[Federal Register Volume 63, Number 58 (Thursday, March 26, 1998)]
[Proposed Rules]
[Pages 14669-14673]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-7890]



[[Page 14669]]

-----------------------------------------------------------------------

DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 301

[REG-104537-97]
RIN 1545-AV11


Guidance Under Subpart F Relating to Partnerships and Branches

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking, notice of proposed rulemaking by 
cross-reference to temporary regulations and notice of public hearing.

-----------------------------------------------------------------------

SUMMARY: The IRS and Treasury Department are issuing temporary 
regulations, published elsewhere in this issue of the Federal Register, 
relating to the treatment under subpart F of certain branches of a 
controlled foreign corporation (CFC) that are treated as separate 
entities for foreign tax purposes. The text of the temporary 
regulations also serves as the text of these proposed regulations. In 
addition, this document contains proposed regulations relating to the 
treatment of a CFC's distributive share of partnership income. This 
document also provides notice of a public hearing on these proposed 
regulations.

DATES: Written comments must be received by June 24, 1998. Outlines of 
oral comments to be discussed at the public hearing scheduled for July 
15, 1998, must be received by June 24, 1998.

ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-104537-97), room 
5226, Internal Revenue Service, POB 7604, Ben Franklin Station, 
Washington DC 20044. Submissions may be hand delivered between the 
hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:T:R (REG-104537-97), 
Courier's Desk, Internal Revenue Service, 1111 Constitution Avenue, 
NW., Washington DC. Alternatively, taxpayers may submit comments 
electronically via the Internet by selecting the ``Tax Regs'' option on 
the IRS Home Page, or by submitting comments directly to the IRS 
Internet site at http://www.irs.ustreas.gov/prod/tax--regs/
comments.html. The public hearing will be held in room 2615, Internal 
Revenue Building, 1111 Constitution Avenue NW., Washington, DC 20224.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Valerie 
Mark, (202) 622-3840; concerning submissions and the hearing, Mike 
Slaughter (202) 622-7190 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

I. In General

    In these proposed regulations, and in temporary regulations 
published elsewhere in this issue of the Federal Register, the Treasury 
and IRS set forth a framework for dealing with the issues posed by the 
use of certain entities which are regarded as fiscally transparent for 
the purposes of U.S. tax law, with regard to the application of subpart 
F of the Internal Revenue Code.
    Subpart F was enacted by Congress to limit the deferral of U.S. 
taxation of certain income earned outside the United States by foreign 
corporations controlled by U.S. persons. Limited deferral was retained 
after the enactment of subpart F to protect the competitiveness of 
controlled foreign corporations (CFCs) doing business overseas. See S. 
Rep. No. 1881, 87th Cong., 2d Sess. 78-80 (1962). This limited deferral 
furthers the objective of allowing a CFC engaged in an active business, 
and located in a foreign country for appropriate economic reasons, to 
compete in a similar tax environment with non-U.S. owned corporations 
located in the same country.
    Conversely, one of the purposes of subpart F is to prevent CFCs 
from converting active income that is not easily moveable and is earned 
in a jurisdiction in which a business is located for non-tax reasons 
into passive, easily moveable income shifted to a lower tax 
jurisdiction primarily for tax avoidance. Moreover, when subpart F was 
first enacted it was realized that related person transactions can be 
easily manipulated to reduce both United States and foreign taxes. 
Consequently, in enacting subpart F, Congress provided that 
transactions of CFCs that involve related persons generally give rise 
to subpart F income with certain enumerated exceptions.
    Hybrid branches, by definition, are not regarded as fiscally 
transparent under foreign law. Thus, they are particularly well suited 
for the type of tax avoidance described above. In light of the recent 
proliferation of hybrid branches, Treasury and the IRS believe that it 
is appropriate to consider the issues related to transactions involving 
hybrid branches, or other hybrid entities, under subpart F.
    The use of other organizations that are fiscally transparent for 
U.S. tax purposes, including partnerships, raise additional issues. 
These entities may or may not be fiscally transparent under foreign 
law. In the context of subpart F, issues similar to those raised in 
connection with hybrid branches are raised in connection with 
partnerships. (Other fiscally-transparent entities, such as grantor 
trusts, will be the subject of guidance issued in conjunction with the 
finalization of regulations under section 672(f).)
    The entity classification regulations of Secs. 301.7701-1 through 
301.7701-3 (the check-the-box regulations) make entity classification 
generally elective, in part so that taxpayers can choose a tax status 
consistent with their business objectives. This administrative 
provision, however, was not intended to change substantive law. 
Particularly in the international area, however, the ability to more 
easily achieve fiscal transparency can lead to inappropriate results 
under certain substantive international provisions of the Code. Thus, 
the Treasury and the IRS believe that it is necessary to provide 
additional guidance regarding the use of hybrid entities in the 
international context. See preamble to T.D. 8697, 61 Fed. Reg. 66585 
(December 18, 1996).

II. Controlled Foreign Corporation's Distributive Share of Partnership 
Income

    In Brown Group, Inc. v. Commissioner, 77 F.3d 217 (8th Cir. 1996), 
vacating and remanding 104 T.C. 105 (1995), a Cayman Islands 
partnership with a Cayman Islands CFC partner earned commission income 
from selling footwear purchased in Brazil on behalf of the CFC's U.S. 
parent. This commission income would have been subpart F income, 
specifically foreign base company sales income under section 954(d), to 
the CFC if it had earned this commission income directly and under the 
same circumstances in which the partnership earned this income. The Tax 
Court held that the CFC's distributive share of this commission income 
was subpart F income. The Eighth Circuit, vacating and remanding the 
Tax Court's decision, held that the CFC's distributive share of this 
commission income was not subpart F income.
    In response to the Eighth Circuit's opinion, the IRS announced that 
it intended to issue regulations under subpart F to confirm its 
position that whether a CFC partner's distributive share of partnership 
income is subpart F income generally is determined at the CFC partner 
level. See Notice 96-39 (1996-2 C.B. 209).
    These proposed regulations would address the treatment of a CFC 
partner's distributive share of partnership income

[[Page 14670]]

under subpart F. These regulations apply to all categories of subpart F 
income, not only to foreign base company sales income, which was at 
issue in Brown Group. These regulations would provide specific rules 
that apply to determine a CFC partner's distributive share of foreign 
personal holding company income, foreign base company sales income, 
foreign base company services income, and earnings invested in United 
States property.
    The approach taken by these proposed regulations is based on the 
provisions of subchapter K and subpart F and the policies underlying 
those provisions. The legislative history of subchapter K indicates 
that a partnership distributive share should be characterized by using 
the approach that best serves the Code or regulations section at issue. 
Subpart F limits deferral of U.S. income tax on common types of passive 
income received by CFCs, as well as on certain other types of easily 
moveable income. To allow a CFC to avoid subpart F treatment for items 
of income by the simple expedient of receiving them as distributive 
shares of partnership income, rather than directly, is contrary to the 
intent of subpart F.

Explanation of Provisions

    Under these proposed regulations, income and deductions would be 
characterized at the partnership level. If any part of the 
partnership's gross income would be subpart F income if received 
directly by partners that are CFCs, it must be separately stated under 
section 702. Comments are requested as to whether this rule should not 
apply for ownership levels under certain thresholds. The regulations 
under section 702 also would be clarified to expressly provide that an 
item must be separately stated when, if separately taken into account 
by any partner, the separately stated item would affect the income tax 
liability of that partner or any other person. This clarification 
incorporates in the regulations the position of the IRS. See Rev. Rul. 
86-138 (1986-2 C.B. 84) (holding that a subsidiary partnership in a 
multi-tiered arrangement must separately state items which, if 
separately taken into account by any partner of any partnership in the 
multi-tiered arrangement, would affect the income tax liability of that 
partner).
    The regulations under section 952 would also be clarified to 
expressly include within the definition of subpart F income a CFC's 
distributive share of any item of gross income of a partnership to the 
extent the income would have been subpart F income if received by the 
CFC partner directly. The proposed regulations would further provide 
that, generally, in determining whether a distributive share of 
partnership income is subpart F income, whether an entity is a related 
person and whether activity takes place in or outside the CFC's country 
of incorporation is determined with respect to the CFC partner and not 
the partnership. Thus, on the Brown Group facts, the income in issue 
would retain its character as commission income from the sale of shoes 
purchased in Brazil on behalf of a U.S. parent for sale in the U.S. It 
would be determined at the CFC partner level that the shoes were 
manufactured and sold for use outside of the CFC's country of 
incorporation (Cayman Islands), and that the U.S. parent was a related 
person with respect to the CFC. Thus, the income would be foreign base 
company sales income.
    The proposed and temporary regulations also address the question of 
whether a CFC's distributive share of partnership income can qualify 
for the exceptions from foreign personal holding company income 
treatment. Some of these exceptions are based on whether the income is 
earned in a transaction with a related person that is incorporated, or 
uses property, in the CFC's country of incorporation. The proposed and 
temporary regulations address the application of those exceptions. 
Other exceptions are based on the activities performed by the CFC in 
connection with the property through which it earns the income. The 
proposed regulations would provide that the exceptions requiring 
activity will generally apply if the exception would have applied to 
the income had the partnership itself been a CFC. This requirement is 
not met if the partnership can qualify for the exception only by taking 
into account the separate activities of its partners (e.g., the 
partnership owns property and the CFC provides the management 
services).
    These proposed regulations would amend the rules regarding the 
application of the manufacturing exception of Sec. 1.954-3(a)(4). The 
regulations would clarify the Service's current position that, in 
general, a controlled foreign corporation can apply the exception only 
if it has performed the manufacturing activities itself. Thus, 
manufacturing activities of a contract manufacturer will not be taken 
into account.
    Nevertheless, the manufacturing activities of a partnership may be 
taken into account under the distributive share rules when the 
partnership sells the property that it manufactures. These proposed 
regulations would clarify how the manufacturing exception of 
Sec. 1.954-3(a)(4) applies in the context of the distributive share 
rules. As previously noted, the general rules would provide that income 
that could be foreign base company sales income at the CFC partner 
level is separately stated and that determinations as to relatedness 
and the relevant country are made at the partner level. Consistent with 
the framework outlined above, these regulations would allow a CFC's 
distributive share of sales income to be excluded, under the 
manufacturing exception of Sec. 1.954-3(a)(4), when the partnership's 
activities with respect to the property it sells (without regard to the 
CFC partner's activities) would be sufficient to constitute 
manufacturing.
    Treasury and the IRS are considering applying foreign base company 
sales income rules in the context of manufacturing branches of 
partnerships. Comments are requested as to the appropriate scope of 
such rules.
    Under the general rule for determining whether a CFC partner's 
distributive share includes subpart F income, a CFC partner's 
distributive share of partnership income earned from performing 
services for or on behalf of a person that is a related person with 
respect to the CFC partner will be foreign base company services 
income. These proposed regulations also would describe how the 
substantial assistance rule of Sec. 1.954-4(b)(1)(iv) applies when the 
CFC earns services income through a partnership. When the partnership 
is performing services for a person unrelated to the CFC partner but 
the CFC partner provides substantial assistance to the partnership 
contributing to the performance of those services, the partner and the 
partnership would be regarded as separate entities and the substantial 
assistance provided from the CFC to the partnership would cause the 
CFC's distributive share of the services income to be treated as 
foreign base company services income. Treasury and the IRS are 
considering applying similar principles to branches. Comments are 
requested on this issue.
    Finally, consistent with Rev. Rul. 90-112 (1990-2 C.B. 186), the 
regulations would provide that, for purposes of section 956, a CFC 
partner's investment in U.S. property includes the U.S. property held 
by a partnership to the extent of the CFC's ownership interest in the 
partnership. Comments are requested on this issue.

III. Hybrid Branches

    Temporary regulations, published elsewhere in this issue of the 
Federal Register amend the Income Tax

[[Page 14671]]

Regulations (26 CFR part 1) relating to sections 952 and 954 by adding 
rules relating to the treatment under subpart F of certain branches of 
a CFC or a partnership in which a CFC is a partner that are treated as 
separate entities for foreign tax purposes. The text of those temporary 
regulations also serves as the text of the proposed regulations. The 
preamble to the temporary regulations explains the reasons for the 
addition.

IV. Proposed Effective Date

    These regulations are proposed to apply for taxable years of a 
controlled foreign corporation beginning on or after the date the final 
regulations are published in the Federal Register. For prior periods, 
the IRS will rely on principles and authorities under subpart F and 
subchapter K to apply an aggregate approach, including Sec. 1.701-2(e) 
and (f) of the regulations for periods for which it is effective.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It has also 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and, because 
the regulation does not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, this notice of proposed 
rulemaking will be submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on its impact on small 
business.

Comments and Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written comments (preferably a 
signed original and eight (8) copies) that are timely submitted to the 
IRS. All comments will be available for public inspection and copying.
    A public hearing has been scheduled for July 15, 1998, at 10 a.m., 
in room 2615, Internal Revenue Building, 1111 Constitution Avenue NW., 
Washington, DC. Because of access restrictions, visitors will not be 
admitted beyond the building lobby more than 15 minutes before the 
hearing starts.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing.
    Persons that wish to present oral comments at the hearing must 
submit written comments by June 22, 1998 and submit an outline of 
topics to be discussed and time to be devoted to each topic (signed 
original and eight (8) copies) by June 24, 1998.
    A period of 10 minutes will be allotted to each person for making 
comments.
    An agenda showing the scheduling of the speakers will be prepared 
after the deadline for receiving outlines has passed. Copies of the 
agenda will be available free of charge at the hearing.

Drafting Information

    The principal author of these regulations is Valerie Mark of the 
Office of the Associate Chief Counsel (International), IRS. However, 
other personnel from the IRS and Treasury Department participated in 
their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

    Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income 
taxes, Penalties, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for 26 CFR part 1 continues to 
read in part as follows:

    Authority: 26 U.S.C. 7805 * * *.

    Par. 2. Section 1.702-1 is amended as follows:
    1. Paragraph (a)(8)(ii) is revised.
    2. A new paragraph (c)(1)(v) is added.
    The addition and revision read as follows:


Sec. 1.702-1  Income and credits of partner.

    (a) * * *
    (8) * * *
    (ii) Each partner must also take into account separately the 
partner's distributive share of any partnership item which, if 
separately taken into account by any partner, would result in an income 
tax liability for that partner, or for any other person, different from 
that which would result if that partner did not take the item into 
account separately. Thus, if any partner is a controlled foreign 
corporation, as defined in section 957, items of income that would be 
gross subpart F income if taken into account by the controlled foreign 
corporation must be separately stated for all partners. Under section 
911(a), if any partner is a bona fide resident of a foreign country who 
may exclude from gross income the part of the partner's distributive 
share which qualifies as earned income as defined in section 911(b), 
the earned income of the partnership for all partners must be 
separately stated. Similarly, all relevant items of income or deduction 
of the partnership must be separately stated for all partners in 
determining the applicability of section 183 (relating to activities 
not engaged in for profit) and the recomputation of tax thereunder for 
any partner.
* * * * *
    (c) * * *
    (1) * * *
    (v) In determining whether the de minimis or full inclusion rules 
of section 954(b)(3) apply.
* * * * *
    Par. 3. In Sec. 1.952-1, paragraphs (b) through (f) are 
redesignated as paragraphs (c) through (g), respectively, and a new 
paragraph (b) is added to read as follows:


Sec. 1.952-1  Subpart F income defined.

* * * * *
    (b) Treatment of distributive share of partnership income--
    (1) In general. A controlled foreign corporation's distributive 
share of any item of income of a partnership is income that falls 
within a category of subpart F income described in section 952(a) to 
the extent the item of income would have been income in such category 
if received by the controlled foreign corporation directly. For 
specific rules regarding the treatment of a distributive share of 
partnership income under certain provisions of subpart F, see 
Secs. 1.954-1(g); 1.954-2(a)(5); 1.954-3(a)(6); 1.954-4(b)(2)(iii); and 
1.954-6(g).
    (2) Example. The application of this paragraph (b) may be 
illustrated by the following example.

    Example. CFC, a controlled foreign corporation, is an 80-percent 
partner in PRS, a foreign partnership. PRS earns $100 of interest 
income that is not export financing interest, as defined in section 
954(c)(2)(B), from a person unrelated to CFC. This interest income 
would have been foreign personal holding company income to CFC, under 
section 954(c), if it had received this income directly. Accordingly, 
CFC's distributive share of this interest income, $80, is foreign 
personal holding company income.
* * * * *
    Par. 4. Section 1.954-1 is amended as follows:


[[Page 14672]]


    1. Paragraphs (c)(1)(i)(A) through (D) are redesignated as 
(c)(1)(i)(A)(1) through (4), respectively.
    2. A new paragraph heading for newly designated paragraph 
(c)(1)(i)(A) is added.
    3. New paragraphs (c)(1)(i)(B) through (E) are added.
    4. Paragraph (g) is added.
    The additions read as follows:


Sec. 1.954-1  Foreign base company income.

* * * * *
    (c) * * *
    (1) * * *
    (i) Deductions against gross foreign base company income--
    (A) In general.* * *
* * * * *
    (B) through (E) [The text of the proposed paragraphs (c)(1)(i)(B) 
through (E) is the same as the text of Sec. 1.954-1T(c)(1)(i)(B) 
through (E) published elsewhere in this issue of the Federal Register].
* * * * *
    (g) Distributive share of partnership income--(1) Application of 
related person and country of organization tests. Unless otherwise 
provided, to determine the extent to which a controlled foreign 
corporation's distributive share of any item of gross income of a 
partnership would have been subpart F income if received by it 
directly, under Sec. 1.952-1(b), if a provision of subpart F requires a 
determination of whether an entity is a related person, within the 
meaning of section 954(d)(3), or whether an activity occurred within or 
outside the country under the laws of which the controlled foreign 
corporation is created or organized, this determination shall be made 
by reference to such controlled foreign corporation and not by 
reference to the partnership.
    (2) Example. The application of paragraph (g)(1) of this section is 
illustrated by the following example:

    Example. (i) CFC1, a controlled foreign corporation organized in 
Country A, is an 80-percent partner in Partnership, a partnership 
organized in Country B. CFC2, a controlled foreign corporation 
organized in Country B, owns the remaining 20 percent interest in 
Partnership. CFC1 and CFC2 are owned by a common U.S. parent, USP. 
CFC2 manufactures Product A in Country B. Partnership earns sales 
income from purchasing Product A from CFC2 and selling it to third 
parties located in Country B that are not related persons with 
respect to CFC1 or CFC2. For purposes of determining whether CFC1's 
distributive share of Partnership's sales income is foreign base 
company sales income under section 954(d), CFC1 is treated as if it 
purchased Product A from CFC2 and sold it to third parties in 
Country B. Under section 954(d)(3), CFC2 is a related person with 
respect to CFC1. Thus, with respect to CFC1, the sales income is 
deemed to be derived from the purchase of personal property from a 
related person. Because the property purchased is both manufactured 
and sold for use outside of Country A, CFC1's country of 
organization, CFC1's distributive share of the sales income is 
foreign base company sales income.
    (ii) For purposes of determining whether CFC2's distributive 
share of Partnership's sales income is foreign base company sales 
income, CFC2 is treated as if it directly sold Product A to third 
parties within Country B. Therefore, Product A is both manufactured 
and sold for use within CFC2's country of organization. Thus, CFC2's 
distributive share of Partnership's sales income is not foreign base 
company sales income.

    Par. 5. In Sec. 1.954-2, paragraphs (a)(5) and (a)(6) are added to 
read as follows:


Sec. 1.954-2  Foreign personal holding company income.

    (a) * * *
    (5) Special rules applicable to distributive share of partnership 
income--(i) [The text of the proposed paragraph (a)(5)(i) is the same 
as the text of Sec. 1.954-2T(a)(5) published elsewhere in this issue of 
the Federal Register].
    (ii) Certain other exceptions applicable to foreign personal 
holding company income. To determine the extent to which a controlled 
foreign corporation's distributive share of an item of income of a 
partnership is foreign personal holding company income, the exceptions 
contained in sections 954(c)(2) and Sec. 1.954-2(b)(2) and (6), 
(e)(1)(ii), (f)(1)(ii), (g)(2)(ii), and (h)(3)(ii), shall apply only if 
any such exception would have applied to exclude the income from 
foreign personal holding company income if the controlled foreign 
corporation had earned the income directly, determined by taking into 
account only the activities of, and property owned by, the partnership 
and not the separate activities or property of the controlled foreign 
corporation or any other person.
    (iii) [The text of the proposed paragraph (a)(5)(iii) is the same 
as the text of Sec. 1.954-2T(a)(5)(iii) published elsewhere in this 
issue of the Federal Register].
    (6) Special rules applicable to exceptions from foreign personal 
holding company income treatment in circumstances involving hybrid 
branches --(i) [The text of the proposed paragraph (a)(6)(i) is the 
same as the text of Sec. 1.954-2T(a)(6) published elsewhere in this 
issue of the Federal Register].
* * * * *
    Par. 6. Section 1.954-3 is amended as follows:

    1. The second sentence of paragraph (a)(4)(i) is revised.
    2. The first sentence of paragraph (a)(4)(ii) is revised.
    3. Paragraph (a)(6) is added.
    The revisions and addition read as follows:


Sec. 1.954-3  Foreign base company sales income.

    (a) * * *
    (4) * * *
    (i) * * * A controlled foreign corporation (selling corporation) 
will be considered, for purposes of this paragraph (a)(4), to have 
manufactured, produced, or constructed personal property that it sells 
if, as a result of the operations conducted by such selling corporation 
in connection with the property that it purchased and sold, the 
property sold is in effect not the property that it purchased. * * *
    (ii) * * * If, prior to its sale of property that it has purchased, 
a selling corporation substantially transforms the property, the 
selling corporation will be treated as having manufactured, produced, 
or constructed such property. * * *
* * * * *
    (6) Special rule applicable to distributive share of partnership 
income--(i) In general. To determine the extent to which a controlled 
foreign corporation's distributive share of any item of gross income of 
a partnership would have been foreign base company sales income if 
received by it directly, under Sec. 1.952-1(b), the property sold will 
be considered to be manufactured, produced or constructed by the 
controlled foreign corporation within the meaning of paragraph (a)(4) 
of this section only if the manufacturing exception of paragraph (a)(4) 
of this section would have applied to exclude the income from foreign 
base company sales income if the controlled foreign corporation had 
earned the income directly, determined by taking into account only the 
activities of, and property owned by, the partnership and not the 
separate activities or property of the controlled foreign corporation 
or any other person.
* * * * *
    Par. 7. In Sec. 1.954-4, paragraph (b)(2)(iii) is added to read as 
follows:


Sec. 1.954-4  Foreign base company services income.

* * * * *
    (b) * * *
    (2) * * *
    (iii) Special rule applicable to distributive share of partnership 
income. A controlled foreign corporation's distributive share of a 
partnership's services income will be deemed to be derived from 
services

[[Page 14673]]

performed for or on behalf of a related person, within the meaning of 
section 954(e)(1)(A), if the partnership is a related person with 
respect to the controlled foreign corporation, under section 954(d)(3), 
and, in connection with the services performed by the partnership, the 
controlled foreign corporation provided assistance that would have 
constituted substantial assistance contributing to the performance of 
such services, under paragraph (b)(2)(ii) of this section, if furnished 
to the controlled foreign corporation by a related person.
* * * * *
    Par. 8. Section 1.954-9 is added to read as follows:


Sec. 1.954-9  Hybrid branches.

    [The text of this proposed section is the same as the text of 
Sec. 1.954-9T published elsewhere in this issue of the Federal 
Register.]
    Par. 9. In Sec. 1.956-2, paragraph (a)(3) is added to read as 
follows:


Sec. 1.956-2  Definition of United States property.

    (a) * * *
    (3) For purposes of section 956, if a controlled foreign 
corporation is a partner in a partnership that owns property that would 
be United States property, within the meaning of paragraph (a)(1) of 
this section, if owned directly by the controlled foreign corporation, 
the controlled foreign corporation will be treated as holding an 
interest in the property equal to its ownership interest in the 
partnership and such ownership interest will be treated as an interest 
in United States property.
* * * * *

PART 301--PROCEDURE AND ADMINISTRATION

    Par. 10. The authority citation for 26 CFR part 301 continues to 
read in part as follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 11. Section 301.7701-3 is amended as follows:
    1. Paragraph (a) is amended by adding a sentence at the end of the 
paragraph.
    2. Paragraph (c)(1)(iv) is amended by adding a sentence at the end 
of the paragraph.
    The additions read as follows:


Sec. 301.7701-3  Classification of certain business entities.

    (a) [The text of the proposed paragraph (a) of this section is the 
same as the text of Sec. 301.7701-3T(a) published elsewhere in this 
issue of the Federal Register.]
* * * * *
    (c) * * *
    (1) * * *
    (iv) [The text of the proposed paragraph (c)(1)(iv) of this section 
is the same as the text of Sec. 301.7701-3T(c)(1)(iv) published 
elsewhere in this issue of the Federal Register.]
* * * * *
Michael P. Dolan,
Deputy Commissioner of Internal Revenue.
[FR Doc. 98-7890 Filed 3-23-98; 12:58 pm]
BILLING CODE 4830-01-P