to know 
based on readily accessible information, the fair market value of the 
beneficiary's interest and the beneficiary does not receive a 
distribution, the value of the beneficiary's interest in the trust, 
both for purposes of determining whether the beneficiary meets the 
reporting thresholds in Sec.  1.6038D-2(a) and, if so, for reporting 
the maximum value of that beneficial interest, is considered to be 
zero. See Sec.  1.6038D-5(f)(2). Similar rules apply with respect to a 
foreign estate. See Sec.  1.6038D-5(f)(3). Thus, a specified individual 
who is such a beneficiary of a foreign trust or estate but has not 
received a distribution generally is only required to report the 
beneficial interest if the beneficiary otherwise is required to file 
Form 8938. If a Form 8938 filing is required, the taxpayer's reporting 
burdens are minimal with respect to the beneficial interest. The 
Treasury Department and the IRS have determined that these rules 
achieve a reasonable and appropriate balance between the government's 
tax administration interests and the beneficiary's compliance burden.

D. Request for Comments on the Treatment of Virtual Currency

    The Treasury Department and the IRS are considering the proper 
treatment of virtual currency under section 6038D and welcome comments 
on this topic.

III. Information Required To Be Reported (Sec.  1.6038D-4)

A. Reporting With Respect to Stock or Other Securities of a Foreign 
Corporation

    A comment requested clarification regarding whether to report on 
Form 8938 the foreign office address of a foreign corporation in which 
the taxpayer has an interest or the address of the U.S. payor reported 
on Form 1099 with respect to dividends paid by the foreign corporation. 
Because the rules set forth in the 2011 temporary regulations are 
clear, the final rule is not changed to reflect these comments. If 
stock of a foreign corporation is held by a taxpayer outside of a 
financial account, Sec.  1.6038D-4(a)(2) provides that the 
corporation's address must be reported. If stock of a foreign 
corporation is held through a financial account other than one 
maintained by a financial institution that is a U.S. payor,

[[Page 73822]]

the financial account is reported, and Sec.  1.6038D-4(a)(1) provides 
that the address of the financial institution with which the account is 
maintained must be reported. However, if stock of a foreign corporation 
is held by a taxpayer in a financial account maintained by a financial 
institution that is a U.S. payor, Sec.  1.6038D-3(a)(3)(i) provides 
that neither the financial account nor the foreign stock held in that 
account must be reported on Form 8938.

B. Scope of Information Required To Be Reported With Respect to an 
Asset

    Another comment recommended that taxpayers not be required to 
report the items listed in Sec.  1.6038D-4(a)(6), (a)(7) and (a)(8) 
(that is, whether a financial account was opened or closed during the 
year, the date on which a specified foreign financial asset (other than 
a financial account) was acquired or disposed of during the year, and 
details regarding income, gain, loss, deduction or credit items 
recognized during the year and where those items are reported by the 
taxpayer, respectively). This comment has not been adopted in the final 
rule. The Treasury Department and the IRS have determined that 
collection of this information is necessary for effective tax 
enforcement actions and is consistent with congressional intent in 
enacting section 6038D.

IV. Valuation Guidelines (Sec.  1.6038D-5)

    The Treasury Department and the IRS received a number of comments 
requesting changes and clarifications to the applicable valuation 
guidelines under the regulations.

A. Asset With No Positive Value During the Year

    Several comments requested that the final rule clarify the 
valuation and reporting rules applicable to specified foreign financial 
assets with no positive value during the year. Under Sec.  1.6038D-
2(a)(5), a specified foreign financial asset is subject to reporting 
even if the asset does not have a positive value during the year, 
although reporting on Form 8938 is required only if the aggregate fair 
market value of a taxpayer's specified foreign financial assets exceeds 
the applicable reporting thresholds in Sec.  1.6038D-2(a). The final 
rule clarifies in Sec.  1.6038D-5(b)(3) that the maximum fair market 
value for a specified foreign financial asset with no positive value 
during the year is treated as zero. The final rule also is revised to 
include in Sec.  1.6038D-2(a)(5) a cross-reference to the valuation 
rules in Sec.  1.6038D-5(b)(3).

B. Appraisals

    One comment recommended revising Sec.  1.6038D-5 to provide that a 
specified person is not required to obtain an appraisal from a third 
party to establish a reasonable estimate of an asset's fair market 
value. For the reasons set forth in section IV.C. of this preamble 
(relating to a reasonable estimate of fair market value), the guidance 
provided with respect to the reasonable estimate standard adequately 
addresses this comment. In addition, the preamble to the 2011 temporary 
regulations and the instructions to Form 8938 already note that a 
taxpayer need not obtain a third-party appraisal to establish a 
reasonable estimate of a specified foreign financial asset's fair 
market value for purposes of section 6038D. Accordingly, the final rule 
does not adopt the requested change.

C. Reasonable Estimate of Fair Market Value

    Several comments requested that the final rule clarify what 
constitutes a reasonable estimate of an asset's fair market value for 
purposes of reporting under section 6038D. Some comments also 
recommended including examples in the final rule addressing when a 
taxpayer would be considered to know, or have reason to know based on 
readily accessible information, that a valuation in a periodic account 
statement was not a reasonable estimate for purposes of reporting.
    The final rule does not provide additional guidance on what 
constitutes a reasonable estimate of fair market value under section 
6038D. The Treasury Department and the IRS have concluded that the 
``reasonable estimate'' standard is an appropriately flexible one that 
will result in helpful information for the IRS with respect to a wide 
range of assets, while not proving unduly burdensome for taxpayers. 
Further, valuation is an inherently factual inquiry, and it is not 
feasible to devise detailed rules that clearly describe outcomes that 
are appropriate for a broad range of factual situations. The 2011 
temporary regulations and final rule incorporate valuation rules 
designed to reduce taxpayer reporting burdens in specific 
circumstances, such as the rule permitting reliance on periodic account 
statements from a financial institution to determine a financial 
account's fair market value (see Sec.  1.6038D-5(d)) and the rule 
permitting the use of a year-end value to determine a reasonable 
estimate of maximum value for certain specified foreign financial 
assets held outside of a financial account (see Sec.  1.6038D-5(f)(1)).

D. Hard-to-Value Assets

    A comment requested that the final rule establish a presumptive 
standard to be applied to determine the fair market value of certain 
illiquid assets such as contractual rights and interests in non-
publicly traded entities. The Treasury Department and the IRS recognize 
that the reporting burdens under section 6038D can be significant with 
respect to hard-to-value assets. However, the Treasury Department and 
the IRS have concluded that the requirement under the 2011 temporary 
regulations to make a reasonable estimate strikes an appropriate 
balance between the usefulness of the information reported on Form 8938 
and the taxpayer burdens associated with complying with the standard. 
For these reasons, the final rule does not adopt valuation presumptions 
for particular types of assets that are hard to value.

E. Interests in Pension Plans and Deferred Compensation Plans

    Another comment recommended that the value of interests in pension 
plans and deferred compensation plans should not be considered to be 
readily ascertainable if the taxpayer has no current rights to withdraw 
plan assets without penalty. Adopting this recommendation would result 
in a taxpayer's interest in a pension or deferred compensation plan 
being valued at zero if the taxpayer has no right to withdraw, even if 
the taxpayer regularly receives statements providing the fair market 
value of the interest in the pension or deferred compensation plan. 
This result is not consistent with the purpose for requiring reporting 
of the maximum value of a specified foreign financial asset and is not 
adopted in the final rule.

F. Foreign Currency

    The final rule adopts two modifications to the valuation rules 
relating to foreign currency. First, in response to a comment, the 
final rule states that a foreign currency conversion shown on a 
periodic financial account statement is among the aspects of the 
statement that a taxpayer may rely upon to the extent provided in Sec.  
1.6038D-5(d). Second, Sec.  1.6038D-5(c) of the 2011 temporary 
regulations provides that, except as otherwise provided, a specified 
person must use the foreign currency exchange rate issued by the U.S. 
Treasury Department's Financial Management Service for purposes of 
section 6038D. The final rule is updated to reflect the fact that 
foreign currency

[[Page 73823]]

exchange rates are now issued by the Treasury Department's Bureau of 
the Fiscal Service.

V. Exceptions From the Reporting of Certain Assets Under Section 6038D 
(Sec.  1.6038D-6)

A. General Alternatives To Reporting on Form 8938

    Several comments recommended that the Treasury Department and the 
IRS adopt an alternative approach to Form 8938 reporting. One comment 
suggested consolidating all foreign asset reporting for U.S. tax 
purposes on one form and eliminating Form 8938. Another comment 
recommended a revision to Schedule B of Form 1040 to permit specified 
individuals to indicate on that schedule that all of their specified 
foreign financial assets were reported on the IRS forms specified in 
Sec.  1.6038D-7(a) such that no Form 8938 is required.
    The final rule does not adopt these recommendations. The Treasury 
Department and the IRS have determined that consolidating a taxpayer's 
information concerning his or her specified foreign financial assets on 
Form 8938 best carries out the purposes of section 6038D by making the 
information readily accessible for use in IRS enforcement programs. In 
addition, using Form 8938 avoids the need to incur costs 
disproportionate to expected benefits from revising existing IRS forms, 
IT systems, submission processing, and enforcement programs.

B. Form 8858, ``Information Return of U.S. Persons With Respect to 
Foreign Disregarded Entities''

    Several comments recommended revising Sec.  1.6038D-7(a) to add 
Form 8858, ``Information Return of U.S. Persons With Respect to Foreign 
Disregarded Entities.'' However, the Treasury Department and the IRS do 
not regard the information furnished on Form 8858 concerning specified 
foreign financial assets held by a disregarded entity as sufficiently 
detailed to consider reporting on Form 8938 duplicative of reporting on 
Form 8858. Thus, the final rule does not adopt this recommendation.

C. Form 8854, ``Initial and Annual Expatriation Statement''

    Several comments recommended adding Form 8854, ``Initial and Annual 
Expatriation Statement,'' to the list of forms in Sec.  1.6038D-7(a) 
intended to relieve duplicative reporting. However, after considering 
the nature of the information collected on Form 8854, the Treasury 
Department and the IRS have concluded that requiring Form 8938 would 
not duplicate the information currently being reported on Form 8854. 
Further, filing of Form 8938 is expected to substantially enhance IRS 
compliance programs with respect to Form 8854 filers. Thus, the final 
rule does not adopt this recommendation.

D. Form 8891, ``U.S. Information Return for Beneficiaries of Certain 
Canadian Registered Retirement Plans''

    Rev. Proc. 2014-55, 2014-44 IRB 753, obsoletes Form 8891, ``U.S. 
Information Return for Beneficiaries of Certain Canadian Registered 
Retirement Plans,'' on a prospective basis. Thus, the final rule is 
modified to describe the taxable years for which the taxpayer's 
reporting of an asset on Form 8891 will relieve the taxpayer of 
reporting that asset on Form 8938 (that is, taxable years beginning 
after March 18, 2010, and ending on or before December 31, 2013).

E. Joint Filers of Forms Listed in Sec.  1.6038D-7(a)

    A comment requested clarification that a specified person included 
as part of a jointly filed Form 5471, ``Information Return of U.S. 
Persons With Respect to Certain Foreign Corporations,'' pursuant to 
Sec.  1.6038-2(j) or as a joint filer of Form 8865, ``Return of U.S. 
Persons With Respect to Certain Foreign Partnerships,'' pursuant to 
Sec.  1.6038-3(c) and who notifies the IRS as required by Sec.  1.6038-
2(i) and Sec.  1.6038-3(c) will be considered to have filed such forms 
for purposes of Sec.  1.6038D-7(a). Because a joint filer of Form 5471 
or Form 8865 fully meets the reporting requirements for such forms, 
reporting on the Form 8938 would be duplicative. Thus, the final rule 
adopts this clarification in Sec.  1.6038D-7(a)(3).

F. Interests in Certain Foreign Trusts

    A number of comments recommended revisions to the section 6038D 
reporting requirements for specified persons with an interest in a 
foreign trust.
    One comment recommended that a foreign trustee of a foreign trust 
with a U.S. owner who is required to file Form 3520-A, ``Annual 
Information Return of Foreign Trust With a U.S. Owner,'' be permitted 
to satisfy the section 6038D reporting requirements for all trust 
beneficiaries by filing Form 3520-A so as to consolidate all foreign 
trust filings in one place. Another comment recommended that a foreign 
trustee of a foreign trust be permitted to satisfy the Form 8938 filing 
requirements on behalf of the trust's beneficiaries. Another comment 
recommended that trust beneficiaries should be excused from filing Form 
8938 if a specified person files a Form 8938 as the owner of the trust 
and discloses the specified foreign financial assets of the foreign 
trust.
    The final rule does not adopt these recommendations to allow a 
beneficiary's Form 8938 filing responsibilities to be satisfied by the 
trustee of the trust or to relieve the beneficiary's reporting 
obligation in the case of a specified person filing Form 8938 as the 
owner of the trust. The IRS can best use the information reported on 
the Form 8938 to enforce tax compliance when it is provided in 
connection with the filing of an annual return by the taxpayer who is 
the beneficial owner of the interest in the foreign trust. Thus, the 
final rule continues to provide that a beneficiary of a trust must file 
Form 8938 with his or her annual return when there is a section 6038D 
filing requirement.

G. Reporting on Both FinCEN Form 114 and Form 8938

    A number of comments recommended that a foreign account reported on 
FinCEN Form 114, ``Report of Foreign Bank and Financial Accounts,'' 
(formerly Form TD F 90-22.1, ``Report of Foreign Bank and Financial 
Accounts'') (an FBAR), should not be required to be reported on Form 
8938. The final rule does not adopt this recommendation.
    Congress enacted both the Title 31 and the Title 26 provisions 
regarding the reporting requirements of the FBAR and Form 8938. 
Reporting on the FBAR is required for law enforcement purposes under 
the Bank Secrecy Act, as well as for purposes of tax administration. As 
a consequence, different policy considerations apply to Form 8938 and 
FBAR reporting. These different policies are reflected in the different 
categories of persons required to file Form 8938 and the FBAR, the 
different filing thresholds for Form 8938 and FBAR reporting, and the 
different assets (and accompanying information) required to be reported 
on each form. Although certain information may be reported on both Form 
8938 and the FBAR, the information required by the forms is not 
identical in all cases, and reflects the different rules, key 
definitions (for example, ``financial account''), and reporting 
requirements applicable to Form 8938 and FBAR reporting.
    These differing policy considerations were recognized by Congress 
during the passage of the HIRE Act (Pub. L. 111-147 (124 Stat. 71)) and 
the enactment of Section 6038D. Congress's intention to retain FBAR 
reporting requirements, notwithstanding the enactment of section 6038D, 
was specifically noted in the Technical Explanation of the

[[Page 73824]]

Revenue Provisions Contained in Senate Amendment 3310, the ``Hiring 
Incentives To Restore Employment Act,'' Under Consideration by the 
Senate (Staff of the Joint Committee on Taxation, JCX-4-10 (February 
23, 2010)) (Technical Explanation) accompanying the HIRE Act. The 
Technical Explanation states that ``[n]othing in this provision 
[section 511 of the HIRE Act enacting new section 6038D] is intended as 
a substitute for compliance with the FBAR reporting requirements, which 
are unchanged by this provision.'' (Technical Explanation at p. 60) 
Against this background, reporting on the Form 8938 and on the FBAR is 
not duplicative and both forms must be filed, if required. The IRS Web 
site provides additional guidance comparing the requirements of both 
forms (https://www.irs.gov/Businesses/Comparison-of-Form-8938-and-FBAR-Requirements).

VI. Penalties

A. Reasonable Cause for Failure to Report

    Several comments requested that the final rule provide additional 
guidance concerning the reasonable cause standard for relief from the 
section 6038D penalty set forth in section 6038D(g) and Sec.  1.6038D-
8(e). For example, one comment recommended that the final rule provide 
objective examples of when a taxpayer would be considered to have 
reasonable cause for failing to report under section 6083D. Another 
comment requested that the final rule state that a specified person's 
failure to file Form 8938 would be considered due to reasonable cause 
and not subject to penalty if all of that person's specified foreign 
financial assets were reflected on timely and properly filed forms 
described in Sec.  1.6038D-7(a)(i). Another comment recommended that 
the final rule provide a presumption that reasonable cause exists with 
respect to all Form 8938 filing errors in the first year a taxpayer is 
required to file Form 8938. Yet another comment recommended that a 
specified person with a continuing failure to report for purposes of 
the section 6038D(d)(2) ``add on'' component of the penalty should no 
longer be subject to penalty once a specified person has requested the 
information necessary to complete Form 8938, provided the specified 
person furnishes the IRS with proof of the requests to obtain that 
information.
    The final rule does not adopt these recommendations because the 
Treasury Department and the IRS have determined that the appropriate 
standards for determining whether the reasonable cause exception to the 
penalty applies in a particular case are the general standards set out 
in the Internal Revenue Manual (IRM) addressing the approach that IRS 
employees must take whenever considering the application of a civil 
penalty and whether a reasonable cause exception applies. The general 
reasonable cause standards are set out in the IRS's ``Penalty 
Handbook,'' which is included in the IRM at section 20.1. The Penalty 
Handbook sets forth general policy and procedural requirements for 
assessing and abating penalties, as well as the criteria for relief 
from certain penalties. For example, IRM 20.1.1.2.2 discusses the need 
to have a fair and consistent approach to penalty administration. 
Section 20.1.1.3.2 of the IRM discusses reasonable cause and what 
constitutes reasonable cause. Consistent with Sec.  1.6038D-8(e)(3), 
the Penalty Handbook states that all of the facts and circumstances 
must be considered to determine whether or not there is reasonable 
cause for penalty relief in a particular case.

B. Section 6038D Penalty and Other Potentially Applicable Civil 
Penalties

    Other comments requested the final rule modify the penalty amount 
and its application in the context of other potentially applicable 
civil penalties. One comment recommended that the final rule provide a 
range of penalties corresponding to the range of reporting errors as 
opposed to the $10,000 penalty amount of section 6038D(d). Another 
comment requested that the final rule provide that a specified person's 
failure to report a specified foreign financial asset on Form 8938 
would not be penalized under section 6038D if the specified person was 
also being penalized for failing to report the asset on a separate IRS 
form (for example, Form 5471).
    The final rule does not adopt these recommendations. The general 
penalty administration rules set forth in the IRM apply in the context 
of the section 6038D penalty and its interaction with other potentially 
applicable penalties. In addition, section 6038D provides a specific 
dollar amount of penalty and does not permit selection of a penalty 
amount from a range of permissible penalty amounts based on taxpayer-
specific considerations.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13653. Therefore, a regulatory 
assessment is not required. It also has been determined that section 
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does 
not apply to these regulations, and because the regulations do not 
impose a collection of information on small entities, the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) does not apply. Pursuant to 
section 7805(f) of the Code, the notice of proposed rulemaking 
preceding this regulation was submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

Drafting Information

    The principal author of these regulations is Joseph S. Henderson, 
Office of Associate Chief Counsel (International). However, other 
personnel from the Treasury Department and the IRS participated in 
their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by removing 
the entries for Sec. Sec.  1.6038D-0T, 1.6038D-1T, 1.6038D-2T, 1.6038D-
3T, 1.6038D-4T, 1.6038D-5T, 1.6038D-7T, and 1.6038D-8T and adding 
entries for Sec. Sec.  1.6038D-0, 1.6038D-1, 1.6038D-2, 1.6038D-3, 
1.6038D-4, 1.6038D-5, 1.6038D-7, and 1.6038D-8 in numerical order to 
read as follows:

    Authority: 26 U.S.C. 7805 * * *

    Section 1.6038D-0 also issued under 26 U.S.C. 6038D.
    Section 1.6038D-1 also issued under 26 U.S.C. 6038D.
    Section 1.6038D-2 also issued under 26 U.S.C. 6038D.
    Section 1.6038D-3 also issued under 26 U.S.C. 6038D.
    Section 1.6038D-4 also issued under 26 U.S.C. 6038D.
    Section 1.6038D-5 also issued under 26 U.S.C. 6038D.
    Section 1.6038D-7 also issued under 26 U.S.C. 6038D.
    Section 1.6038D-8 also issued under 26 U.S.C. 6038D.
* * * * *

0
Par. 2. Section 1.6038D-0 is added to read as follows:

[[Page 73825]]

Sec.  1.6038D-0  Outline of regulation provisions.

    This section lists the table of contents for Sec. Sec.  1.6038D-1 
through 1.6038D-8.


Sec.  1.6038D-1  Reporting with respect to specified foreign financial 
assets, definition of terms.

    (a) In general.
    (1) Specified person.
    (2) Specified individual.
    (3) Resident alien.
    (4) Bona fide resident of a U.S. possession.
    (5) U.S. possession.
    (6) Specified foreign financial asset.
    (7) Financial account.
    (8) Financial institution.
    (9) Foreign financial institution.
    (10) Foreign entity.
    (11) Annual return.
    (12) Specified domestic entity. [Reserved]
    (13) Model 1 IGA and Model 2 IGA.
    (b) Effective/applicability dates.
    (1) In general.
    (2) Financial accounts.


Sec.  1.6038D-2  Requirement to report specified foreign financial 
assets.

    (a) Reporting requirement.
    (1) In general.
    (2) Special rule for married specified individuals filing a joint 
annual return.
    (3) Special rule for certain specified individuals living abroad.
    (4) Special rule for married specified individuals filing a joint 
annual return and living abroad.
    (5) Assets with no positive value.
    (6) Aggregate value calculation in case of specified foreign 
financial asset excluded from reporting.
    (7) Form 8938 filed with annual return.
    (i) General rule.
    (ii) Consolidated returns.
    (8) Reporting required regardless of tax result.
    (9) Reporting period.
    (10) Successor forms.
    (b) Interest in a specified foreign financial asset.
    (1) In general.
    (2) Property transferred in connection with the performance of 
services.
    (3) Special rule for parent making an election under section 
1(g)(7).
    (4) Entities.
    (i) In general.
    (ii) Specified foreign financial assets held by certain trusts.
    (iii) Specified foreign financial assets held by a disregarded 
entity.
    (iv) Interest in a foreign trust or foreign estate.
    (c) Special rules for joint interests.
    (1) In general.
    (i) Determining aggregate value of assets.
    (ii) Reporting maximum value.
    (2) Aggregate asset value for married specified individuals filing 
a joint annual return.
    (3) Aggregate asset value for married specified individuals filing 
a separate annual return.
    (i) Both spouses are specified individuals.
    (ii) One spouse is not a specified individual.
    (d) Annual return filed by a married specified individual.
    (1) Joint annual return.
    (2) Separate annual return.
    (e) Special rules for dual resident taxpayers.
    (1) In general.
    (2) Dual resident taxpayer filing as a nonresident alien at end of 
taxable year.
    (3) Dual resident taxpayer filing as a resident alien at end of 
taxable year.
    (f) Example.
    (1) Facts.
    (2) Filing requirement.
    (i) Married specified individuals filing separate annual returns.
    (ii) Married specified individuals filing a joint annual return.
    (g) Effective/applicability dates.


Sec.  1.6038D-3  Specified foreign financial assets.

    (a) Financial accounts.
    (1) In general.
    (2) Financial account in a U.S. possession.
    (3) Excepted financial accounts.
    (i) Accounts maintained by U.S. payors.
    (ii) Mark-to-market election under section 475.
    (b) Other specified foreign financial assets.
    (1) In general.
    (2) Mark-to-market election under section 475.
    (3) Held for investment.
    (4) Trade-or-business test.
    (5) Direct relationship between holding an asset and a trade or 
business.
    (i) In general.
    (ii) Presumption of direct relationship.
    (c) Special rule for interests in foreign trusts and foreign 
estates.
    (d) Examples.
    (e) Effective/applicability dates.


Sec.  1.6038D-4  Information required to be reported.

    (a) Required information.
    (b) Effective/applicability dates.


Sec.  1.6038D-5  Valuation guidelines.

    (a) Fair market value.
    (b) Valuation of assets.
    (1) Maximum value.
    (2) U.S. dollars.
    (3) Asset with no positive value.
    (c) Foreign currency conversion.
    (1) In general.
    (2) Other publicly available exchange rate.
    (3) Currency exchange rate.
    (4) Determination date.
    (d) Financial accounts.
    (e) Asset held in a financial account.
    (f) Other specified foreign financial assets.
    (1) General rule.
    (2) Interests in trusts that are specified foreign financial 
assets.
    (i) Maximum value.
    (ii) Reporting threshold.
    (3) Interests in estates, pension plans, and deferred compensation 
plans.
    (i) Maximum value.
    (ii) Reporting threshold.
    (g) Effective/applicability dates.


Sec.  1.6038D-6  Specified domestic entities. [Reserved]


Sec.  1.6038D-7  Exceptions from the reporting of certain assets under 
section 6038D.

    (a) Elimination of duplicative reporting of assets.
    (1) In general.
    (2) Foreign grantor trusts.
    (3) Joint Form 5471 or Form 8865 filing.
    (b) Owner of certain trusts.
    (c) Special rules for bona fide residents of a U.S. possession.
    (d) Effective/applicability dates.


Sec.  1.6038D-8  Penalties for failure to disclose.

    (a) In general.
    (b) Married specified individuals filing a joint annual return.
    (c) Increase in penalty.
    (d) Presumption of aggregate value.
    (e) Reasonable cause exception.
    (1) In general.
    (2) Affirmative showing required.
    (3) Facts and circumstances taken into account.
    (f) Penalties for underpayments attributable to undisclosed foreign 
financial assets.
    (1) Accuracy related penalty.
    (2) Criminal penalties.
    (g) Effective/applicability dates.


Sec.  1.6038D-0T  [Removed]

0
Par. 3. Section 1.6038D-0T is removed.

0
Par. 4. Section 1.6038D-1 is added to read as follows:


Sec.  1.6038D-1  Reporting with respect to specified foreign financial 
assets, definition of terms.

    (a) In general. The following definitions apply for purposes of 
section 6038D and the regulations--
    (1) Specified person. The term specified person means a specified

[[Page 73826]]

individual or a specified domestic entity.
    (2) Specified individual. The term specified individual means an 
individual who is a--
    (i) U.S. citizen;
    (ii) Resident alien of the United States for any portion of the 
taxable year;
    (iii) Nonresident alien for whom an election under section 6013(g) 
or (h) is in effect; or
    (iv) Nonresident alien who is a bona fide resident of Puerto Rico 
or a section 931 possession (as defined in Sec.  1.931-1(c)(1)).
    (3) Resident alien. The term resident alien has the meaning set 
forth in section 7701(b) and Sec. Sec.  301.7701(b)-1 through 
301.7701(b)-9 of this chapter.
    (4) Bona fide resident of a U.S. possession. The term bona fide 
resident of a U.S. possession means an individual who is a ``bona fide 
resident'' under section 937(a) and Sec.  1.937-1.
    (5) U.S. possession. The term U.S. possession means American Samoa, 
Guam, the Northern Mariana Islands, Puerto Rico, or the U.S. Virgin 
Islands.
    (6) Specified foreign financial asset. The term specified foreign 
financial asset has the meaning set forth in Sec.  1.6038D-3.
    (7) Financial account. The term financial account has the meaning 
set forth in Sec.  1.1471-5(b), provided, however, that the exclusions 
of retirement and pension accounts and non-retirement savings accounts 
under Sec.  1.1471-5(b)(2)(i) and retirement and pension accounts, non-
retirement savings accounts, and accounts satisfying similar conditions 
in an applicable Model 1 IGA or Model 2 IGA under Sec.  1.1471-
5(b)(2)(vi) shall not apply (see the section 6038D coordination rule in 
Sec.  1.1471-5(b)(2)(i)(D)). See Sec.  1.6038D-3(a)(2) relating to 
financial accounts maintained by a financial institution that is 
organized under the laws of a U.S. possession.
    (8) Financial institution. The term financial institution has the 
meaning set forth in section 1471(d)(5) and the regulations thereunder.
    (9) Foreign financial institution. The term foreign financial 
institution has the meaning set forth in Sec.  1.1471-5(d).
    (10) Foreign entity. The term foreign entity has the meaning set 
forth in Sec.  1.1473-1(e).
    (11) Annual return. The term annual return means an annual federal 
income tax return of a specified individual or an annual federal income 
tax return or information return of a specified domestic entity filed 
with the Internal Revenue Service under section 876, 6011, 6012, 6013, 
6031, or 6037, and the regulations.
    (12) Specified domestic entity. [Reserved].
    (13) Model 1 IGA and Model 2 IGA. The terms Model 1 IGA and Model 2 
IGA have the meanings set forth in Sec.  1.1471-1(b)(78) and (79), 
respectively.
    (b) Effective/applicability dates--(1) In general. Except as 
otherwise provided in this paragraph (b), this section applies to 
taxable years ending after December 19, 2011. Taxpayers may elect to 
apply the rules of this section to taxable years ending prior to 
December 19, 2011.
    (2) Financial accounts. For purposes of applying the financial 
account definition in Sec.  1.6038D-1(a)(7), the treatment under Sec.  
1.1471-5(b)(2)(vi) of retirement and pension accounts, non-retirement 
savings accounts, and accounts satisfying similar conditions in an 
applicable Model 1 IGA or Model 2 IGA (see Sec.  1.1471-1(b)(78) and 
(79)) as financial accounts for purposes of the reporting required 
under section 6038D and Sec.  1.6038D-2(a) shall apply to taxable years 
beginning after December 12, 2014.


Sec.  1.6038D-1T  [Removed]

0
Par. 5. Section 1.6038D-1T is removed.
0
Par. 6. Section 1.6038D-2 is added to read as follows:


Sec.  1.6038D-2  Requirement to report specified foreign financial 
assets.

    (a) Reporting requirement--(1) In general. Except as otherwise 
provided, a specified person that has any interest in a specified 
foreign financial asset during the taxable year must attach Form 8938, 
``Statement of Specified Foreign Financial Assets,'' to that specified 
person's annual return for the taxable year to report the information 
required by section 6038D and Sec.  1.6038D-4 if the aggregate value of 
all such assets exceeds--
    (i) $50,000 on the last day of the taxable year; or
    (ii) $75,000 at any time during the taxable year.
    (2) Special rule for married specified individuals filing a joint 
annual return. Except as provided in paragraph (a)(4) of this section, 
married specified individuals who file a joint annual return for the 
taxable year must attach a single Form 8938 to their joint annual 
return for the taxable year to report the information required by 
section 6038D and Sec.  1.6038D-4 if the aggregate value of all of the 
specified foreign financial assets in which either married specified 
individual has an interest exceeds--
    (i) $100,000 on the last day of the taxable year; or
    (ii) $150,000 at any time during the taxable year.
    (3) Special rule for certain specified individuals living abroad. 
Except as provided in paragraph (a)(4) of this section, a specified 
individual who is a qualified individual under section 911(d)(1) for 
the taxable year must attach a Form 8938 to his or her annual return 
for the taxable year to report the information required by section 
6038D and Sec.  1.6038D-4 if the aggregate value of the specified 
foreign financial assets in which the specified individual has an 
interest exceeds--
    (i) $200,000 on the last day of the taxable year; or
    (ii) $300,000 at any time during the taxable year.
    (4) Special rule for married specified individuals filing a joint 
annual return and living abroad. A specified individual who is a 
qualified individual under section 911(d)(1) for the taxable year and 
the qualified individual's spouse who file a joint annual return for 
the taxable year must attach a single Form 8938 to their return for the 
taxable year to report the information required by section 6038D and 
Sec.  1.6038D-4 if the aggregate value of the all of the specified 
foreign financial assets in which either married individual has an 
interest exceeds--
    (i) $400,000 on the last day of the taxable year; or
    (ii) $600,000 at any time during the taxable year.
    (5) Assets with no positive value. A specified foreign financial 
asset is subject to reporting even if the specified foreign financial 
asset does not have a positive value. See Sec.  1.6038D-5(b)(3) to 
determine the maximum value of a specified foreign financial asset that 
does not have a positive value during the taxable year.
    (6) Aggregate value calculation in case of specified foreign 
financial asset excluded from reporting. The value of any specified 
foreign financial asset in which a specified individual has an interest 
and that is excluded from reporting on Form 8938 pursuant to Sec.  
1.6038D-7(a) (concerning certain assets reported on another form) is 
included for purposes of determining the aggregate value of specified 
foreign financial assets. The value of any specified foreign financial 
asset in which a specified individual has an interest and that is 
excluded from reporting under Sec.  1.6038D-7(b) (concerning assets 
held by certain domestic trusts) or Sec.  1.6038D-7(c) (concerning 
certain assets owned by a bona fide resident of a U.S. possession) is 
excluded for purposes of determining

[[Page 73827]]

the aggregate value of specified foreign financial assets.
    (7) Form 8938 filed with annual return--(i) General rule. A 
specified person, including a specified individual who is a bona fide 
resident of a U.S. possession, is not required to file Form 8938 with 
respect to a taxable year if the specified person is not required to 
file an annual return with the Internal Revenue Service with respect to 
such taxable year.
    (ii) Consolidated returns. If a specified domestic entity is a 
member of an affiliated group of corporations that files a consolidated 
income tax return, the Form 8938 of the specified domestic entity must 
be filed with the affiliated group's annual return.
    (8) Reporting required regardless of tax result. The Form 8938 
required by section 6038D and this section must be furnished by a 
specified person even if none of the specified foreign financial assets 
that must be reported affect the specified person's tax liability under 
the Internal Revenue Code for the taxable year.
    (9) Reporting period. The reporting period covered by Form 8938 is 
the specified person's taxable year, except the reporting period for a 
specified person that is a specified individual for less than an entire 
taxable year is the portion of the taxable year that the specified 
person is a specified individual.
    (10) Successor forms. References to Form 8938 include any successor 
form.
    (b) Interest in a specified foreign financial asset--(1) In 
general. A specified person has an interest in a specified foreign 
financial asset if any income, gains, losses, deductions, credits, 
gross proceeds, or distributions attributable to the holding or 
disposition of the specified foreign financial asset are or would be 
required to be reported, included, or otherwise reflected by the 
specified person on an annual return. A specified person has an 
interest in a specified foreign financial asset even if no income, 
gains, losses, deductions, credits, gross proceeds, or distributions 
are attributable to the holding or disposition of the specified foreign 
financial asset for the taxable year.
    (2) Property transferred in connection with the performance of 
services. A specified person that is transferred property in connection 
with the performance of personal services is first considered to have 
an interest in the property for purposes of section 6038D on the first 
date that the property is substantially vested (within the meaning of 
Sec.  1.83-3(b)) or, in the case of property with respect to which a 
specified person makes a valid election under section 83(b), on the 
date of transfer of the property.
    (3) Special rule for parent making election under section 1(g)(7). 
A parent who makes an election under section 1(g)(7) to include certain 
unearned income of a child in the parent's gross income has an interest 
in any specified foreign financial asset held by the child for the 
purposes of section 6038D and the regulations.
    (4) Entities--(i) In general. Except as provided in this paragraph 
(b)(4), a specified person is not treated as having an interest in any 
specified foreign financial assets held by a corporation, partnership, 
trust, or estate solely as a result of the specified person's status as 
a shareholder, partner, or beneficiary of such entity.
    (ii) Specified foreign financial assets held by certain trusts. A 
specified person that is treated as the owner of a trust or any portion 
of a trust under sections 671 through 679, other than a domestic 
liquidating trust under Sec.  301.7701-4(d) of this chapter created 
pursuant to a court order issued in a bankruptcy under Chapter 7 (11 
U.S.C. 701 et seq.) or a confirmed plan under Chapter 11 (11 U.S.C. 
1101 et seq.) of the Bankruptcy Code, or a domestic widely held fixed 
investment trust under Sec.  1.671-5, is treated as having an interest 
in any specified foreign financial assets held by the trust or the 
portion of the trust.
    (iii) Specified foreign financial assets held by a disregarded 
entity. A specified person that owns a foreign or domestic entity that 
is disregarded as an entity separate from its owner as described in 
Sec.  301.7701-2 of this chapter (a disregarded entity) is treated as 
having an interest in any specified foreign financial assets held by 
the disregarded entity.
    (iv) Interest in a foreign trust or foreign estate. See Sec.  
1.6038D-3(c) to determine whether an interest in a foreign trust or 
foreign estate is a specified foreign financial asset. See Sec.  
1.6038D-5(f) to determine the maximum value of an interest in a foreign 
trust or foreign estate.
    (c) Special rules for joint interests--(1) In general--(i) 
Determining aggregate value of assets. Except as otherwise provided in 
this paragraph (c), each specified person that is a joint owner of a 
specified foreign financial asset (whether with a spouse or other 
person) must include the entire value of the specified foreign 
financial asset (and not the value of the specified person's interest) 
for purposes of determining whether the aggregate value of the 
specified person's specified foreign financial assets exceeds the 
reporting thresholds set forth in Sec.  1.6038D-2(a).
    (ii) Reporting maximum value. Except as provided in paragraph (d) 
of this section, a specified person that is a joint owner of a 
specified foreign financial asset must report the entire value of each 
jointly owned specified foreign financial asset on Form 8938.
    (2) Aggregate asset value for married specified individuals filing 
a joint annual return. Married specified individuals who file a joint 
annual return must include the value of each specified foreign 
financial asset that they jointly own or in which both have an interest 
under paragraph (b)(1) of this section only once in determining whether 
the aggregate value of all of the specified foreign financial assets in 
which either married specified individual has an interest exceeds the 
reporting thresholds set forth in Sec.  1.6038D-2(a).
    (3) Aggregate asset value for married specified individual filing a 
separate annual return--(i) Both spouses are specified individuals. If 
a married specified individual files a separate annual return and his 
or her spouse is a specified individual, the married specified 
individual must include one-half of the value of a specified foreign 
financial asset that the married specified individual jointly owns with 
his or her spouse in determining whether the married specified 
individual has an interest in specified foreign financial assets the 
aggregate value of which exceeds the reporting thresholds set forth in 
Sec.  1.6038D-2(a).
    (ii) One spouse is not a specified individual. If a married 
specified individual files a separate annual return and his or her 
spouse is not a specified individual, the married specified individual 
must include the entire value of a specified foreign financial asset 
that the married specified individual jointly owns with his or her 
spouse in determining whether the married specified individual has an 
interest in specified foreign financial assets the aggregate value of 
which exceeds the reporting thresholds set forth in Sec.  1.6038D-2(a).
    (d) Annual return filed by a married specified individual--(1) 
Joint annual return. Married specified individuals who file a joint 
annual return must file a single Form 8938 to fulfill their reporting 
requirements under section 6038D and Sec.  1.6038D-2(a). The single 
Form 8938 must report all of the specified foreign financial assets in 
which either married specified individual has an interest. If both 
married specified individuals jointly own a specified foreign financial 
asset

[[Page 73828]]

or if they have an interest in a specified foreign financial asset 
under paragraph (b)(1) of this section, the asset must be reported only 
once on the single Form 8938 filed for the taxable year.
    (2) Separate annual return. A married specified individual who 
files a separate annual return for the taxable year must fulfill the 
reporting requirements under section 6038D and Sec.  1.6038D-2(a) by 
filing a separate Form 8938 with his or her return that reports all of 
the specified foreign financial assets in which the married specified 
individual has an interest, including each of the assets jointly owned 
with the married specified individual's spouse or with another person. 
If both of the spouses are specified individuals, each specified 
individual must report the entire value of each specified foreign 
financial asset that the spouses jointly own on Form 8938, not the 
value taken into account under paragraph (c)(3)(i) of this section for 
purposes of applying the applicable reporting thresholds.
    (e) Special rules for dual resident taxpayers--(1) In general. 
Subject to the provisions of paragraphs (e)(2) and (3) of this section, 
a specified individual is not required to report specified foreign 
financial assets on Form 8938 for a taxable year or any portion of a 
taxable year that the individual is a dual resident taxpayer (within 
the meaning of Sec.  301.7701(b)-7(a)(1) of this chapter) who is 
treated as a nonresident alien pursuant to Sec.  301.7701(b)-7 of this 
chapter for purposes of computing his or her U.S. tax liability with 
respect to the portion of the taxable year the individual is considered 
a dual resident taxpayer.
    (2) Dual resident taxpayer filing as a nonresident alien at end of 
taxable year. If a specified individual to whom this paragraph (e) 
applies computes his or her U.S. income tax liability as a nonresident 
alien on the last day of the taxable year and complies with the filing 
requirements of Sec.  301.7701(b)-7(b) and (c) of this chapter and, in 
particular, such individual timely files with the Internal Revenue 
Service Form 1040NR, ``U.S. Nonresident Alien Income Tax Return,'' or 
Form 1040NR-EZ, ``U.S. Income Tax Return for Certain Nonresident Aliens 
With No Dependents,'' as applicable, and attaches thereto Form 8833, 
``Treaty-Based Return Position Disclosure Under Section 6114 or 
7701(b),'' such individual will not be required to report specified 
foreign financial assets on Form 8938 with respect to the portion of 
the taxable year covered by Form 1040NR (or Form 1040NR-EZ).
    (3) Dual resident taxpayer filing as resident alien at end of 
taxable year. If a specified individual to whom this paragraph (e) 
applies computes his or her U.S. income tax liability as a resident 
alien on the last day of the taxable year and complies with the filing 
requirements of Sec.  1.6012-1(b)(2)(ii)(a) and, in particular, such 
individual timely files with the Internal Revenue Service Form 1040, 
``U.S. Individual Income Tax Return,'' or Form 1040EZ, ``Income Tax 
Return for Single and Joint Filers With No Dependents,'' as applicable, 
and attaches a properly completed Form 8833 to the schedule required by 
Sec.  1.6012-1(b)(2)(ii)(a), such individual will not be required to 
report specified foreign financial assets on Form 8938 with respect to 
the portion of the individual's taxable year reflected on the schedule 
to such Form 1040 or Form 1040EZ required by Sec.  1.6012-
1(b)(2)(ii)(a).
    (f) Example. The following example illustrates the application of 
paragraph (c) of this section:

    Example  (1) Facts. Two married specified individuals, H and W, 
jointly own a specified foreign financial asset with a value of 
$90,000 at all times during the taxable year. H separately has an 
interest in a specified foreign financial asset with a value of 
$10,000 at all times during the taxable year. W separately has an 
interest in a specified foreign financial asset with a value of 
$1,000 at all times during the taxable year.
    (2) Filing requirement--(i) Married specified individuals filing 
separate annual returns. If H and W file separate annual returns, 
the aggregate value of the specified foreign financial assets in 
which H has an interest at the end of the taxable year is $55,000, 
comprising one-half of the value of the jointly owned asset, 
$45,000, and the value of H's separately owned specified foreign 
financial asset, $10,000. The aggregate value of the specified 
foreign financial assets in which W has an interest at the end of 
the taxable year is $46,000, comprising one-half of the value of the 
jointly owned asset, $45,000, and the value of W's separately owned 
specified foreign financial asset, $1,000. H must file Form 8938 
with his annual return for the taxable year because the aggregate 
value of the specified foreign financial assets in which H has an 
interest exceeds the applicable reporting threshold ($50,000) set 
forth in Sec.  1.6038D-2(a)(1). H must report the maximum value of 
the entire jointly owned asset, $90,000, and the maximum value of 
the separately owned asset, $10,000. See Sec.  1.6038D-5(b) 
regarding the maximum value of a jointly owned specified foreign 
financial asset to be reported by a specified person, including a 
married specified individual, that is a joint owner of an asset. The 
aggregate value of the specified foreign financial assets in which W 
has an interest, $46,000, does not exceed the applicable reporting 
threshold set forth in Sec.  1.6038D-2(a)(1). W is not required to 
file Form 8938 with her separate annual return.
    (ii) Married specified individuals filing a joint annual return. 
If H and W file a joint annual return, they must file a single Form 
8938 with their joint annual return for the taxable year because the 
aggregate value of all of the specified foreign financial assets in 
which either H or W have an interest ($90,000 (included only once), 
$10,000, and $1000, or $101,000) exceeds the applicable reporting 
threshold ($100,000) set forth in Sec.  1.6038D-2(a)(2). The single 
Form 8938 must report the maximum value of the jointly owned 
specified foreign financial asset, $90,000, and the maximum value of 
the specified foreign financial assets separately owned by H and W, 
$10,000 and $1,000, respectively.

    (g) Effective/applicability dates. This section applies to taxable 
years ending after December 19, 2011. Taxpayers may elect to apply the 
rules of this section to taxable years ending prior to December 19, 
2011.


Sec.  1.6038D-2T  [Removed]

0
 Par. 7. Section 1.6038D-2T is removed.
0
Par. 8. Section 1.6038D-3 is added to read as follows:


Sec.  1.6038D-3  Specified foreign financial assets.

    (a) Financial accounts--(1) In general. Except as otherwise 
provided in this section, a specified foreign financial asset includes 
any financial account maintained by a foreign financial institution. An 
asset held in a financial account maintained by a foreign financial 
institution is not required to be separately reported on Form 8938, 
``Statement of Specified Foreign Financial Assets.''
    (2) Financial account in a U.S. possession. A specified foreign 
financial asset includes a financial account maintained by a financial 
institution that is organized under the laws of a U.S. possession.
    (3) Excepted financial accounts--(i) Accounts maintained by U.S. 
payors. A financial account maintained by a U.S. payor as defined in 
Sec.  1.6049-5(c)(5)(i) (including assets held in such an account) is 
not a specified foreign financial asset for purposes of section 6038D 
and the regulations.
    (ii) Mark-to-market election under section 475. A financial account 
is not a specified foreign financial asset if the rules of section 
475(a) apply to all of the holdings in the account or an election under 
section 475(e) or (f) is made with respect to all of the holdings in 
the account.
    (b) Other specified foreign financial assets--(1) In general. 
Except as otherwise provided in this section, a specified foreign 
financial asset includes any of the following assets that

[[Page 73829]]

are not financial accounts and that are held for investment and not 
held in an account maintained by a financial institution--
    (i) Stock or securities issued by a person other than a United 
States person (including stock or securities issued by a person 
organized under the laws of a U.S. possession);
    (ii) A financial instrument or contract that has an issuer or 
counterparty which is other than a United States person (including a 
financial instrument or contract issued by a person organized under the 
laws of a U.S. possession); and
    (iii) An interest in a foreign entity.
    (2) Mark-to-market election under section 475. An asset is not a 
specified foreign financial asset if the rules of section 475(a) apply 
to the asset or an election under section 475(e) or (f) is made with 
respect to the asset.
    (3) Held for investment. An asset is held for investment for 
purposes of section 6038D and the regulations if that asset is not used 
in, or held for use in, the conduct of a trade or business of a 
specified person.
    (4) Trade-or-business test. For purposes of section 6038D and the 
regulations, an asset is used in, or held for use in, the conduct of a 
trade or business and not held for investment if the asset is--
    (i) Held for the principal purpose of promoting the present conduct 
of the trade or business;
    (ii) Acquired and held in the ordinary course of the trade or 
business, as, for example, in the case of an account or note receivable 
arising from that trade or business; or
    (iii) Otherwise held in a direct relationship to the trade or 
business as determined under paragraph (b)(5) of this section.
    (5) Direct relationship between holding an asset and a trade or 
business--(i) In general. In determining whether an asset is held in a 
direct relationship to the conduct of a trade or business by a 
specified person, principal consideration will be given to whether the 
asset is needed in the trade or business of the specified person. An 
asset shall be considered needed in the trade or business, for this 
purpose, only if the asset is held to meet the present needs of that 
trade or business and not its anticipated future needs. An asset shall 
be considered as needed in the trade or business if, for example, the 
asset is held to meet the operating expenses of the trade or business. 
Conversely, an asset shall be considered as not needed in the trade or 
business if, for example, the asset is held for the purpose of 
providing for future diversification into a new trade or business, 
future plant replacement, or future business contingencies. Stock is 
never considered used or held for use in a trade or business for 
purposes of applying this test.
    (ii) Presumption of direct relationship. An asset will be treated 
as held in a direct relationship to the conduct of a trade or business 
of a specified person if--
    (A) The asset was acquired with funds generated by the trade or 
business of the specified person or the affiliated group of the 
specified person, if any;
    (B) The income from the asset is retained or reinvested in the 
trade or business; and
    (C) Personnel who are actively involved in the conduct of the trade 
or business exercise significant management and control over the 
investment of such asset.
    (c) Special rule for interests in foreign trusts and foreign 
estates. An interest in a foreign trust or a foreign estate is not a 
specified foreign financial asset of a specified person unless the 
person knows, or has reason to know based on readily accessible 
information, of the interest. Receipt of a distribution from the 
foreign trust or foreign estate constitutes actual knowledge for this 
purpose.
    (d) Examples. Examples of assets other than financial accounts that 
may be considered other specified foreign financial assets include, but 
are not limited to--
    (1) Stock issued by a foreign corporation;
    (2) A capital or profits interest in a foreign partnership;
    (3) A note, bond, debenture, or other form of indebtedness issued 
by a foreign person;
    (4) An interest in a foreign trust;
    (5) An interest rate swap, currency swap, basis swap, interest rate 
cap, interest rate floor, commodity swap, equity swap, equity index 
swap, credit default swap, or similar agreement with a foreign 
counterparty; and
    (6) Any option or other derivative instrument with respect to any 
of the items listed as examples in this paragraph or with respect to 
any currency or commodity that is entered into with a foreign 
counterparty or issuer.
    (e) Effective/applicability dates. This section applies to taxable 
years ending after December 19, 2011. Taxpayers may elect to apply the 
rules of this section to taxable years ending prior to December 19, 
2011.


Sec.  1.6038D-3T  [Removed]

0
Par. 9. Section 1.6038D-3T is removed.
0
Par. 10. Section 1.6038D-4 is added to read as follows:


Sec.  1.6038D-4  Information required to be reported.

    (a) Required information. The following information must be 
reported on Form 8938, ``Statement of Specified Foreign Financial 
Assets,'' with respect to each specified foreign financial asset:
    (1) In the case of a financial account, the name and address of the 
foreign financial institution with which the account is maintained and 
the account number of the financial account;
    (2) In the case of stock or securities, the name and address of the 
issuer, and information that identifies the class or issue of which the 
stock or security is a part;
    (3) In the case of a financial instrument or contract, information 
that identifies the financial instrument or contract, including the 
names and addresses of all issuers and counterparties;
    (4) In the case of an interest in a foreign entity, information 
that identifies the interest, including the name and address of the 
foreign entity in which the interest is held;
    (5) The maximum value of the specified foreign financial asset 
during the portion of the taxable year in which the specified person 
has an interest in the asset;
    (6) In the case of a financial account that is a depository account 
as defined in Sec.  1.1471-5(b)(3)(i) or a custodial account as defined 
in Sec.  1.1471-5(b)(3)(ii), whether the account was opened or closed 
during the taxable year;
    (7) The date, if any, on which the specified foreign financial 
asset, other than a financial account that is a depository account as 
defined in Sec.  1.1471-5(b)(3)(i) or a custodial account as defined in 
Sec.  1.1471-5(b)(3)(ii), was either acquired or disposed of (or both) 
during the taxable year;
    (8) The amount of any income, gain, loss, deduction, or credit 
recognized for the taxable year with respect to the reported specified 
foreign financial asset, and the schedule, form, or return filed with 
the Internal Revenue Service on which the income, gain, loss, 
deduction, or credit, if any, is reported or included by the specified 
person;
    (9) The foreign currency in which the account is maintained or the 
asset is denominated, the foreign currency exchange rate and, if the 
source of such rate is other than as described in Sec.  1.6038D-
5(c)(1), the source of the rate used to determine the specified foreign

[[Page 73830]]

financial asset's U.S. dollar value, including maximum value;
    (10) For any specified foreign financial asset excepted from 
reporting on Form 8938 under Sec.  1.6038D-7(a), the specified person 
must report the number of Forms 3520, ``Annual Return To Report 
Transactions With Foreign Trusts and Receipt of Certain Foreign 
Gifts,'' Forms 3520-A, ``Annual Information Return of Foreign Trust 
With a U.S. Owner,'' Forms 5471, ``Information Return of U.S. Persons 
With Respect To Certain Foreign Corporations,'' Forms 8621, ``Return by 
a Shareholder of a Passive Foreign Investment Company or a Qualified 
Electing Fund,'' Forms 8865, ``Return of U.S. Persons With Respect To 
Certain Foreign Partnerships,'' and, solely for taxable years beginning 
after March 18, 2010, and ending on or before December 31, 2013, Forms 
8891, ``U.S. Information Return for Beneficiaries of Certain Canadian 
Registered Retirement Plans,'' or such other form under Title 26 of the 
United States Code identified by the Secretary under Sec.  1.6038D-
7(a), timely filed with the Internal Revenue Service on which excepted 
foreign financial assets are reported or reflected for the taxable 
year; and
    (11) Such other information as may be required by Form 8938 or its 
instructions or other guidance.
    (b) Effective/applicability dates. This section applies to taxable 
years ending after December 19, 2011. Taxpayers may elect to apply the 
rules of this section to taxable years ending prior to December 19, 
2011.


Sec.  1.6038D-4T  [Removed]

0
Par. 11. Section 1.6038D-4T is removed.
0
Par. 12. Section 1.6038D-5 is added to read as follows:


Sec.  1.6038D-5  Valuation guidelines.

    (a) Fair market value. Except as provided in paragraphs (c) and (e) 
of this section, the value of a specified foreign financial asset for 
purposes of determining the aggregate value of specified foreign 
financial assets held by a specified person and the maximum value of a 
specified foreign financial asset required to be reported on Form 8938, 
``Statement of Specified Foreign Financial Assets,'' is the asset's 
fair market value.
    (b) Valuation of assets--(1) Maximum value. Except as provided in 
this section, the maximum value of a specified foreign financial asset 
means a reasonable estimate of the asset's maximum fair market value 
during the taxable year.
    (2) U.S. dollars. For purposes of determining the aggregate value 
of specified foreign financial assets in which a specified person has 
an interest and determining the maximum value of a specified foreign 
financial asset, the value of a specified foreign financial asset 
denominated in a foreign currency during the taxable year must be 
determined in the foreign currency and then converted to U.S. dollars.
    (3) Asset with no positive value. If the maximum fair market value 
of a specified foreign financial asset is zero or less than zero, then 
the asset's value is treated as zero for purposes of determining the 
aggregate value of specified foreign financial assets in which a 
specified person has an interest, and the maximum value of the 
specified foreign financial asset is zero for purposes of reporting 
under Sec.  1.6038D-4(a)(5).
    (c) Foreign currency conversion--(1) In general. Except as provided 
in paragraphs (c)(2) and (d) of this section, the U.S. Treasury 
Department's Bureau of the Fiscal Service foreign currency exchange 
rate is to be used to convert the value of a specified foreign 
financial asset into U.S. dollars for purposes of determining the 
aggregate value of specified foreign financial assets in which a 
specified person has an interest and determining the maximum value of a 
specified foreign financial asset.
    (2) Other publicly available exchange rate. If no U.S. Treasury 
Department Bureau of the Fiscal Service foreign currency exchange rate 
is available for a particular currency, another publicly available 
foreign currency exchange rate may be used to convert the value of a 
specified foreign financial asset into U.S. dollars. In such case, the 
source of the foreign currency exchange rate must be disclosed on Form 
8938.
    (3) Currency exchange rate. In converting the currency of a foreign 
country, the foreign currency exchange rate applicable for converting 
the currency into U.S. dollars (that is, to purchase U.S. dollars) must 
be used.
    (4) Determination date. In converting the currency of a foreign 
country into U.S. dollars for purposes of determining the maximum value 
of a specified foreign financial asset and determining the aggregate 
value of specified foreign financial assets in which a specified person 
has an interest, the applicable foreign currency exchange rate is the 
rate on the last day of the taxable year of the specified person, even 
if the specified person sold or otherwise disposed of a specified 
foreign financial asset prior to the last day of such year.
    (d) Financial accounts. A specified person may rely upon periodic 
account statements that are provided at least annually by or on behalf 
of a financial institution maintaining an account, including the 
foreign currency conversion reflected in those statements, to determine 
the financial account's maximum value unless the specified person has 
actual knowledge, or reason to know based on readily accessible 
information, that the statements do not reflect a reasonable estimate 
of the maximum account value during the taxable year.
    (e) Asset held in a financial account. The value of an asset held 
in a financial account maintained by a foreign financial institution is 
included in determining the value of that financial account for 
purposes of Sec.  1.6038D-5(a).
    (f) Other specified foreign financial assets--(1) General rule. 
Except as provided in paragraphs (f)(2) and (3) of this section, for 
specified foreign financial assets that are not financial accounts and 
that are held for investment and not held in an account maintained by a 
financial institution, a specified person may use the value of the 
asset as of the last day of the taxable year on which the specified 
person has an interest in the asset as the maximum value of that asset, 
unless the specified person has actual knowledge, or reason to know 
based on readily accessible information, that the value does not 
reflect a reasonable estimate of the maximum value of the asset during 
the taxable year.
    (2) Interests in trusts that are specified foreign financial 
assets--(i) Maximum value. If a specified person is a beneficiary of a 
foreign trust, the maximum value of the specified person's interest in 
the trust is the sum of--
    (A) The fair market value, determined as of the last day of the 
taxable year, of all of the currency or other property distributed from 
the foreign trust during the taxable year to the specified person as a 
beneficiary; and
    (B) The value, determined as of the last day of the taxable year, 
of the specified person's right as a beneficiary to receive mandatory 
distributions from the foreign trust as determined under section 7520.
    (ii) Reporting threshold. For purposes of determining the aggregate 
value of specified foreign financial assets in which a specified person 
has an interest, if the specified person does not know, or have reason 
to know based on readily accessible information, the fair market value 
of the person's interest in a foreign trust during the taxable year, 
the value to be included in determining the aggregate value of the 
specified foreign financial assets is the maximum

[[Page 73831]]

value of the specified person's interest in the foreign trust under 
paragraph (f)(2)(i) of this section.
    (3) Interests in estates, pension plans, and deferred compensation 
plans--(i) Maximum value. The maximum value of a specified person's 
interest in a foreign estate, foreign pension plan, or foreign deferred 
compensation plan is the fair market value, determined as of the last 
day of the taxable year, of the specified person's beneficial interest 
in the assets of the foreign estate, foreign pension plan, or foreign 
deferred compensation plan. If the specified person does not know, or 
have reason to know based on readily accessible information, such fair 
market value, the maximum value to be reported is the fair market 
value, determined as of the last day of the taxable year, of the 
currency and other property distributed during the taxable year to the 
specified person as a beneficiary or participant.
    (ii) Reporting threshold. For purposes of determining the aggregate 
value of specified foreign financial assets in which a specified person 
has an interest, if the specified person does not know, or have reason 
to know based on readily accessible information, the fair market value 
of the person's interest in a foreign estate, foreign pension plan, or 
foreign deferred compensation plan during the taxable year, the value 
to be included in determining the aggregate value of the specified 
foreign financial assets is the fair market value, determined as of the 
last day of the taxable year, of the currency and other property 
distributed during the taxable year to the specified person as a 
beneficiary or participant.
    (g) Effective/applicability dates. This section applies to taxable 
years ending after December 19, 2011. Taxpayers may elect to apply the 
rules of this section to taxable years ending prior to December 19, 
2011.


Sec.  1.6038D-5T  [Removed]

0
Par. 13. Section 1.6038D-5T is removed.

0
Par. 14. Section 1.6038D-6 is added to read as follows:


Sec.  1.6038D-6   Specified domestic entities. [Reserved]


Sec.  1.6038D-6T  [Removed]

0
Par. 15. Section 1.6038D-6T is removed.

0
Par. 16. Section 1.6038D-7 is added to read as follows:


Sec.  1.6038D-7  Exceptions from the reporting of certain assets under 
section 6038D.

    (a) Elimination of duplicative reporting of assets--(1) In general. 
A specified person is not required to report a specified foreign 
financial asset on Form 8938, ``Statement of Specified Foreign 
Financial Assets,'' if the specified person--
    (i) Reports the asset on at least one of the following forms timely 
filed with the Internal Revenue Service for the taxable year--
    (A) Form 3520, ``Annual Return To Report Transactions With Foreign 
Trusts and Receipt of Certain Foreign Gifts'' (in the case of a 
specified person that is the beneficiary of a foreign trust);
    (B) Form 5471, ``Information Return of U.S. Persons With Respect To 
Certain Foreign Corporations'';
    (C) Form 8621, ``Return by a Shareholder of a Passive Foreign 
Investment Company or Qualified Electing Fund'';
    (D) Form 8865, ``Return of U.S. Persons With Respect To Certain 
Foreign Partnerships'';
    (E) For taxable years beginning after March 18, 2010, and ending on 
or before December 31, 2013, Form 8891, ``U.S. Information Return for 
Beneficiaries of Certain Canadian Registered Retirement Plans''; or
    (F) Any other form under Title 26 of the United States Code timely 
filed with the Internal Revenue Service and identified for this purpose 
by the Secretary in regulations or other guidance; and
    (ii) Reports on Form 8938 the filing of the form on which the asset 
is reported.
    (2) Foreign grantor trusts. A specified person that is treated as 
an owner of a foreign trust or any portion of a foreign trust under 
sections 671 through 679 is not required to report any specified 
foreign financial assets held by the foreign trust on Form 8938, 
provided--
    (i) The specified person reports the trust on a Form 3520 timely 
filed with the Internal Revenue Service for the taxable year;
    (ii) The trust timely files Form 3520-A, ``Annual Information 
Return of Foreign Trust With a U.S. Owner,'' with the Internal Revenue 
Service for the taxable year; and
    (iii) The Form 8938 filed by the specified person for the taxable 
year reports the filing of the Form 3520 and Form 3520-A.
    (3) Joint Form 5471 or Form 8865 filing. A specified person that is 
included as part of a joint Form 5471 filing pursuant to Sec.  1.6038-
2(j) or a joint Form 8865 filing pursuant to Sec.  1.6038-3(c) and who 
notifies the Internal Revenue Service as required by Sec.  1.6038-2(i) 
or Sec.  1.6038D-(3)(c) will be considered to have filed a Form 5471 or 
Form 8865 for purposes of paragraph (a)(1) of this section.
    (b) Owner of certain trusts. A specified person that is treated as 
an owner of any portion of a domestic trust under sections 671 through 
678 is not required to file Form 8938 to report any specified foreign 
financial asset held by the trust if the trust is--
    (1) A widely-held fixed investment trust under Sec.  1.671-5; or
    (2) A liquidating trust within the meaning of Sec.  301.7701-4(d) 
of this chapter that is created pursuant to a court order issued in a 
bankruptcy under Chapter 7 (11 U.S.C. 701 et seq.) or a confirmed plan 
under Chapter 11 (11 U.S.C. 1101 et seq.) of the Bankruptcy Code.
    (c) Special rules for bona fide residents of a U.S. possession. A 
specified individual who is a bona fide resident of a U.S. possession 
is not required to include the following specified foreign financial 
assets in the determination of the aggregate value of his or her 
specified foreign financial assets and, if required to file Form 8938 
with the Internal Revenue Service, is not required to report the 
following specified foreign financial assets:
    (1) A financial account maintained by a financial institution 
organized under the laws of the U.S. possession of which the specified 
individual is a bona fide resident;
    (2) A financial account maintained by a branch of a financial 
institution not organized under the laws of the U.S. possession of 
which the specified individual is a bona fide resident, if the branch 
is subject to the same tax and information reporting requirements 
applicable to a financial institution organized under the laws of the 
U.S. possession;
    (3) Stock or securities issued by an entity organized under the 
laws of the U.S. possession of which the specified individual is a bona 
fide resident;
    (4) An interest in an entity organized under the laws of the U.S. 
possession of which the specified individual is a bona fide resident; 
and
    (5) A financial instrument or contract held for investment, 
provided each issuer or counterparty that is not a United States person 
is--
    (i) An entity organized under the laws of the U.S. possession of 
which the specified individual is a bona fide resident; or
    (ii) A bona fide resident of the U.S. possession of which the 
specified individual is a bona fide resident.
    (d) Effective/applicability dates. This section applies to taxable 
years ending after December 19, 2011. Taxpayers may elect to apply the 
rules of this section to taxable years ending prior to December 19, 
2011.

[[Page 73832]]

Sec.  1.6038D-7T  [Removed]

0
Par. 17. Section 1.6038D-7T is removed.
0
Par. 18. Section 1.6038D-8 is added to read as follows:


Sec.  1.6038D-8  Penalties for failure to disclose.

    (a) In general. If a specified person fails to file a Form 8938, 
``Statement of Specified Foreign Financial Assets,'' that includes the 
information required by section 6038D(c) and Sec.  1.6038D-4 with 
respect to any taxable year at the time and in the manner described in 
section 6038D(a) and Sec.  1.6038D-2, a penalty of $10,000 will apply 
to that specified person.
    (b) Married specified individuals filing a joint annual return. 
Married specified individuals who file a joint annual return and fail 
to file a required Form 8938 that includes the information required by 
section 6038D(c) and Sec.  1.6038D-4 with respect to any taxable year 
at the time and in the manner described in section 6038D(a) and Sec.  
1.6038D-2 are subject to penalties under this section as if the married 
specified individuals are a single specified individual. The liability 
of married specified individuals who file a joint annual return with 
respect to any penalties under this section is joint and several.
    (c) Increase in penalty. If any failure to comply with the 
applicable reporting requirement of section 6038D and the regulations 
continues for more than 90 days after the day on which the Commissioner 
or his delegate mails a notice of the failure to the specified person 
required to file the Form 8938, the specified person is required to pay 
an additional penalty of $10,000 for each 30-day period (or fraction 
thereof) during which the failure continues after the 90-day period has 
expired. The additional penalty imposed by section 6038D(d)(2) and this 
paragraph (c) is limited to a maximum of $50,000 for each such failure.
    (d) Presumption of aggregate value. For the purpose of assessing 
penalties imposed under section 6038D(d), if the Commissioner or his 
delegate determines that a specified person has an interest in one or 
more specified foreign financial assets and the specified person does 
not provide sufficient information to demonstrate the aggregate value 
of the assets upon request by the Commissioner or his delegate, then 
the aggregate value of the assets is treated as being in excess of the 
applicable reporting threshold set forth in Sec.  1.6038D-2(a).
    (e) Reasonable cause exception--(1) In general. If the failure to 
report the information required in section 6038D(c) and Sec.  1.6038D-4 
is shown to be due to reasonable cause and not due to willful neglect, 
no penalty will be imposed under section 6038D(d) or this section.
    (2) Affirmative showing required. In order to show that the failure 
to report the information required in section 6038D(c) and Sec.  
1.6038D-4 is due to reasonable cause and not due to willful neglect for 
purposes of section 6038D(g) and this section, the specified person 
must make an affirmative showing of all the facts alleged as reasonable 
cause for the failure to disclose.
    (3) Facts and circumstances taken into account. The determination 
of whether a failure to disclose a specified foreign financial asset on 
Form 8938 was due to reasonable cause and not due to willful neglect is 
made on a case-by-case basis, taking into account all pertinent facts 
and circumstances. The fact that a foreign jurisdiction would impose a 
civil or criminal penalty on the specified person (or any other person) 
for disclosing the required information is not reasonable cause.
    (f) Penalties for underpayments attributable to undisclosed foreign 
financial assets--(1) Accuracy-related penalty. For application of the 
accuracy-related penalty in the case of any portion of an underpayment 
attributable to any undisclosed foreign financial asset understatement, 
see section 6662(j).
    (2) Criminal penalties. In addition to other penalties, failure to 
comply with the reporting requirements of section 6038D and the 
regulations, or any underpayment related to such failure, may result in 
criminal penalties under sections 7201, 7203, 7206, et seq., or other 
provisions of Federal law.
    (g) Effective/applicability dates. This section applies to taxable 
years ending after December 19, 2011. Taxpayers may elect to apply the 
rules of this section to taxable years ending prior to December 19, 
2011.


Sec.  1.6038D-8T  [Removed]

0
Par. 19. Section 1.6038D-8T is removed.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: December 4, 2014.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2014-29125 Filed 12-11-14; 8:45 am]
BILLING CODE 4830-01-P