[Federal Register Volume 81, Number 213 (Thursday, November 3, 2016)]
[Proposed Rules]
[Pages 76542-76544]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-26424]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-114734-16]
RIN 1545-BN51


United States Property Held by Controlled Foreign Corporations 
Through Partnerships With Special Allocations

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations that provide rules 
regarding the determination of the amount of United States property 
treated as held by a controlled foreign corporation (CFC) through a 
partnership. The proposed regulations affect United States shareholders 
of CFCs.

DATES: Written or electronic comments and requests for a public hearing 
must be received by February 1, 2017.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-114734-16), Room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
114734-16), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at http://www.regulations.gov (IRS REG-114734-16).

FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations, 
Rose E. Jenkins, (202) 317-6934; concerning submissions of comments or 
requests for a public hearing, Regina Johnson, (202) 317-6901 (not 
toll-free numbers).

SUPPLEMENTARY INFORMATION: 

Background

    In the Rules and Regulations section of this issue of the Federal 
Register, the Department of Treasury (Treasury Department) and the IRS 
are issuing final regulations that amend the Income Tax Regulations (26 
CFR part 1) relating to sections 954 and 956. Under Sec.  1.956-4(b), a 
CFC that is a partner in a partnership determines its share of United 
States property held by the partnership in accordance with the CFC's 
liquidation value percentage in the partnership, or, when relevant, 
based on a special allocation of income (or, where appropriate, gain) 
from the property. This document proposes to amend Sec.  1.956-4(b) so 
that a CFC that is a partner in a controlled partnership determines its 
share of United States property held by the partnership under the 
liquidation value percentage method, regardless of the existence of any 
special allocation of income or gain from the property.

Explanation of Provisions

    Section 956 determines the amount that a United States shareholder 
(as defined in section 951(b)) of a CFC must include in gross income 
with respect to the CFC under section 951(a)(1)(B). This amount is 
determined, in part, based on the average of the amounts of United 
States property held, directly or indirectly, by the CFC at the close 
of each quarter during its taxable year. For this purpose, in general, 
the amount taken into account with respect to any United States 
property is the adjusted basis of the property, reduced by any 
liability to which the property is subject. See section 956(a) and 
Sec.  1.956-1(e). Section 956(e) grants the Secretary authority to 
prescribe such regulations as may be necessary to carry out the 
purposes of section 956, including regulations to prevent the avoidance 
of section 956 through reorganizations or otherwise.
    Under Sec.  1.956-4(b), a CFC that is a partner in a partnership 
generally is treated as holding its share of United States property 
held by the partnership

[[Page 76543]]

in accordance with the CFC partner's liquidation value percentage in 
the partnership. However, if there is a special allocation of income 
(or, where appropriate, gain) from United States property that does not 
have a principal purpose of avoiding the purposes of section 956, the 
partner's attributable share of that property is determined solely by 
reference to the special allocation. See Sec.  1.956-4(b)(2)(ii). The 
Treasury Department and the IRS have concluded that, in general, these 
rules provide a reasonable means of determining a partner's interest in 
property held by a partnership for purposes of section 956 because they 
generally result in an allocation of specific items of property that 
corresponds with each partner's economic interest in that property, 
including any income or gain that may be subject to special 
allocations.
    The Treasury Department and the IRS are concerned, however, that 
special allocations with respect to a partnership that is controlled by 
a single multinational group are unlikely to have economic significance 
for the group as a whole and can facilitate tax planning that is 
inconsistent with the purposes of section 956. Accordingly, these 
proposed regulations propose to revise Sec.  1.956-4(b) such that a 
partner's attributable share of each item of property of a partnership 
controlled by the partner would be determined solely in accordance with 
the partner's liquidation value percentage, even if income or gain from 
the property is subject to a special allocation. Specifically, under 
proposed Sec.  1.956-4(b)(2)(iii), the rule in Sec.  1.956-4(b)(2)(ii) 
requiring a partner's attributable share of partnership property to be 
determined by reference to special allocations with respect to the 
property would not apply in the case of a partnership controlled by the 
partner. For this purpose, a partner is treated as controlling a 
partnership if the partner and the partnership are related within the 
meaning of section 267(b) or section 707(b), substituting ``at least 80 
percent'' for ``more than 50 percent''. The examples in Sec.  1.956-
4(b)(3) are proposed to be modified in accordance with the proposed 
rule.
    These proposed regulations are proposed to be effective for taxable 
years of CFCs ending on or after the date of publication in the Federal 
Register of the Treasury decision adopting them as final regulations, 
and taxable years of United States shareholders in which or with which 
such taxable years end, with respect to property acquired on or after 
the date of publication in the Federal Register of the Treasury 
decision adopting them as final regulations. The IRS may, where 
appropriate, challenge transactions under currently applicable Code or 
regulatory provisions or judicial doctrines.

Special Analyses

    Certain IRS regulations, including these regulations, are exempt 
from the requirements of Executive Order 12866, as supplemented and 
reaffirmed by Executive Order 13563. 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 regulations do 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), 
this notice of proposed rulemaking has been submitted to the Chief 
Counsel of Advocacy of the Small Business Administration for comment on 
its impact on small business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ``Addresses'' 
heading. The Treasury Department and the IRS request comments on all 
aspects of the proposed rules. All comments will be available at 
www.regulations.gov or upon request. A public hearing will be scheduled 
if requested in writing by any person that timely submits electronic or 
written comments. If a public hearing is scheduled, notice of the date, 
time, and place for the public hearing will be published in the Federal 
Register.

Drafting Information

    The principal author of these proposed regulations is Rose E. 
Jenkins of the Office of Associate Chief Counsel (International). 
However, other personnel from the Treasury Department and the IRS 
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 part 1 continues to read in 
part as follows:

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

    Section 1.956-4 also issued under 26 U.S.C. 956(d) and 956(e).

    Par. 2. Section 1.956-4 is amended by:

0
1. Revising paragraph (b)(2)(ii).
0
2. Adding paragraph (b)(2)(iii).
0
3. Adding a sentence at the end of paragraph (i) of Example 2 of 
paragraph (b)(3).
0
4. Revising paragraph (ii) of Example 2 of paragraph (b)(3).
0
5. Revising Example 3 of paragraph (b)(3).
0
6. Adding Example 4 to paragraph (b)(3).
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7. Revising paragraph (f)(1).
    The revisions and additions read as follows:


Sec.  1.956-4  Certain rules applicable to partnerships.

* * * * *
    (b) * * *
    (2) * * *
    (ii) Special allocations. Except as otherwise provided in paragraph 
(b)(2)(iii) of this section, for purposes of paragraph (b)(1) of this 
section, if a partnership agreement provides for the allocation of book 
income (or, where appropriate, book gain) from a subset of the property 
of the partnership to a partner other than in accordance with the 
partner's liquidation value percentage in a particular taxable year (a 
special allocation), then the partner's attributable share of that 
property is determined solely by reference to the partner's special 
allocation with respect to the property, provided the special 
allocation does not have a principal purpose of avoiding the purposes 
of section 956.
    (iii) Limitation on special allocations in the case of a controlled 
partnership. Paragraph (b)(2)(ii) of this section does not apply to 
determine a partner's attributable share of partnership property in the 
case of a partnership controlled by the partner. For purposes of this 
paragraph (b)(2)(iii), a partner controls a partnership when the 
partner and the partnership are related within the meaning of section 
267(b) or section 707(b), determined by substituting ``at least 80 
percent'' for ``more than 50 percent'' wherever it appears.
    (3) * * *

    Example 2.  (i) Facts. * * * FS does not control FPRS within the 
meaning of paragraph (b)(2)(iii) of this section.
    (ii) Result. Under paragraph (b)(1) of this section, for 
purposes of section 956, FS is treated as holding its attributable 
share of the property held by FPRS with an adjusted basis equal to 
its attributable share of FPRS's adjusted basis in such property. In 
general, FS's attributable share of property held by

[[Page 76544]]

FPRS is determined in accordance with FS's liquidation value 
percentage. However, because FS does not control FPRS within the 
meaning of paragraph (b)(2)(iii) of this section and because the 
special allocation does not have a principal purpose of avoiding the 
purposes of section 956, under paragraph (b)(2)(ii) of this section, 
FS's attributable share of the FPRS property is determined by 
reference to its special allocation. FS's special allocation 
percentage for the FPRS property is 80%, and thus FS's attributable 
share of the FPRS property is 80% and its attributable share of 
FPRS's basis in the FPRS property is $80x. Accordingly, for purposes 
of determining the amount of United States property held by FS as of 
the close of quarter 1 of year 1, FS is treated as holding United 
States property with an adjusted basis of $80x.
    Example 3.  (i) Facts. USP, a domestic corporation, wholly owns 
FS, a controlled foreign corporation, which, in turn, owns a 25% 
capital and profits interest in FPRS, a foreign partnership. The 
remaining 75% capital and profits interest in FPRS is owned by an 
unrelated foreign person. Thus, FS does not control FPRS within the 
meaning of paragraph (b)(2)(iii) of this section. FPRS holds 
property (the ``FPRS property'') that would be United States 
property if held by FS directly. The FPRS property has an adjusted 
basis of $100x and is anticipated to appreciate in value but 
generate relatively little income. The FPRS partnership agreement, 
which satisfies the requirements of section 704(b), specially 
allocates 80% of the income with respect to the FPRS property to the 
unrelated foreign person and 80% of the gain with respect to the 
disposition of FPRS property to FS. The special allocation does not 
have a principal purpose of avoiding the purposes of section 956.
    (ii) Result. Because FPRS is not controlled by FS within the 
meaning of paragraph (b)(2)(iii) of this section, and the special 
allocation does not have a principal purpose of avoiding the 
purposes of section 956, under paragraph (b)(2)(ii) of this section, 
FS's attributable share of the FPRS property is determined by 
reference to a special allocation with respect to the FPRS property. 
Given the income and gain anticipated with respect to the FPRS 
property, it is appropriate to determine FS's attributable share of 
the property in accordance with the special allocation of gain. 
Accordingly, for purposes of determining the amount of United States 
property held by FS in each year that FPRS holds the FPRS property, 
FS's attributable share of the FPRS property is 80% and its 
attributable share of FPRS's basis in the FPRS property is $80x. 
Thus, FS is treated as holding United States property with an 
adjusted basis of $80x.
    Example 4.  (i) Facts. The facts are the same as in Example 3 of 
this paragraph (b)(3), except that USP owns the 75% capital and 
profits interest in FPRS rather than an unrelated foreign person. 
Thus, FS controls FPRS within the meaning of paragraph (b)(2)(iii) 
of this section. At the close of quarter 1 of year 1, the 
liquidation value percentage, as determined under paragraph (b)(2) 
of this section, for FS with respect to FPRS is 25%.
    (ii) Result. Because FPRS is controlled by FS within the meaning 
of paragraph (b)(2)(iii) of this section, under paragraph 
(b)(2)(iii) of this section, FS's attributable share of the FPRS 
property is not determined by reference to the special allocation of 
gain with respect to the FPRS property. Accordingly, for purposes of 
determining the amount of United States property held by FS in each 
year that FPRS holds the FPRS property, FS's attributable share of 
the FPRS property is determined under paragraph (b)(2)(i) in 
accordance with FS's liquidation value percentage, which is 25%, and 
its attributable share of FPRS's basis in the FPRS property is $25x. 
Thus, FS is treated as holding United States property with an 
adjusted basis of $25x.
* * * * *
    (f) * * *
    (1) Except as otherwise provided in this paragraph (f)(1), 
paragraph (b) of this section applies to taxable years of controlled 
foreign corporations ending on or after November 3, 2016, and taxable 
years of United States shareholders in which or with which such taxable 
years end, with respect to property acquired on or after November 3, 
2016. Paragraphs (b)(2)(ii) and (iii) of this section, as well as 
Example 2, Example 3, and Example 4 of paragraph (b)(3) of this 
section, apply to taxable years of controlled foreign corporations 
ending on or after the date of publication in the Federal Register of 
the Treasury decision adopting this rule as a final regulation, and 
taxable years of United States shareholders in which or with which such 
taxable years end, with respect to property acquired on or after the 
date of publication in the Federal Register of the Treasury decision 
adopting this rule as a final regulation. For purposes of this 
paragraph (f)(1), a deemed exchange of property pursuant to section 
1001 on or after November 3, 2016 constitutes an acquisition of the 
property on or after that date, and a deemed exchange of property 
pursuant to section 1001 on or after the date of publication in the 
Federal Register of the Treasury decision adopting this rule as a final 
regulation constitutes an acquisition of the property on or after that 
date.
    See Sec.  1.956-2(a)(3), as contained in 26 CFR part 1 revised as 
of April 1, 2016, for the rules applicable to taxable years of a 
controlled foreign corporation beginning on or after July 23, 2002, and 
ending before November 3, 2016, and with respect to property acquired 
before November 3, 2016, to taxable years of a controlled foreign 
corporation beginning on or after July 23, 2002.

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2016-26424 Filed 11-2-16; 8:45 am]
 BILLING CODE 4830-01-P