SPECIAL REPORT: I'm Looking Through You, You're Not The Same: Partnership-Held CFCs

Tax Notes Federal

In this report, Jonathan Brenner and Josiah Child examine the complexity, uncertainty, and compliance burdens created by the treatment of domestic partnerships as aggregates in determining U.S. partners’ inclusions from controlled foreign corporations under the proposed subpart F regulations and the final regulations on global intangible low-taxed income.

Copyright 2019 Jonathan S. Brenner and Josiah P. Child. All rights reserved.

I. Introduction

Since Congress first decided to impose tax on U.S. shareholders that earned specified, largely passive, income indirectly through controlled foreign corporations, domestic partnerships have been analyzed as entities rather than as aggregates in computing U.S. shareholders’ subpart F income. Although this approach can result in subpart F inclusions for small partners that would not have been required if they had owned their share of the partnership’s CFC stock directly, it is based on a straightforward accounting model in which gross income and tax attributes flow up uniformly from the CFC, through the domestic partnership’s income tax return, to all its partners. Domestic partnerships apply the accounting rules for U.S. shareholders by including the CFC’s subpart F income and section 956 amount in their taxable income under section 951, maintaining previously taxed earnings and profits (PTEP) accounts,1 making basis adjustments in their CFC stock to reflect the section 951 inclusions,2 and benefiting from an overlap rule when CFCs are also passive foreign investment companies.3 Partners determine the tax consequences of indirect CFC ownership through the partnership under the rules of subchapter K.

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1Section 959.
2Section 961.
3Section 1297(d).


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