2024-09-30
Today we published a chart of PLR 200943004. The entity structure for this ruling was a bit complicated, but the rule being invoked wasn’t that complicated. Prior to TCJA, if a U.S. person owned an interest in a partnership and that partnership owned an interest in a controlled foreign corporation (“CFC”), then the U.S. person could have Subpart F Income inclusions from the CFC flowing up through the partnership.
If that CFC would also qualify as a passive foreign investment company (“PFIC”), because it generated passive income or had passive assets, the CFC overlap rule in section 1297(d) would kick in so that the foreign corporation was not treated as both a CFC and a PFIC -- it would only be treated as a CFC.
Thus, prior to TJCA, partners in a partnership could have Subpart F Income inclusions from a CFC that also satisfied the PFIC passive asset test or passive income test. It didn’t matter how small of an interest the partner owned in the partnership.
These rules changed with the regulations promulgated after TCJA. First, the IRS decided that, for GILTI inclusion purposes, partners directly or indirectly owning less than 10% of the foreign corporation would not have GILTI tested items. TD 9866 . Then, the IRS made it so that for Subpart F Income inclusion purposes, partners directly or indirectly owning less than 10% of the foreign corporation would not have Subpart F Income inclusions. TD 9960. See Reg. 1.958-1(d).
The IRS has issued proposed regulations (REG-118250-20) to deal with situations where a U.S. person indirectly owns less than 10% of a foreign corporation through a domestic partnership (or S corporation) where the foreign corporation meets the PFIC passive assets test or passive income test. These proposed regulations have been criticized by the NYSBA and the AICPA.