[Federal Register Volume 72, Number 134 (Friday, July 13, 2007)]
[Rules and Regulations]
[Pages 38474-38475]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-13496]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9326]
RIN 1545-BE34


Guidance under Subpart F Relating to Partnerships

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of the temporary regulations.

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SUMMARY: This document contains final regulations providing guidance 
under subpart F relating to partnerships. The final regulations add 
rules for determining whether a controlled foreign corporation's 
(CFC's) distributive share of partnership income is excluded from 
foreign personal holding company income under the exception contained 
in section 954(i). These regulations will affect CFCs that are 
qualified insurance companies, as defined in section 953(e)(3), that 
have an interest in a partnership and U.S. shareholders of such CFCs.

DATES: Effective Date: These regulations are effective July 13, 2007.
    Applicability Date: For date of applicability, see Sec.  1.954-
2(a)(5)(v).

FOR FURTHER INFORMATION CONTACT: Kate Y. Hwa, (202) 622-3840 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    On January 17, 2006, the IRS and the Treasury Department published 
in the Federal Register a notice of proposed rulemaking (REG-106418-05, 
2006-7 IRB 461, 71 FR 2496) by cross-reference to temporary regulations 
(TD 9240, 2006-7 IRB 454, 71 FR 2462) (collectively, the January 2006 
regulations), which provide that a CFC's distributive share of 
partnership income will qualify for the exception contained in section 
954(i) of the Internal Revenue Code (Code) if the CFC is a qualifying 
insurance company and the income of the partnership would have been 
qualified insurance income under section 954(i) if received by the CFC 
directly. Thus, whether the CFC partner's distributive share of 
partnership income is qualified insurance income is determined at the 
CFC partner level.
    The IRS and the Treasury Department received no comments responding 
to the January 2006 regulations and no public hearing was requested or 
held. Accordingly, the proposed regulations are adopted without change 
by this Treasury decision and the corresponding temporary regulations 
are removed.

Special Analyses

    It has been determined that this Treasury decision 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, the notice of proposed 
rulemaking that preceded these regulations was submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on its impact on small business.

Drafting Information

    The principal author of these regulations is Kate Y. Hwa of the 
Office of the Associate Chief Counsel (International). 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.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is 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 1.954-2 is amended by revising paragraphs 
(a)(5)(ii)(C) and (a)(5)(iii) Example 2, to read as follows:


Sec.  1.954-2  Foreign personal holding company income.

    (a) * * *
    (5) * * *
    (ii) * * *
    (C) A controlled foreign corporation's distributive share of 
partnership income will not be excluded from foreign personal holding 
company income under the exception contained in section 954(i) unless 
the controlled foreign corporation is a qualifying insurance company, 
as defined in section 953(e)(3), and the income of the partnership 
would have been qualified insurance income, as defined in section 
954(i)(2), if received by the controlled foreign corporation directly. 
See Sec.  1.952-1(g)(1).
    (iii) * * *

    Example 2. D Corp, a Country F corporation, is a controlled 
foreign corporation within the meaning of section 957(a). D Corp is 
a qualifying insurance company, within the meaning of section 
953(e)(3), that is engaged in the business of issuing life insurance 
contracts. D Corp has reserves of $100x, all of which are allocable 
to exempt contracts, and $10x of surplus, which is equal to 10 
percent of the reserves allocable to exempt contracts. D Corp 
contributed the $100x of reserves and $10x of surplus to DJ 
Partnership in exchange for a 40-percent partnership interest. DJ 
Partnership is an entity organized under the laws of Country G and 
is treated as a partnership under the laws of Country G and Country 
F. DJ Partnership earns $30x of investment income during the taxable 
year that is received from persons who are not related persons with 
respect to D Corp, within the meaning of section 954(d)(3). D Corp's 
distributive share of this investment income is $12x. This income is 
treated as earned by D Corp in Country F under the tax laws of 
Country F and meets the definition of exempt insurance income in 
section 953(e)(1). This $12x of investment income would be qualified 
insurance income, under

[[Page 38475]]

section 954(i)(2), if D Corp had received the income directly, 
because the $110x invested by D Corp in DJ Partnership is equal to D 
Corp's reserves allocable to exempt contracts under section 
954(i)(2)(A) and allowable surplus under section 954(i)(2)(B)(ii). 
Thus, D Corp's distributive share of DJ Partnership's income will be 
excluded from foreign personal holding company income under section 
954(i).
* * * * *


Sec.  1.954-2T  [Removed]

0
Par. 3. Section 1.954-2T is removed.

    Dated: July 2, 2007.
Kevin M. Brown,
Deputy Commissioner for Services and Enforcement.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
 [FR Doc. E7-13496 Filed 7-12-07; 8:45 am]
BILLING CODE 4830-01-P