The last part of the instructions to the Form 5471 for Category 2 filers says “See Regulations section 1.6046-1(f)(3) for exceptions.” (f)(3) in this regulation seems to be a definition of U.S. person. It doesn’t seem to be discussing any exceptions. However, when I look at 1.6046-1(e)(4), it is titled “Persons excepted from filing returns.” I wonder if the exception in (e)(4)(ii) might apply to your client? It seems like the obligation to file as a Category 2 filer is found in 1.6046-1(a)(2), and the exception in (e)(4)(ii) says:
Notwithstanding paragraph (a)(2) of this section, any U.S. citizen or resident required to make a return under such paragraph with respect to a person acquiring stock of a foreign corporation in an acquisition described in subdivision (i)(a) or (b) of such paragraph need not make such return, if:
(a) As a result of such acquisition of stock of such foreign corporation, a U.S. person files a return as a shareholder under paragraph (c)(1) of this section, and
(b) Immediately after such acquisition of stock, three or fewer U.S. persons own 95 percent or more in value of the outstanding stock of such foreign corporation.