On May 14, 2010, the Treasury Department and I.R.S. published Notice 2010-41, indicating that they intend to issue regulations that will classify certain domestic partnerships as foreign partnerships for purposes of identifying the “United States shareholders” of a controlled foreign corporation (“CFC”) that are required to include in gross income the amounts specified under Code § 951(a) (“Subpart F Income”) of such CFC.
On December 29, 2008, the Treasury Department and the I.R.S. issued Notice 2009-7, identifying a “transaction of interest” where a U.S. taxpayer (Taxpayer) wholly owns two CFCs (CFC1 and CFC2), each of which owns 50% of another CFC (CFC3) through a domestic partnership. CFC3 has Subpart F Income. Taxpayer takes the position that it does not have Subpart F Income inclusions with respect to CFC3 because the domestic partnership is the first United States person in the chain of ownership of CFC3.
In Notice 2009-7, the Treasury Department and I.R.S. indicated that they believe that the Taxpayer’s position is contrary to the purpose and intent of Code § 951. Notice 2010-41 indicates that in these circumstances, the regulations will classify the domestic partnership as a foreign partnership solely for purposes of identifying the U.S. shareholders of a CFC required to include Subpart F Income inclusions in income. This reclassification will cause U.S. Taxpayer to be the first U.S. person in the chain of ownership of CFC3, and will therefore require U.S. Taxpayer to include the Subpart F Income in its income.
The regulations will be applicable to taxable years of domestic partnerships ending on or after May 14, 2010.