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January 24, 2022

BREAKING TAX NEWS | Treasury releases final regulations on the treatment of domestic partnerships under IRC Section 958, as well as proposed PFIC regulations

Today, Treasury finalized regulations (TD 9960) requiring an aggregate approach to determine the Subpart F inclusion for a controlled foreign corporation (CFC) owned by a domestic partnership. Under this approach, a partner of a domestic partnership would have a Subpart F inclusion from the indirectly-owned CFC if the partner itself were a US shareholder of the underlying CFC. This aggregate approach is consistent with the treatment of a domestic partnership for GILTI inclusion purposes. The aggregate approach does not, however, apply for IRC Section 1248 purposes or when determining whether (i) a US person is a US shareholder, or (ii) a foreign corporation is a CFC.

Accompanying proposed regulations (REG-118250-20) would extend the aggregate approach to domestic partnerships that own an interest in a passive foreign investment company (PFIC). The proposed extension would have the following consequences:

  • A domestic partnership would no longer be treated as a PFIC shareholder for purposes of making qualified electing fund (QEF) or mark-to-market (MTM) elections, recognizing QEF inclusions or MTM amounts, or filing Forms 8621.
  • A partner of a domestic partnership, rather than the domestic partnership, would be required to make a QEF election, and the partner would have to notify its partnership to assist it with information reporting and basis tracking in the QEF stock.
  • Domestic partnerships would be treated as aggregates for purposes of applying the CFC-PFIC overlap rule under IRC Section 1297(d).

The final regulations generally apply to tax years of a foreign corporation beginning on or after the date that the regulations are filed with the Federal Register (e.g., 2023 for calendar-year taxpayers). Domestic partnerships may apply the final rules in their entirety to tax years of a foreign corporation beginning after 2017, subject to certain consistency requirements. The proposed regulations generally would apply prospectively to tax years beginning on or after the date the rules are adopted as final regulations.

A detailed Tax Alert is forthcoming.