Form 5471, Schedule G, Line 14, continued. On line 3, the phrase (total of lines 2a-2e) has been replaced with (combine lines 2a through 2e) to reflect the fact that negative amounts can be entered on lines 2a through 2e. Enter amounts in U.S. dollars. Category 4: A U.S. person who had control (defined below) of a foreign corporation for an uninterrupted period of at least 30 days during the annual accounting period. See Regulations section 1.245A-5(f) for further guidance on tiered extraordinary reduction amounts. If the sum of foreign base company income (determined without regard to section 954(b)(5)) and gross insurance income (as defined in section 954(b)(3)(C)) for the tax year is less than the smaller of 5% of gross income for income tax purposes, or $1 million, then no portion of the gross income for the tax year is treated as foreign base company income or insurance income. (Form 5471, Schedule I-1, line 9a). Enter the amount of taxes paid or accrued by the foreign corporation to the United States. Enter the reduction to the column (b) tested income group for tested income taxes not deemed paid. The functional currency of Domestic Corporation, CFC1, CFC2, and CFC3 is the U.S. dollar. Also, CFC1 receives in the tax year ending December 31, 2021, a refund of 3u from Country X on 15u of foreign source income with respect to CFC1s tax year ending December 31, 2017, translated to equal $5, and on which the original liability was $7. Name of person filing Form 5471 Street address City State (if U.S. address) ZIP code (if U.S. address) Region (if foreign address) ZIP code (if foreign address) Country (if foreign address) Identifying number Annual tax year beginning Annual tax year ending Mark any applicable Category filer checkboxes. For example, June 30, 2021, would be entered as 06-30-2021.. "field, "60.Enter the smaller of line 58 or line 59. The purchase represented 10% ownership of the foreign corporation. One person may file Form 5471 and the applicable schedules for other persons who have the same filing requirements. In other words, is line 13b, 13d, 13e, 14b, 15b, or 16b of Worksheet A greater than zero? Enter the year in which the U.S. shareholder included income of the lower-tier foreign corporation under section 951(a) or section 951A and established the PTEP account to which the distribution is attributed. Enter on page 1, Item 1f, the six-digit code selected from the list below. Section 111 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 extended the look-through rule of section 954(c)(6). See Regulations section 1.960-3(c)(1). For the tax year, enter the total amount of IDCs for the CSA on line 7a. Enter this amount in U.S. dollars. If Worksheet A, line 37c, is less than the amount on Worksheet A, line 36, allocate the subpart F income remaining (after having been limited) (that is, the line 38 amount) to the four categories of subpart F income listed on Worksheet A, lines 40 through 43, using the rules of Regulations section 1.952-1(e). "field, "47.Shareholders pro rata share of line 41. Current-year tax on reattributed income from disregarded payments. Otherwise, check No. Apply Regulations section 1.385-3(b)(3)(iii)(E) to determine when a debt instrument is treated as issued for purposes of Regulations section 1.385-3(b)(3)(iii). Proc. The amounts reclassified are reported as negative numbers in columns (e)(vi) through (e)(x) and positive numbers in columns (e)(i) through (e)(v), as applicable. A domestic corporation that is a U.S. shareholder with respect to a CFC must maintain a hybrid deduction account with respect to each share of stock of the CFC that the domestic corporation owns directly or indirectly through a partnership, trust, or estate. This example can also be found in the Schedule Q, Form 5471 instructions. See section 989(b). Enter the greater of line 7a or line 7b" field, "9. Foreign gross income that arises from a disregarded payment that is treated as a remittance for U.S. tax purposes is assigned to an income group by reference to the income groups to which the assets of the payor taxable unit are assigned (or would be assigned if the taxable unit were a United States person) under the rules of Regulations section 1.861-9 for purposes of apportioning interest expense. Changes to separate Schedule J (Form 5471). Certain filers may be able to use alternative information (as defined in section 3.01 of Rev. See Item 1(b)(2)Reference ID number for more information about reference ID numbers. Do not enter aggregate cash flows, year-end loan balances, average balances, or net balances. A U.S. person (see Category 2 Filer, above, for definition) who acquires stock in a foreign corporation which, when added to any stock owned on the date of acquisition, meets the 10% stock ownership requirement (described above) with respect to the foreign corporation; A U.S. person who acquires stock which, without regard to stock already owned on the date of acquisition, meets the 10% stock ownership requirement with respect to the foreign corporation; A person who is treated as a U.S. shareholder under section 953(c) with respect to the foreign corporation; A person who becomes a U.S. person while meeting the 10% stock ownership requirement with respect to the foreign corporation; or. This amount must be converted from functional currency to U.S. dollars using the average exchange rate for the year of the CFC. The third quarter of the tax year" field, "1d. See Regulations section 1.904-4(c)(3)(i). Check the appropriate box on line 6c to indicate whether any stock-based compensation was granted during the term of the CSA to individuals who performed functions in business activities that generate cost shared intangibles that were not treated as directly identified with, or reasonably allocable to, the IDA as defined in Regulations section 1.482-7(d)(1)(i). Any transaction offered under conditions of confidentiality for which the corporation (or a related party) paid an advisor a fee of at least $250,000. Enter the appropriate code on line a (at the top of page 1 of Schedule J). Do not abbreviate the country name. The foreign corporation is a foreign-controlled corporation. Attach a statement detailing the nature and amount of any adjustments in E&P not accounted for on lines 8 through 11. Exclusion of U.S. income. One person may file Form 5471 and the applicable schedules for other persons who have the same filing requirements. Proc. Criminal penalties under sections 7203, 7206, and 7207 may apply for failure to file the information required by sections 6038 and 6046. See Regulations section 1.245A-5(d) for further guidance on tiered extraordinary disposition amounts. For a noncorporate U.S. shareholder, include the result as Other income on Schedule 1 (Form 1040), line 8z (other income), or on the comparable line of other noncorporate tax returns. Special rules apply for foreign corporations that use the U.S. dollar approximate separate transactions method of accounting (DASTM) under Regulations section 1.985-3. For purposes of Category 1 filers, a U.S. shareholder is a U.S. person who owns (directly, indirectly, or constructively, within the meaning of sections 958(a) and (b)) 10% or more of the total combined voting power of all classes of voting stock of a section 965 SFC or, in the case of a tax year of a foreign corporation beginning after December 31, 2017, 10% or more of the total combined voting power or value of shares of all classes of stock of a section 965 SFC. Only earnings of a CFC not distributed or otherwise previously taxed are subject to these rules. Enter the exchange rate used in computing line 5d. See section 6712. Adjusted net related person insurance income (line 19). 2019-40, Item HPerson(s) on Whose Behalf This Information Return Is Filed, Items 1f and 1gPrincipal Business Activity, Reporting Amounts on Lines 1 Through 4 on Your Income Tax Return, Part ITaxes for Which a Foreign Tax Credit Is Allowed, Section 1Taxes Paid or Accrued Directly by Foreign Corporation, Section 2Taxes Deemed Paid (Section 960(b)), Part IIITaxes for Which Foreign Tax Credit Is Disallowed, Specific Instructions Related to Lines 1 through 16. Comprehensive example Form 5471; Form 8992; Form 8993; Form 1118; Other forms and reporting requirements; Best practices; Benefits. If the foreign corporation uses the DASTM under Regulations section 1.985-3, the functional currency column should reflect local hyperinflationary currency amounts computed in accordance with U.S. GAAP. For example, when translating amounts to be reported on Schedule E, you must generally use the average exchange rate as defined in section 986(a). For the foreign corporations annual accounting period with respect to which reporting is being made on this Form 5471, if the foreign corporation is required to file a U.S. income tax return (for example, Form 1120F), check the Yes box if the foreign corporation has interest expense disallowed under section 163(j). Enter the PTEP distribution with respect to the PTEP group within the annual PTEP account identified in column (d) and column (e) in the functional currency of the distributing lower-tier foreign corporation. There is an election in effect under section 986(a)(1)(D) to translate foreign taxes using the exchange rate in effect on the date of payment. See section 989(b). 1.951A-4 (b) (1) (iii) (A): Column (e)(iii) is PTEP described in the following three subgroups (which are aggregated into a single PTEP group). But, regardless of the specific method required, all exchange rates must be reported using a divide-by convention rounded to at least four places. Also assume for both years that the local currency in which the tax was paid was the same as the foreign corporations functional currency. Check the Yes box on line 6a if the filer of this Form 5471 is claiming a deduction under section 250 with respect to foreign-derived intangible income (FDII), and enter the amounts requested on lines 6b, 6c, and 6d. Enter foreign currency translation adjustments before the income tax expense (benefit) is allocated. Report on line 10, column (e), the taxes that relate to PTEP of the foreign corporation that are deemed paid by a shareholder of the foreign corporation, either an upper-tier foreign corporation or a U.S. shareholder, with respect to a distribution of PTEP made by the foreign corporation. A separate Schedule G-1 must be filed for each cost sharing arrangement (CSA) as defined in Regulations section 1.482-7(b) in which the foreign corporation was a controlled participant (as defined in Regulations section 1.482-7(j)) during the tax year. If more than one category applies, check all boxes that apply. See the instructions for line 4. Subtract line 60 from line 57. If the total of all lines 6 of all separate Schedules I-1 (Form 5471) for the CFC is a negative number, enter the amount as a positive number on line 37b. Also use this schedule to report the E&P of specified foreign corporations that are only treated as CFCs for limited purposes under section 965(e)(2). Attach this statement to Form 5471. For purposes of these rules, a 25% shareholder is a CFC that owns directly 25% or more of the capital or profits interest in a partnership. If code 901j is entered on line a, enter on line b the country code for the sanctioned country using the two-letter codes (from the list at IRS.gov/CountryCodes). Section 956(a)(2) amount. 55, available at, A U.S. person described in Category 1, 3, 4, or 5 (shareholder) does not have to file Form 5471 if. Also, a trade or service receivable acquired or treated as acquired by a CFC from a related U.S. person is considered an investment in U.S. property for purposes of section 956 (Worksheet B) if the obligor is a U.S. person. The other reporting requirements of a taxpayer that includes passive category income with general category income in a Schedule I-1 do not change because the taxpayer includes passive category income with general category income in a Schedule I-1. If the U.S. taxpayer engaged in multiple PCTs during the tax year with the foreign corporation and used different methods to price the PCTs, check the appropriate boxes on line 5c to indicate which methods were selected as the best method for one or more of the PCTs reported in the tax year. If a CFC or a member of a controlled group (within the meaning of section 993(a)(3)) that includes the CFC has operations in, or related to, a country (or with the government, a company, or a national of a country) that requires participation in or cooperation with an international boycott as a condition of doing business within such country or with the government, company, or national of that country, a portion of the CFC's income is included in subpart F income. With respect to foreign currency gain or loss on a distribution of GILTI: For a corporate U.S. shareholder, include the gain or (loss) as Other income on Form 1120, line 10, or on the comparable line of other corporate tax returns. The reference ID number that is entered in Item 1b(2) must be alphanumeric (defined later) and no special characters or spaces are permitted. Report the opening balance, current year additions and subtractions, and the closing balance in the foreign corporation's E&P described in section 959(c)(3). 2019-40 provides a safe harbor for determining certain items, including taxable income and E&P, of certain CFCs based on alternative information. 309, available at IRS.gov/irb/2009-36_IRB#RP-2009-37. "field, "64.Amount of line 61 that applies to section 954(c) subpart F Foreign Base Company Sales Income. Form 5471 is used by certain U.S. persons who are officers, directors, or shareholders in certain foreign corporations. During the tax year, did the CFC receive or accrue from a related CFC dividends, interest (including factoring income treated as income equivalent to interest for purposes of section 954(c)(1)(E)), rents, or royalties attributable or properly allocable to income of the related person which is neither subpart F income nor income treated as effectively connected with the conduct of a trade or business in the United States? If the foreign corporation uses DASTM, enter on line 5d the same amount entered on line 5c. To determine the appropriate code, see Categories of Income in the Instructions for Form 1118. "field, "54.Shareholders pro rata share of export trade income that applies to line 53 amount. Proc. Add lines 6 and 7" field, "9.Enter 5% of total gross income (as computed for income tax purposes)" field, "10.Enter 70% of total gross income (as computed for income tax purposes)" field, "11.If line 8 is less than line 9 and less than $1 million, enter 0 on this line and skip lines 12 through 21" field, "12.If line 8 is more than line 10, enter total gross income (as computed for income tax purposes)" field, "13.Total adjusted gross foreign base company income and insurance income (enter the greater of line 8 or line 12)" field, "14. Form 5471 (Schedule E) Income, War Profits, and Excess Profits Taxes Paid or Accrued. If this Item D is checked, complete Schedule O. For example, if you are completing Schedule J for the passive category (that is, you have entered "PAS" on line a at the top of page 1 of Schedule J), enter the current year E&P (or deficit in E&P) amount from Schedule H (Form 5471), line 5c(ii), in the applicable column. The average exchange rate is 108.8593 Japanese Yen to one U.S. dollar or (0.009184) U.S. dollar to one Japanese Yen. Amount excluded, reduction amount, or other amount not reported or reportable, "1.Gross foreign personal holding company income:", "1a.Dividends, interest, royalties, rents, and annuities (section 954(c)(1)(A)) (excluding amounts described in sections 954(c)(2) and (3))" field, "1b.Excess of gains over losses from certain property transactions (section 954(c)(1)(B))" field, "1c.Excess of gains over losses from commodity transactions (section 954(c)(1)(C))" field, "1d. Enter the foreign corporations share of reasonably anticipated benefits (RAB) for the CSA during the tax year. Example. On page 2, Schedule E-1, former line 18 is now line 16 (balance of taxes paid or accrued at beginning of the next year), and, as a result of the changes listed above, line 16 now instructs filers that line 16, columns (a), (b), and (c), must always equal zero. As a result of the deletion of line 14, all subsequent lines have been renumbered, as appropriate. This column is used to report current-year tax imposed solely by reason of the receipt of a disregarded payment that is a reattribution payment. Corporation B owns 51% of the voting stock in Corporation C. Corporation C owns 51% of the voting stock in Corporation D. Therefore, Corporation D is controlled by Corporation A. Report actual distributions as negative numbers. Begin by providing the name of the person filling the form and the identifying . 2019-40 provides a safe harbor for determining certain items of certain SFCs based on alternative information. Step 1: Go to IRS website and download say 2018 form 5471 or 2017 form 5471. Add lines 26, 29, 32, and 35." In other words, are any amounts excluded from line 1d of Worksheet A by reason of being attributable to a transaction(s) directly related to the business needs of the foreign corporation? As such, the exchange rate must be reported as the units of foreign currency that equal one U.S. dollar, rounded to at least four places. The total reported on Schedule E, Part I, Section 1, line 5, column (l), should be separated into columns (a) through (e) according to the type of income or E&P to which such taxes relate. Section 6 of Rev. Check Yes if, during the tax year, the filer engaged in at least one of the transactions described in Regulations section 1.385-3(b)(2). Enter on lines 1e through 1h the amounts from Worksheet A, lines 63, 65, 67, and 69, respectively. In the case of a covered asset acquisition (as defined in section 901(m)(2)), enter the disqualified portion of any tax determined with respect to the income or gain attributable to the relevant foreign assets (section 901(m)). Otherwise, enter zero. See also section 1293(f) for inclusions with respect to a passive foreign investment company. For more information, see the Instructions for Form 8938, generally, and in particular, Duplicative Reporting and the specific instructions for Part IV, Excepted Specified Foreign Financial Assets. The schedules of Form 5471 are used to satisfy the reporting requirements of the Internal Revenue Code. Enter the balances for each column at the beginning of the tax year. If the answer to the question on line 17a was Yes, complete the question on line 17b. See specific instructions for Item FAlternative Information Under Rev. During Year 1, Domestic Corporation reports an inclusion under section 951(a)(1) of $100 and deemed paid taxes of $20 under section 960(a) as a result of subpart F income of CFC3. See Regulations sections 1.960-1(d)(3)(ii)(A) and 1.861-20(d)(3)(v)(B). Therefore, the reporting on Schedule J is necessary regardless of whether the U.S. shareholder made a section 962 election. Form 5471 (Information Return of U.S. The foreign corporation's functional currency is determined under section 985. A Category 1, 4, or 5 filer does not have to file Form 5471 if the shareholder: Does not own a direct or indirect interest in the foreign corporation, and. Category 5 filers, a U.S. person is: An estate or trust that is not a foreign estate or trust, as defined in See Regulations section 1.861-20(d)(3)(v)(C)(1). Enter the U.S. dollar amount of the recipient foreign corporation's income taxes deemed paid that are properly attributable to the PTEP distribution reported in column (f) and not deemed to have been paid by the domestic corporation for any prior tax year. If applicable, use the reference ID number shown on Form 5471, page 1, Item 1b(2). Otherwise, attach a brief statement of the reason(s) it is not possible to include a present value estimate for one or more PCTs (for example, no revenue projections for a PCT that is priced based on a sales-based royalty from a comparable uncontrolled transaction). The shareholder does not own a direct interest in the foreign corporation. On lines 4 and 6, the phrase (see instructions) has been inserted at the end of these line descriptions. For line 3(2), $150 of gross income is reported in column (ii), $10 of foreign tax is reported in each of columns (x) and (xii), and the checkbox in column (xiv) is not checked. In other words, are any amounts described in section 954(c)(2)(A) excluded from line 1a of Worksheet A? See Related constructive U.S. shareholder below for instructions pertaining to when Form 5471 may be completed as a Category 5c filer. 2019-40 as well as Rev. On line 15, report reductions for foreign income taxes attributable to the column (b) tested income group that are not deemed paid as a result of the inclusion percentage or the 80% limitation. The sale or exchange of assets used (by the corporation) in the trade or business of extracting minerals from oil or gas wells located outside the United States and its possessions. Enter the employer identification number (EIN) or reference ID number of the lower-tier foreign corporation listed in column (a). In other words, are any amounts that are derived in connection with property that does not satisfy section 954(d)(1)(A) excluded from line 3 of Worksheet A (that is, income excluded by reason of Regulations section 1.954-3(a)(2))? Instead, they should be reported in the year to which such taxes relate. Average amount of U.S. property held (directly or indirectly) by the C.F.C. Such tax is related to previously taxed subpart F income. Illegal bribes, kickbacks, and other payments. Such tax should also be reflected as a negative amount in column (d). Enter on lines 5c(i), 5c(ii), 5c(iii)(A), 5c(iii)(B), 5c(iii)(C), and 5c(iii)(D), as applicable, the portion of the line 5c current year E&P amount with respect to each applicable category of income. Unrelated section 958(a) U.S. shareholder. See section 960(a) and (d). Because Mr. Jackson has reduced his holding in the foreign corporation, he is required to complete Form 5471 and Schedule O. Line 9. Invested in U.S. Property. This amount does not include the amount of dividends that are not eligible for a deduction under section 245A and are instead entered on lines 5b, 5c, and 5d. The form and schedules satisfy the reporting requirements of sections 6038 and 6046 and the related regulations. Adjusted net foreign base company income (lines 1 through 17). In such a case, the Schedule P must be attached to the statement described above.. A reference ID number (defined below) is required on line 1b(2) only in cases where no EIN was entered on line 1b(1) for the foreign corporation. An exception applies to transactions directly related to the business needs of a CFC. Summary: This is an example of worksheet A, which is used to determine the shareholder's share of Subpart F income. The following are reportable transactions. Amount of U.S. property (as defined in sections 956(c) and (d)) held (directly or indirectly) by the C.F.C. The above definition does not apply to any foreign corporation if: At all times during the foreign corporation's tax year, less than 20% of the total combined voting power of all classes of stock of the corporation entitled to vote, and less than 20% of the total value of the corporation, is owned (directly or indirectly under the principles of section 883(c)(4)) by persons who are (directly or indirectly) insured under any policy of insurance or reinsurance issued by the corporation or who are related persons to any such person; The related person insurance income (determined on a gross basis) of the corporation for the tax year is less than 20% of its insurance income for the tax year, or. See Regulations section 1.482-7(d) for more information on IDCs. Reclassified section 951A PTEP and section 951A PTEP that is in the section 951A category should be reported on the Schedule P completed for the general category. Use Schedule Q to report the CFCs income, deductions, taxes, and assets by CFC income groups for purposes of sections 960(a) and (d). Columns (b) through (f) should request dollar amounts of the specified other amounts received during the annual accounting period by the foreign corporation from the persons listed in the headings for columns (b) through (f). These amounts are included in the total amount of residual income, which is reported on line 4. All taxes relate to general category income. The form and schedules are used to satisfy the reporting requirements of sections 6038 and 6046, and the related regulations. 2016-8 provides that as of December 22, 2015, section 901(j) no longer applies to Cuba. Check the Yes box on line 17b if any controlling section 245A shareholder (as defined in Regulations section 1.245A-5(i)(2)) made an election to close the tax year of the foreign corporation such that no amount is treated as an extraordinary reduction amount or tiered extraordinary reduction amount as to any U.S. shareholder of the foreign corporation. For an example of when this might occur, see Regulations section 1.951A-5(b)(2)(ii). Category 1a, 1c, 3, 4, 5a, and 5c filers must complete Part II. However, see Certain Category 1 and Category 5 Filers, later, which may apply. field, "33.Enter the sum of the portion of lines 16e, 18e, 19e, 20, 21, and 22 that is U.S. source income effectively connected with a U.S. trade or business (section 952(b))" field, "34.Exclusions under section 959(b) that apply to line 16e, 18e, 19e, 20, 21, and 22 amounts" field, "35.Other subpart F income. section 927(d)(6), as in effect before its repeal); Investment income and carrying charges (as defined in sections 927(c) and 927(d)(1), as in effect before their repeal); and. If the box on line F is checked, enter the applicable code from the list provided below. The facts are the same as in Example 2, except that during Year 4, CFC1 distributes $36 to Domestic Corporation. Accordingly, $4 of foreign income taxes related to section 959(c)(2) previously taxed E&P is reclassified to section 959(c)(1) previously taxed E&P on line 11, column (e)(iii). If applicable for lines 5c(iii)(A), 5c(iii)(B), 5c(iii)(C), and 5c(iii)(D), also enter the country code for the sanctioned country using the two-letter codes (from the list at, Enter the line 5c functional currency amount translated into U.S. dollars at the average exchange rate for the foreign corporation's tax year. Line 3. For a corporate shareholder, enter the result from line 1a on Form 1120, Schedule C, line 16a; enter the result from line 1b on Form 1120, Schedule C, line 16b; and enter the remaining lines 1c through 1h, 2, and 4 on Form 1120, Schedule C, line 16c; or on the comparable line of other corporate tax returns. Enter the amounts on lines 1 through 5c in the CFC's functional currency. 92-70, 1992-2 C.B. Specifically, if you are reporting with respect to more than two units, add to pages 1 and 2, as appropriate, new lines (3), (4), (5), etc. However, the foreign corporations reference ID number should also be entered on Form 8858 if the foreign corporation is listed as a tax owner of a foreign disregarded entity (FDE) or foreign branch (FB) on Form 8858. See Regulations section 1.960-1(d)(2)(ii). The top margin of the summary return must be labeled Filed Pursuant to Rev. See Regulations section 1.482-7(e) for rules on a determining and updating controlled participants RAB share. Section 956(a)(1) amount. For purposes of Category 2 and Category 3, a U.S. person is: A citizen or resident of the United States. Rule of thumb - always inquire about underlying partnerships and corporations when investing more than 10% in a foreign entity. The specific instructions for the affected schedules state these requirements. If a taxpayer requires an extension of filing Form 5471, then they would file an extension on Form 4868 for their regular tax return and then the 5471 will go on extension as well. The additional penalty is limited to a maximum of $50,000 for each failure. For more information, see section 898 and Rev. We ask for the information on this form to carry out the Internal Revenue laws of the United States. Enter taxes for which a foreign tax credit is disallowed other than those detailed in columns (c) through (g). For more information, see sections 245A, 951, 952, and 964(e). In other words, are any amounts excluded from line 1a of Worksheet A by reason of the look-through rule described in section 954(c)(6)? Do not include any income includible on Form 5471, Schedule I, lines 1a through 1d, or any income includible under section 951A (Schedule I-1 is used to provide information relating to section 951A). The corporate U.S. shareholder should include the line 5b amount on Form 1120, Schedule C, line 14, column (a), or the comparable line of other corporate income tax returns. Form 5471 is used by certain U.S. persons who are officers, directors, or shareholders in certain foreign corporations. This would include stock-based compensation granted in earlier years (which could give rise to deductions in the current tax year) that were not treated as identified with or reasonably allocable to the IDA. See Regulations section 1.6046-1(i) for rules on determining when U.S. persons constructively own stock of a foreign corporation and therefore are subject to the section 6046 filing requirements. These are also reported in column (e). If the failure continues 90 days or more after the date the IRS mails notice of the failure to the U.S. person, an additional 5% reduction is made for each 3-month period, or fraction thereof, during which the failure continues after the 90-day period has expired.

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