Section 3. — Instruction 8865 (Schedule K-2 & K-3)

(FDII) Deduction Apportionment Factors

Note: Don’t complete this Section 3 if there are no domestic corporate partners (whether direct or indirect).

This information is relevant to partners to allocate and apportion their FDII deduction under section 250(a)(1)(A) for foreign tax credit limitation purposes. The deduction is definitely related and allocable to the class of gross income included in the partner’s foreign-derived deduction eligible income (FDDEI) (as defined in section 250(b)(4)) and is apportioned within the class, if necessary, ratably between the statutory grouping (or among the statutory groupings) of gross income and the residual grouping of gross income based on the relative amounts of FDDEI in each grouping. See Regulations section 1.861-8(e) (13). If the partner is a member of a consolidated group, see Regulations section 1.861-14(e)(4). Accordingly, this section requires information that its partners use to determine the source and separate category of its income such that partners may allocate and apportion the FDII deduction under section 250(a) (1)(A) for purposes of the foreign tax credit limitation.

Lines 1 and 2. Report the partnership’s foreign-derived gross receipts and cost of goods sold, respectively, by source and separate category.

Lines 3 and 4. Report the partnership’s deductions allocable to foreign-derived gross receipts and other partnership deductions apportioned to foreign-derived gross receipts, respectively. See Part IV, Section 2, lines 11 and 12. Although these deduction amounts are necessary to figure the partner’s FDII deduction, once this amount is determined, the actual FDII deduction itself is allocated and apportioned as described in Regulations section 1.861-8(e)(13).

Column (d). As of the date of these instructions, the only separate category that could be included in column (d) is the section 901(j) category of income. See the Instructions for Form 1118 for the potential countries to be listed with the section 901(j) category of income.