Final regulations expand subpart F to cover certain partnerships
TAX ALERT |
On Nov. 3, 2016, the U.S. Treasury issued final regulations that expand certain anti-avoidance provisions of the subpart F regime of the Internal Revenue Code to certain partnership transactions. The regulations finalized proposed regulations and withdrew temporary regulations that had been issued in September 2015. The final regulations could create income for U.S. shareholders in controlled foreign corporations (CFCs) by treating the CFCs as owning U.S. property in different situations involving partnerships. A U.S. shareholder in a CFC that invests in U.S. property must include in income the shareholder’s pro rata share of such investment. The final regulations are generally effective for taxable years of CFCs ending on or after Nov. 3, 2016, the date the final regulations were issued, but they apply to transactions entered into on or after Sept. 1, 2015. Therefore, a transaction entered into in September 2015 could be subject to the final regulations.
The final regulations address several situation involving partnerships including:
- CFC lends to a partnership. Under the final rules, an obligation of a partnership is attributed to its partners based on the partner’s liquidation value percentage. Thus, a CFC that lends money to a partnership will be treated as lending money to its U.S. shareholders who are partners in the partnership and an income inclusion may result to the U.S. shareholder. However, if no partner is related to the CFC, the rule does not apply. The final regulation also applies where the CFC guarantees a loan to the partnership made by a third party; regardless of how the loan proceeds are used. For example, if a bank lends money to a partnership, the CFC guarantees the loan and a partner is related to the CFC, then the CFC has a potential income inclusion regardless of whether the proceeds are actually distributed to the partners.
- Partnership lends to U.S. persons. CFC partners are treated as having a U.S. obligation equal to their ‘attributable share’ of a loan to a U.S. person, which equals their liquidation value percentage, taking into account any special allocations.
- Guarantees of obligations of a foreign partnership. A CFC that guarantees (or pledges assets) an obligation of a foreign partnership is treated as holding an obligation of a U.S. person if the obligation is attributed to a U.S. partner.
- Guarantees by partnerships. A partnership that guarantees an obligation of a U.S. person will be treated as holding that obligation. As a result, the partners may be treated as holding their shares of the obligation.
Taxpayers should review whether they have entered into lending or guarantee arrangements involving partnerships and determine whether these rules would result in a subpart F income inclusion.