CFC requirements

Hi,

I am looking for a bit of guidance with regards to the need for form 5471. I've already gotten some good advice on this but just want to confirm and get some other opinions, just to make sure I am not complicating my tax life.

My spouse is about to go from employee to a company. He has incorporated his own company - a private company. He'll be its main employee with me only possibly doing small bits (probably the admin side of things), and it'll never go beyond that.

My spouse is not American and has never lived nor worked there and is thus a NRA.

My questions:

1. Does his private company even class as a corporation in the IRS' eyes? I have been told no, and this makes sense to me, but I want to double check.
2. If yes, my understanding of it is that I would not complicate my tax situation at all because this business would not be a CFC because I would not be its owner, and constructive/indirect ownership would not apply since my spouse is a non-resident alien. Is this analysis correct? (Obviously I'd pay taxes as normal on any earnings/dividends from the business.)

Every website I have come across confirms this, but the instructions for form 5471 makes me nervous because it only lists the bit about NRA for filers in category 4/5, whereas as far as I understand, I'd be category 2.

Thank you for the help!

Why is this even an issue? How do you file your taxes? "Married Separately" is often preferred for the US citizen with an NRA spouse to avoid exposing the spouse to US tax.

Sorry, I forgot to specify a key point! He'll be making me a director of the company (probably 40% of the shares), which is why the indirect ownership aspect worried me, if his company is considered a corporation.

If as an NRA I can't have indirect ownership over his 60% then we are fine, but obviously if I can, then that would bring in form 5471 into play. Form 5471 talks  about how NRA won't cause their spouses to gain indirect ownership in filer categories 4/5, but it doesn't mention it in category 2 for American directors - though other websites say this is the case anyway.

And yes, I file married separately.

I'm no expert on this but used to work with a guy that was! Based on my slightly hazy recollection, I think you do need to file a 5471.    I'm pretty sure it's because you own more than 9.9% of the share capital (though there's also some pretty complex constructive ownership rules for spouses who own any kind of share which may come into play too). 

Yes, 10% or more and you have to file the form, and if your spouse owns a majority, you are seen as having constructive ownership. The thing is though is that most sites say you can't constructively own an NRA spouse's share, meaning mine would be 40% and not 100% in the IRS eyes. That is the bit I am trying to confirm, that it also applies for cat 2 (directors of a foreign company).

Ask the accountant who created this interesting advice,as it will inevitably increase your annual accounting costs, even if it results in no increase in tax payable.