The IRS has issued final regs regarding the treatment of domestic partnerships for purposes of determining amounts included in the gross income of their partners with respect to foreign corporations.
These final regs finalize the portion of proposed regs (referred below to as the proposed regs) that generally treat domestic partnerships as aggregates of their partners for purposes of determining income inclusions under Code Sec. 951 and for purposes of provisions that apply specifically by reference to Code Sec. 951. For discussion of the proposed regs, see Proposed rules for determining stock ownership and global intangible low-taxed income (06/18/2019).
Note that the IRS has issued a series of proposed regs in tandem with these final regs, regarding passive foreign investment companies and controlled foreign corporations held by domestic partnerships and S corporations and related person insurance income. For a discussion of the newly issued proposed regs, see IRS releases proposed PFIC regs.
The final regs adopt the proposed regs with changes discussed below.
Application of Section 956.
Subject to certain exceptions, the proposed regs treated domestic partnerships as aggregates of their partners for purposes of Code Sec. 951 and Code Sec. 951A and for purposes of any other provision that applies by reference to Code Sec. 951 or Code Sec. 951A. (Prop Reg §1.958-1(d)(1) and Prop Reg §1.958-1(d)(2))
Although Code Sec. 951(a)(1)(B) requires a U.S. shareholder of a CFC to include in gross income the amount determined under Code Sec. 956 with respect to the U.S. shareholder (to the extent not excluded from gross income under Code Sec. 959(a)(2)), Code Sec. 956 itself does not specifically apply by reference to Code Sec. 951 (or Code Sec. 951A). Accordingly, the final regs clarify that aggregate treatment of domestic partnerships applies for purposes of Code Sec. 956(a) and any provisions that specifically apply by reference to Code Sec. 956(a) (such as Reg §1.956-1(a)(2)) to ensure that a U.S shareholder partner determines a Code Sec. 956 amount with respect to CFCs owned through a domestic partnership as part of the U.S. shareholder partner’s Code Sec. 951(a) inclusion. (Reg §1.958-1(d)(1) and Reg §1.958-1(d)(3)(iii))
Aggregate treatment does not apply, however, for purposes of Code Sec. 956(c) or Code Sec. 956(d) (or provisions that apply by reference to these sections) because treating a domestic partnership as an entity separate from its partners is more appropriate to carry out the purposes of these provisions. (Reg §1.956-4(e))
To avoid similar confusion regarding the scope of Reg §1.958-1(d), the final regs replace the language “any other provision that applies by reference” to Code Sec. 951 or Code Sec. 951A in Prop Reg §1.958-1(d)(1) with “any provision that specifically applies by reference” to Code Sec. 951, Code Sec. 951A, or Code Sec. 956(a). The addition of the word “specifically” is intended to clarify that the rule in Reg §1.958-1(d) applies only to the particular provision within a Code section or reg that applies specifically by reference to Code Sec. 951, Code Sec. 951A or Code Sec. 956(a), rather than the section or reg in its entirety.
Additionally, the final regs clarify that the rule in Reg §1.958-1(d)(1) applies for purposes of any provision that specifically applies by reference to regs issued under or relating to the sections identified in Reg §1.958-1(d)(1). Corresponding revisions are made to the cross references to Reg §1.958-1(d) provided in Reg §1.951-1(a)(4) and Reg §1.951A-1(e).
Effective date.
The final regs are effective January 25, 2022.
To continue your research on the treatment of domestic partnerships and S corporations otherwise qualifying as U.S. shareholders, see FTC 2d/FIN ¶O-2303.1.
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