Final regulations affect owners of foreign stock

By Paul Bonner

The IRS on Monday issued final regulations (T.D. 9960) under Sec. 958 regarding the treatment of domestic partnerships for purposes of determining amounts included in the gross income of their partners with respect to foreign corporations.

At the same time, the IRS issued proposed regulations (REG-118250-20) providing guidance on passive foreign investment companies (PFICs) and controlled foreign corporations (CFCs) held by domestic partnerships and S corporations. The proposed regulations also address inclusion of related-person insurance income as Subpart F income under Sec. 952(a).

2019 regulations

On June 21, 2019, the IRS published final regulations (T.D. 9866) (the final Sec. 951A regulations) providing guidance with respect to the treatment of domestic partnerships that own stock in CFCs for purposes of Sec. 951A that generally treat a domestic partnership as an aggregate of all of its partners for purposes of computing income inclusions under Sec. 951A (and other provisions that apply by reference to Sec. 951A).

Concurrently with those final regulations, the IRS published proposed regulations (REG-101828-19) under Secs. 951, 951A, 954, 956, 958, and 1502. Consistent with the approach adopted in the Sec. 951A final regulations, the 2019 proposed regulations generally extended 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 Sec. 951. A portion of those proposed regulations under Secs. 951A and 954 address the treatment of income subject to a high rate of foreign tax.

The final regulations finalize the portion of the 2019 proposed regulations that generally treat domestic partnerships as aggregates of their partners for purposes of determining income inclusions under Sec. 951 and for purposes of provisions that apply specifically by reference to Sec. 951.

The final regulations clarify these provisions by providing that aggregate treatment of domestic partnerships applies for purposes of Sec. 956(a) and any provisions that specifically apply by reference to it (such as Regs. Sec. 1.956-1(a)(2)), to ensure that a "U.S. shareholder partner" determines a Sec. 956 amount with respect to CFCs owned through a domestic partnership as part of the U.S. shareholder partner's Sec. 951(a) inclusion. A U.S. shareholder partner, under the hybrid approach, refers to a domestic partnership that is a U.S. shareholder with respect to a CFC.

Similarly, to avoid confusion about the scope of Regs. Sec. 1.958-1(d), the final regulations replace "any other provision that applies by reference" to Sec. 951 or 951A in the proposed regulations with "any provision that specifically applies by reference to Sec. 951, Sec. 951A, or Sec. 956(a)" in Regs. Sec. 1.958-1(d) in the final regulations, to clarify that the rule in Regs. Sec. 1.958-1(d) applies only to the particular provision within a Code section or regulation that applies specifically by reference to Sec. 951 951A, or 956(a) rather than the section or regulation in its entirety.

Certain existing final regulations (Regs. Secs. 1.956-1(a)(2)(i), (iii), and (a)(3)(iv)) treat domestic partnerships as entities separate from their partners for purposes of Sec. 956. Because this treatment is inconsistent with the aggregate approach, the final regulations removed these provisions.

The final regulations are effective on their publication in the Federal Register, which is scheduled to occur on Tuesday, Jan. 25.

Proposed regulations

The proposed regulations follow up on Notice 2019-46 issued in August 2019, which envisioned regulations permitting domestic partnerships or S corporations to apply the hybrid approach of Prop. Regs. Sec. 1.951A-5 for tax years ending before June 22, 2019.

The proposed regulations provide guidance regarding the determination of the controlling domestic shareholders of foreign corporations, the owner of a CFC or qualified electing fund that makes an election under Sec. 1411 (net investment income tax), the treatment of S corporations with accumulated earnings and profits under Subpart F, and the determination and inclusion of related-person insurance income.

The proposed regulations generally would apply to tax years beginning on or after the date of their publication as final in the Federal Register, with certain rules having other specified applicability dates or allowing reliance on Notice 2019-46 until the proposed regulations are finalized.

— To comment on this article or to suggest an idea for another article, contact Paul Bonner at

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