IRS Issues Regulations Affecting Owners of Foreign Stock
The IRS recently issued final regulations (T.D. 9960) regarding the treatment of domestic partnerships for purposes of determining amounts included in the gross income of their partners with respect to foreign corporations.
The IRS concurrently issued proposed regulations (REG-118250-20) regarding passive foreign investment companies (PFICs) and controlled foreign corporations (CFCs) held by domestic partnerships and S corporations. The proposed regulations additionally address inclusion of related-person insurance income as Subpart F income under Sec. 952(a).
Final Regulations
Effective Jan. 25, 2022, the final regulations affect U.S. persons that own stock of foreign corporations through domestic partnerships and domestic partnerships that are U.S. shareholders of foreign corporations. The regulations finalize the portion of 2019’s proposed regulations (REG-101828-19) that generally treat domestic partnerships as aggregates of their partners for purposes of determining income inclusions under Sec. 951 and for purposes of provisions that apply specifically by reference to Sec. 951.
The final regulations clarify these provisions by providing that aggregate treatment of domestic partnerships applies for purposes of Sec. 956(a) and any provisions that specifically apply by reference to it in order to ensure that a "U.S. shareholder partner" determines a Sec. 956 amount with respect to CFCs owned through a domestic partnership as part of the U.S. shareholder partner's Sec. 951(a) inclusion. Using the hybrid approach, a U.S. shareholder partner refers to a domestic partnership that is a U.S. shareholder with respect to a CFC.
To provide clarity regarding the scope of Regs. Sec. 1.958-1(d), the final regulations replace "any other provision that applies by reference" to Sec. 951 or 951A in the proposed regulations with "any provision that specifically applies by reference to Sec. 951, Sec. 951A, or Sec. 956(a)" in Regs. Sec. 1.958-1(d). This clarifies that the rule in Regs. Sec. 1.958-1(d) applies to the particular provision within a Code section or regulation that applies specifically by reference to Sec. 951 951A, or 956(a) rather than the entire section or regulation.
The existing final regulations Regs. Secs. 1.956-1(a)(2)(i), (iii), and (a)(3)(iv) treat domestic partnerships as entities separate from their partners for purposes of Sec. 956. These provisions have been removed from the final regulations.
Proposed Regulations
The proposed regulations relate to Notice 2019-46, which discusses regulations permitting domestic partnerships or S corporations to apply the hybrid approach of Prop. Regs. Sec. 1.951A-5 for tax years ending before June 22, 2019.
The proposed regulations cover the determination of the controlling domestic shareholders of foreign corporations, the owner of a CFC or qualified electing fund that makes an election under Sec. 1411, the treatment of S corporations with accumulated earnings and profits under Subpart F and the determination and inclusion of related-person insurance income.
Generally, the proposed regulations would apply to tax years beginning on or after the date of their publication as final in the Federal Register. Certain rules may have other applicability dates or allow reliance on Notice 2019-46 until the regulations are finalized.