When to Report Related Parties on Form 5472: Understanding Family Member Reporting Requirements

Filing Form 5472 for foreign-owned U.S. corporations can be confusing, especially when determining which family members qualify as related parties. Do you need to report your brother? What about your uncle or nephew? Understanding these requirements is crucial for IRS compliance and avoiding $25,000 penalties.

What is Form 5472?

Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation) is required when a foreign person owns at least 25% of a U.S. corporation or U.S. LLC. This form reports transactions between the reporting corporation/ company and its related parties during the tax year.

Two Attribution Systems Work Together

The IRS uses two attribution rule systems to determine which family members are related parties: Section 318 and Section 267(c).

Section 318: Primary Attribution Rules

Section 318 provides the main constructive ownership rules. An individual is considered to own stock owned by:

• Spouse (unless legally separated)
• Children
• Grandchildren
• Parents

Critical Point: Section 318 does NOT include siblings.

Section 267(c): Filling the Gaps

Regulation §1.6038A-1(e)(1) states that Section 267(c) applies "to the extent they attribute ownership to persons to whom section 318 does not attribute ownership."

Section 267(c)(4) defines family as: "brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants."

This is where siblings enter Form 5472 reporting.

How They Work Together

1. First, apply Section 318 attribution
2. Then, apply Section 267(c) to fill gaps

Result: Siblings ARE related parties for Form 5472—through Section 267(c), not Section 318.

Family Attribution Example from IRS Revenue Procedure 91-55

Family structure (all foreign residents):

• Husband, Wife, Child 1, Child 2, Grandchild (Child 1's child)
• Each owns 20% of Foreign Corp (FC)
• FC owns 100% of U.S. Corp (RC)

Attribution results:

Husband's FC ownership:

• 20% direct + 80% attributed (spouse, children, grandchild) = 100%

Child 1's FC ownership:

• 20% direct + 60% from Section 318 (parents, own child) + 20% from Section 267(c) (sibling) = 100%

Child 2's FC ownership:

• 20% direct + 40% from parents + 20% from sibling = 80%
• Note: 0% from Grandchild (no aunt/uncle-niece/nephew attribution exists)

Result: All five family members are indirect 25% foreign shareholders requiring Form 5472 reporting.

Which Family Members Must Be Reported?

Always Evaluate These Relatives:

Parents and Children: Report if they own 25%+ or conduct reportable transactions

Siblings (Brothers/Sisters): Report if they:

• Own 25%+ (directly or through attribution), OR
• Are related to a 25% foreign shareholder, OR
• Conduct reportable transactions (even with 0% ownership)

Spouse: Always considered a related party for attribution

Grandparents: Included as "ancestors" under Section 267(c)(4)

Aunts, Uncles, Nieces, Nephews: NOT Automatically Related Parties

This is critical: these extended family members are NOT related parties under attribution rules.

Why They're Excluded

Both Section 318 and Section 267(c) have specific family definitions that do NOT include:

• Aunts and uncles
• Nieces and nephews
• Cousins
• In-laws (except spouse)
• Step-relatives (without legal adoption)

Legal basis: Revenue Ruling 71-50, Tilles v. Commissioner, and IRS guidance confirm these exclusions.

Three Key Scenarios

Scenario 1: Uncle with Direct Ownership

Uncle owns 30% of your U.S. corporation directly.

Result: Report uncle because he's a direct 25% shareholder—not because of family attribution to you. His ownership does NOT attribute to you or your siblings.

Scenario 2: Nephew with No Ownership

Nephew owns 0% but provides $75,000 in consulting services.

Result: No Form 5472 required. Nephew is not a related party under Section 267(c)(4). Transaction is arm's length with an unrelated third party.

Scenario 3: Aunt Below 25% Threshold

Aunt owns 40% of Foreign Corp, which owns 60% of your U.S. corporation.

Calculation: 40% × 60% = 24% (under Section 318(a)(2)(C))

Result:

• Foreign Corp must be reported (direct 25% shareholder)
• Aunt does NOT meet 25% threshold independently
• Aunt may be a related party under Section 267(b) as someone related to the 25% shareholder (Foreign Corp)
• Aunt's ownership does NOT attribute to you (no aunt-niece/nephew attribution)

Exception: Entity-Based Relationships

Extended family can still be related parties through entity ownership structures under Section 267(b)—not family attribution.

Example: Your uncle owns 60% of Corp A. You own 70% of Corp B. If both corporations have common ownership exceeding 50%, they may be related under Section 267(b)(10).

Common Reporting Scenarios

Scenario 1: Brother as Direct Shareholder

Foreign brother owns 30% of your U.S. corporation.

Form 5472 Impact: Report brother as 25% foreign shareholder. Disclose all transactions (loans, services, rents, etc.).

Scenario 2: Sister with No Ownership

Sister owns 0% but loans $100,000 to the corporation.

Form 5472 Impact: Report the loan. Sister is a related party under Section 267(b)(1) because siblings are family under Section 267(c)(4).

Scenario 3: Parent Through Entity

Foreign mother owns 50% of Foreign Corp, which owns 40% of your U.S. corporation.

Calculation: 50% × 40% = 20% attributed to mother

Form 5472 Impact: Report both Foreign Corp (direct 25% shareholder) and mother (related party). Mother's ownership also attributes to you as her child.

Reportable Transactions

Once you identify a related party, report these transactions:

• Sales and purchases (inventory, tangible property)
• Rents and royalties
• Services and compensation
• Loans and interest
• Insurance premiums
• Cost-sharing arrangements
• Intangible property licenses
• Other amounts paid or received

Even arm's-length transactions require reporting if they involve related parties.

Critical Technical Rules

Modified 10% Threshold for Form 5472

Standard Section 318(a)(2)(C) uses 50% ownership for entity attribution. Form 5472 modifies this to 10% under IRC §6038A(c)(5).

Impact: If you own 10%+ of a corporation, you're deemed to own your proportionate share of what that corporation owns. This captures more indirect shareholders.

Section 318(a)(5)(B): No Double Attribution

Stock attributed from one family member cannot be re-attributed to another family member.

Example: Consider a scenario with a mother (M), a son (S), and a daughter (D), each owning 100 shares of a corporation. 

• Under Section 318(a)(1), the mother (M) is deemed to own her children's shares (S's 100 shares and D's 100 shares), for a total of 300 shares.
• The daughter (D) is deemed to own her mother's shares (M's 100 shares), for a total of 200 shares (her own plus M's).
• Without Section 318(a)(5)(B): M's attributed ownership of S's stock might be re-attributed to D, making D own the brother's stock through the mother.
• With Section 318(a)(5)(B): The stock that M constructively owns from S (her son) cannot be considered as "actually owned" by M to then attribute it to D (her daughter). This prevents "sidewise" attribution between siblings through a common parent. 

This provision ensures that family attribution only occurs directly between the defined relationships (parent-child, spouse-spouse, grandparent-grandchild) and not indirectly between siblings, aunts/uncles, or cousins through intermediate family members. 

Form 5472 Penalties

Initial Penalty: $25,000 per form for:

• Failure to file
• Substantially incomplete filing
• Failure to maintain records

Continuation Penalty: Additional $25,000 for each 30-day period after 90 days of IRS notification

No maximum penalty—these accumulate indefinitely

Extended Statute: Failure to file keeps the statute of limitations open indefinitely

Criminal Penalties: Possible under IRC §§ 7203, 7206, 7207

Best Practices for Compliance

1. Create Ownership Charts: Document all shareholders with family relationships. Show Section 318 and Section 267(c) attribution pathways separately.

2. Identify Correctly:

• DO report: spouse, parents, grandparents, children, grandchildren, siblings
• DON'T over-report: aunts, uncles, nieces, nephews, cousins

3. Calculate Carefully: Percentages matter. 24% vs. 25% determines whether someone is a "25% foreign shareholder."

4. Track Transactions: Maintain detailed records for every related party transaction.

5. Apply Both Systems: Use Section 318 first, then Section 267(c) for gaps.

6. File Separate Forms: Each related party with reportable transactions needs a separate Form 5472.

7. Consider Entity Relationships: Extended family members excluded from attribution may still be related parties through entity ownership under Section 267(b).

8. Work with Professionals or use MyFreeTaxAmerica.com Software: Form 5472 compliance is complex. Engage CPAs or tax attorneys specializing in international taxation.

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Quick Reference: Family Member Attribution

*Unless they qualify through direct ownership (25%+) or entity-based relationships under Section 267(b)

Conclusion

Form 5472 related party reporting requires understanding how Section 318 and Section 267(c) work together. Section 318 provides the foundation, while Section 267(c) fills gaps—adding siblings and grandparents to the attribution analysis.

Don't go beyond what the statutes explicitly state. The IRS has confirmed in multiple rulings that extended family members are not included in attribution rules. However, verify direct ownership and entity-based relationships for all family members.

When in doubt, consult a tax professional specializing in Form 5472 compliance. The $25,000 penalty per form makes proper compliance essential.

IRS Resources:

• Instructions for Form 5472 - When and Where to File
• Form 1120 - U.S. Corporation Income Tax Return
• Form 7004 - Extension of Time to File

This article provides general information about Form 5472 related party reporting requirements. It is not legal or tax advice. Consult a qualified tax professional about your specific circumstances.