[Federal Register Volume 65, Number 183 (Wednesday, September 20, 2000)]
[Proposed Rules]
[Pages 56836-56840]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-23529]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-112502-00]
RIN 1545-AY45


Guidance Under Subpart F Relating to Partnerships

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking and notice of public hearing.

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SUMMARY: A notice of proposed rulemaking and notice of proposed 
rulemaking by cross-reference to temporary regulations published in the 
Federal Register on March 26, 1998, providing guidance under subpart F 
relating to partnerships and branches, were withdrawn by a notice of 
proposed rulemaking published in the Federal Register on July 13, 1999. 
This document proposes, with minor changes, the former proposed 
regulations relating to the treatment of a controlled foreign 
corporation's distributive share of partnership income. These 
regulations are necessary to provide guidance on the treatment under 
subpart F of income earned by a controlled foreign corporation through 
a partnership. This document also provides notice of a public hearing 
on these proposed regulations.

DATES: Written comments and outlines of oral comments to be discussed 
at the public hearing scheduled for December 5, 2000, must be received 
by November 14, 2000.

ADDRESSES: Send submissions to: CC:M&SP:RU (REG-112502-00), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington DC 
20044. Submissions may be hand delivered Monday through Friday between 
the hours of 8 a.m. and 5 p.m. to: CC:M&SP:RU (REG-112502-00), 
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/tax_regs/comments.html. The 
public hearing will be held in room 4718, Internal Revenue Building, 
1111 Constitution Avenue NW., Washington, DC 20224.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Valerie 
Mark, (202) 622-3840; concerning submissions of comments, the hearing, 
and/or to be placed on the building access list to attend the hearing, 
Treena Garrett, (202) 622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    On March 26, 1998 (63 FR 14613), the IRS issued proposed 
regulations (REG-104537-97) which contained two sets of provisions, one 
relating to the treatment under subpart F of a controlled foreign 
corporation's (CFC's) distributive share of partnership income 
(including a clarification of the manufacturing exception under the 
foreign base company sales income rules) and the other relating to 
hybrid branch transactions. The provisions relating to hybrid branch 
transactions were also issued as temporary regulations (TD 8767). 
Congress and taxpayers raised concerns about the proposed and temporary 
regulations relating to hybrid branch transactions. To respond to these 
concerns, on July 6, 1998, Treasury and the IRS issued Notice 98-35 
(1998-27 I.R.B. 35), which announced that they would withdraw the 
proposed regulations and remove the temporary regulations. Notice 98-35 
also announced that Treasury and the IRS would issue two new separate 
sets of proposed regulations. One proposed regulation would contain 
hybrid branch rules. The other proposed regulation would contain rules 
pertaining to the treatment under subpart F of a CFC's distributive 
share of partnership income. On July 13, 1999, in furtherance of Notice 
98-35, Treasury and the IRS published REG-113909-98 (64 FR 37727), 
which withdrew the proposed regulations and issued new proposed 
regulations containing the hybrid branch provisions with new dates of 
applicability to give Congress and the Treasury more time to evaluate 
the issues raised by these provisions. On the same date, TD 8827 (64 FR 
37677) removed the temporary regulations relating to hybrid branch 
transactions. Treasury and the IRS are now proposing

[[Page 56837]]

the regulations relating to the subpart F treatment of a CFC's 
distributive share of partnership income.
    This document substantially restates the former proposed 
regulations relating to the treatment of a CFC's distributive share of 
partnership income under subpart F. These new proposed regulations, 
however, do not contain the provisions of the former proposed 
regulations that clarified the manufacturing exception under subpart F. 
Regulations clarifying the manufacturing exception will be proposed at 
a later date.

Explanation of Provisions

    These proposed regulations clarify the appropriate treatment under 
subpart F of certain partnership items that had been the subject of 
Brown Group, Inc. v. Commissioner, 77 F.3d 217 (8th Cir. 1996), 
vacating and remanding 104 T.C. 105 (1995). In Brown Group, a Cayman 
Islands partnership with a Cayman Islands CFC partner earned commission 
income from purchasing footwear 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 applied an aggregate theory of partnerships and held that the 
CFC's distributive share of this commission income was foreign base 
company sales income. The Eighth Circuit, vacating and remanding the 
Tax Court's decision, applied an entity theory of partnerships and held 
that the CFC's distributive share of this commission income was not 
foreign base company sales income.
    In response to the Eighth Circuit's opinion, the IRS announced that 
it intended to issue regulations under subpart F to clarify 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).
    The proposed regulations would provide guidance for the treatment 
under subpart F of a CFC partner's distributive share of subpart F 
income. The regulations would provide general rules to determine 
whether a CFC partner's distributive share of partnership income falls 
within, not only foreign base company sales income, the category of 
income at issue in Brown Group, but any category of subpart F income. 
These regulations also would provide guidance about the treatment of 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 under 
certain specific provisions of subpart F.
    The proposed regulations are based on the authority of subchapter K 
and subpart F and the policies underlying those provisions. The 
legislative history of subchapter K provides that a partnership 
distributive share should be characterized by using the approach that 
best serves the Internal Revenue Code or regulations section at issue.
    To allow a CFC to avoid subpart F treatment for items of income 
through the simple expedient of receiving them as distributive shares 
of partnership income, rather than directly, is contrary to the intent 
of subpart F. Subpart F was intended to limit deferral of U.S. income 
tax on passive income received by CFCs, as well as on certain other 
kinds of easily transferable income.
    Under these proposed regulations, gross income would be 
characterized at the partnership level, as, for example, sales income. 
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 
taken into account by each partner, under section 702. Thus, to the 
extent the separately stated income is subpart F income at the CFC 
partner level, it will be taken into account in determining the CFC's 
total subpart F income for the taxable year and U.S. shareholders of 
the CFC will currently include their pro rata share of this income in 
gross income to the extent provided under the rules of subpart F.
    The regulations under section 702 would be clarified to expressly 
provide that an item must be separately taken into account when, if 
separately taken into account by any partner, the item would result in 
an income tax liability for that partner, or any other person, 
different from that which would result if the partner did not take the 
item into account separately. This clarification incorporates into the 
regulations Rev. Rul. 86-138 (1986-2 C.B. 84), which holds 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 also would 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. Comments are requested as to whether this rule 
should apply for ownership interests that fall below certain 
thresholds.
    The proposed regulations would provide further that, generally, in 
determining whether a distributive share of partnership income is 
subpart F income, whether an entity is a related person and whether an 
activity takes place in or outside the CFC's country of incorporation 
is determined with respect to the CFC partner and not the partnership. 
Applying these rules to the Brown Group facts, the income would be 
characterized at the partnership level as commission income from the 
purchase of shoes in Brazil on behalf of the U.S. parent for sale in 
the U.S. Each partner would be required to separately take into account 
its distributive share of this commission income. It would then 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 CFC's distributive share of commission income would 
be foreign base company sales income.
    The proposed regulations also would address whether a CFC's 
distributive share of partnership income can qualify for the exceptions 
from foreign personal holding company income treatment that 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 an exception requiring activity would generally apply if 
the exception would have applied to the income if the CFC itself had 
directly earned the income taking into account only the property and 
activities of the partnership. This requirement is not met if the 
partnership can qualify for the exception only by taking into account 
the separate activities of its partners. Thus, for example, if the 
partnership earns rental income from leasing real property that it owns 
and with respect to which it performs active and substantial management 
functions, the CFC partner's distributive share of the rental income 
can be excluded from subpart F income under the active rents exception 
of section 954(c)(2)(A) if the rental income is earned from a person 
that is not a related person with respect to the CFC partner. However, 
if the partnership owns the real property but the CFC contracts to 
perform the management functions, the rental income is not excludible 
under this exception.

[[Page 56838]]

    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. The proposed regulations would provide that 
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. 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 general rules 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 manufactures the property that it sells 
(without regard to the activities of the CFC partner or any other 
person).
    The general rule, described above, would determine whether a CFC 
partner's distributive share of partnership income is foreign base 
company services income when the income is earned from performing 
services for or on behalf of a person that is a related person with 
respect to the CFC partner. 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, or a related person, provides 
substantial assistance to the partnership contributing to the 
performance of those services, the CFC partner and the partnership 
would be regarded as separate entities and the substantial assistance 
provided to the partnership by the CFC partner, or a related person, 
would cause the CFC's partner'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 of 
CFCs. 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 interest in the 
partnership. Comments are requested as to whether, for purposes of 
section 956, a CFC partner's interest in a partnership should be based 
on the CFC's capital interest in the partnership, the CFC's interest in 
partnership profits, or another standard, such as the facts and 
circumstances relating to the CFC's interest in the partnership.
    Treasury is currently conducting a study to review the provisions 
of subpart F. The study may examine the foreign base company rules, 
contract manufacturing, and the use of hybrid partnerships under 
subpart F. Although comments will be sought separately on the study, 
comments received on these regulations will be reviewed in connection 
with the study.

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 applicable).

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 Procedures 
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. 
The IRS and Treasury specifically request comments on the clarity of 
these proposed regulations and how they may be made easier to 
understand.
    A public hearing has been scheduled for December 5, 2000, at 10 
a.m., in room 4718, Internal Revenue Building, 1111 Constitution Avenue 
NW., Washington DC. Due to building security procedures, visitors must 
enter at the 10th Street entrance, located between Constitution and 
Pennsylvania Avenues, NW. In addition, all visitors must present photo 
identification to enter the building. Because of access restrictions, 
visitors will not be admitted beyond the immediate entrance area more 
than 15 minutes before the hearing starts. For information about having 
your name placed on the building access list to attend the hearing, see 
the FOR FURTHER INFORMATION CONTACT section of this preamble.
    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 and an outline of topics to be discussed and 
time to be devoted to each topic (signed original and eight (8) copies) 
by November 14, 2000.
    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 in 26 CFR Part 1

    Income taxes, 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 Sec. 1.702-1 is amended as follows:
    1. Paragraph (a)(8)(ii) is revised.
    2. Paragraph (c)(1)(iii) is amended by removing the word ``and''.
    3. Paragraph (c)(1)(iv) is amended by removing the period at the 
end and adding ``; and'' in its place.
    4. Paragraph (c)(1)(v) is added.
    The addition and revision read as follows:


Sec. 1.702-1  Income and credits of partner.

    (a) * * *

[[Page 56839]]

    (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 separately 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. This paragraph (a)(8)(ii) applies to 
taxable years beginning on or after the date final regulations are 
published in the Federal Register.
* * * * *
    (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, paragraph (g) is added to read as follows:


Sec. 1.952-1  Subpart F income defined.

* * * * *
    (g) 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), and 1.954-4(b)(2)(iii).
    (2) Example. The application of this paragraph (g) 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.

    (3) Effective date. This paragraph (g) applies to taxable years of 
a controlled foreign corporation beginning on or after the date final 
regulations are published in the Federal Register.
    Par. 4. In Sec. 1.954-1, paragraph (g) is added to read as follows:


Sec. 1.954-1  Foreign base company income.

* * * * *
    (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(g), 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) Examples. The application of paragraph (g)(1) of this section 
is illustrated by the following examples:

    Example 1. CFC, a controlled foreign corporation organized in 
Country A, is an 80-percent partner in Partnership, a partnership 
organized in Country A. All of the stock of CFC is owned by USP, a 
U.S. corporation. Partnership earns commission income from 
purchasing Product O on behalf of USP, from unrelated manufacturers 
in Country B, for sale in the United States. To determine whether 
CFC's distributive share of Partnership's commission income is 
foreign base company sales income under section 954(d), CFC is 
treated as if it purchased Product O on behalf of USP. Under section 
954(d)(3), USP is a related person with respect to CFC. Thus, with 
respect to CFC, the sales income is deemed to be derived from the 
purchase of personal property on behalf of a related person. Because 
the property purchased is both manufactured and sold for use outside 
of Country A, CFC's country of organization, CFC's distributive 
share of the sales income is foreign base company sales income.
    Example 2. (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. To determine 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) To determine 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. Because Product A is both manufactured and sold 
for use within CFC2's country of organization, CFC2's distributive 
share of Partnership's sales income is not foreign base company 
sales income.

    (3) Effective date. This paragraph (g) applies to taxable years of 
a controlled foreign corporation beginning on or after the date final 
regulations are published in the Federal Register.
    Par. 5. In Sec. 1.954-2, paragraph (a)(5) is 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) [Reserved]
    (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 section 954(c) that are based on whether the controlled 
foreign corporation is engaged in the active conduct of a trade or 
business, including section 954(c)(2), (h) and (i), and paragraphs 
(b)(2) and (6), (e)(1)(ii) and (3)(ii), (iii) and (iv), (f)(1)(ii), 
(g)(2)(ii), and (h)(3)(ii) of this section, 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

[[Page 56840]]

partnership and not the separate activities or property of the 
controlled foreign corporation or any other person.
    (iii) [Reserved]
    (iv) Effective date. This paragraph (a)(5) applies to taxable years 
of a controlled foreign corporation beginning on or after the date 
final regulations are published in the Federal Register.
* * * * *
    Par. 6. In Sec. 1.954-3, paragraph (a)(6) is added to read as 
follows:


Sec. 1.954-3  Foreign base company sales income.

    (a) * * *
    (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(g), 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.
    (ii) Example. The application of paragraph (a)(6)(i) of this 
section is illustrated by the following example:

    Example. CFC, a controlled foreign corporation organized under 
the laws of Country A, is an 80 percent partner in Partnership X, a 
partnership organized under the laws of Country B. Partnership X 
performs activities in Country B that would constitute the 
manufacture of Product O, within the meaning of paragraph (a)(4) of 
this section, if performed directly by CFC. Partnership X, through 
its sales offices in Country B, then sells Product O to Corp D, a 
corporation that is a related person with respect to CFC, within the 
meaning of section 954(d)(3),for use within Country B. CFC's 
distributive share of Partnership X's sales income is not foreign 
base company sales income because the manufacturing exception of 
paragraph (a)(4) of this section would have applied to exclude the 
income from foreign base company sales income if CFC had earned the 
income directly. (The branch rule of paragraph (b) of this section 
does not apply to these facts).

    (iii) Effective date. This paragraph (a)(6) applies to taxable 
years of a controlled foreign corporation beginning on or after the 
date final regulations are published in the Federal Register.
* * * * *
    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 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, or a person that is a 
related person with respect to 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. This paragraph (b)(2)(iii) applies to 
taxable years of a controlled foreign corporation beginning on or after 
the date final regulations are published in the Federal Register.
* * * * *
    Par. 8. 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) Property owned through partnership. 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 interest 
in the partnership and such interest will be treated as an interest in 
United States property. This paragraph (a)(3) applies to taxable years 
of a controlled foreign corporation beginning on or after the date 
final regulations are published in the Federal Register.
* * * * *

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 00-23529 Filed 9-19-00; 8:45 am]
BILLING CODE 4830-01-U