On February 4, the IRS published temporary regulations (TD 9748) expanding and clarifying rules relating to the allocation of creditable foreign tax expenditures (CFTEs) by a partnership. Of particular importance to law firms is guidance on how to determine a partnership's net income in a CFTE category for purposes of testing allocations of CFTEs with respect to certain allocations and guaranteed payments. Under the temporary regulations, a partnership's net income in a CFTE category from which a guaranteed payment that is not deductible in a foreign jurisdiction is made increases by the amount of the guaranteed payment that is deductible for US federal income tax purposes. This amount will be treated as an allocation to the recipient of the guaranteed payment for purposes of determining the partners' shares of income in the CFTE category, but only for purposes of testing allocations of CFTEs attributable to a foreign tax that does not allow a deduction for the guaranteed payment. The temporary regulations apply for partnership tax years that both begin on or after January 1, 2016, and end after February 4, 2016. For more on the regulations, see Tax Alert 2016-274.

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