During the period of this update (Nov. 1, 2021, through Oct. 31, 2022), the IRS issued guidance for taxpayers regarding changes made to Subchapter K over the past few years. Also, the Service issued guidance related to foreign partners. In addition, the courts and the IRS issued various rulings that addressed partnership operations and allocations.

Final regulations address foreign stock owned through domestic partnerships

In 2018, Treasury and the IRS issued proposed regulations regarding the treatment of domestic partnerships for purposes of determining amounts included in the gross income of their partners with respect to controlled foreign corporations for purposes of Sec. 951A. In 2019, these proposed regulations were finalized in modified form, and additional proposed regulations issued (the 2019 proposed regulations) that would extend the treatment of domestic partnerships as aggregates of their partners for purposes of determining income inclusions under Sec. 951 and provisions applicable by reference to it. Then, in 2020, Treasury and the IRS finalized the portions of the 2019 proposed regulations relating to Secs. 951A and 954 addressing the treatment of income subject to a high rate of foreign tax.

In 2022, Treasury and the IRS finalized an additional portion of the 2019 proposed regulations. These final regulations apply to U.S. persons that own stock of foreign corporations through domestic partnerships and domestic partnerships that are U.S. shareholders of foreign corporations. The final regulations generally extend the treatment of domestic partnerships as aggregates of their partners for purposes of determining income inclusions under Sec. 951 and for purposes of provisions that apply by reference to it. The final regulations also clarify that aggregate treatment of domestic partnerships applies for purposes of Sec. 956(a) and any provisions that specifically apply by reference to that provision. Aggregate treatment does not apply, however, for purposes of Sec. 956(c) or (d) (or provisions that apply by reference to these subsections), because treating a domestic partnership as an entity separate from its partners is more appropriate to carry out the purposes of these provisions. Certain existing final regulations treat domestic partnerships as entities separate from their partners for purposes of Sec. 956. The final regulations remove those provisions.

The proposed regulations had requested comments with respect to the application of the passive foreign investment company (PFIC) regime to domestic partnerships that directly or indirectly own PFIC stock, particularly with respect to whether elections and income inclusions are more appropriate at the level of a domestic partnership or at the level of its partners. Treasury and the IRS did not address these issues in the final regulations.