Category Archives: Beneficial Ownership

Beneficial Ownership, Income Tax, and FBARs

By Stephen J. Dunn

For U.S. income tax purposes, ownership of property means beneficial ownership.  Only the beneficial owner of property is required to report taxable income from the property on a U.S. income tax return.

The beneficial owner of property is its real, true owner, the person entitled to control the property, and to realize the benefit of it.

The legal owner of property, in contrast, is the person whose name is on title documents to the property, such as a deed to real property or signature cards to a bank account.

A person is required to report an account on a FinCEN Form 114, Report of Foreign Bank and Financial Accounts, (“FBAR”), if the person had a financial interest in the account, or signature authority over it.  Financial interest in an account is beneficial or legal title to the account.

Assume that Jack, a native of Sweden, lives in the United States.  Sarah, Jack’s mother, resides in her native Sweden.  Sarah titles $1,000,000 of Swedish financial accounts in the names of Sarah and Jack, as joint tenants with rights of survivorship.  Sarah does this as a will substitute, to pass the accounts to Jack at her death.  Sarah accesses the accounts, making deposits to them and withdrawals from them, for her benefit.  Jack acknowledges the accounts as Sarah’s during her lifetime, and makes no transactions in them.

Jack does not have beneficial ownership of Sarah’s accounts.  Accordingly, Jack does not report income from the accounts on Schedule B, Interest and Ordinary Dividends, to his U.S. income tax return.  Nor does Jack respond concerning the accounts to the questions on Schedule B, line 7a. Nor does Jack report the Swedish accounts on a Form 8938, Statement of Foreign Financial Assets, filed with his U.S. income tax return.

Jack does, however, report his financial interest in the accounts on an FBAR.

If Jack has been out of compliance with U.S. laws concerning Sarah’s Swedish accounts for several years, all he has to do to become compliant is file FBARs for the last six years reporting the accounts.  Because Jack does not beneficially own the Swedish accounts, he does not report the accounts or income therefrom on a U.S. income tax return.   Because he does not have unreported U.S. income tax with respect to the Swedish accounts, he is not under audit or investigation concerning the accounts, and the IRS has not contacted him concerning the accounts, all he has to do to become compliant with U.S. laws concerning the Swedish accounts is file FBARs or delinquent FBARs for the last six years reporting them.

This article originally appeared on Newsmax on January 27, 2017.