Part IV. Items — Internal Revenue Bulletin 2016-48

Notice of Proposed Rulemaking

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

REG–114734–16

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking

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 handdelivered 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 call).

SUPPLEMENTARY INFORMATION:

Background

In the Rules and Regulations section of this issue of the Bulletin, 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 § 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 § 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 § 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 § 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 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 § 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 § 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 § 1.956–4(b)(2)(iii), the rule in § 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 § 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

Bulletin No. 2016–48 777 November 28, 2016

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 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

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.

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:

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

§ 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

November 28, 2016 778 Bulletin No. 2016–48

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 Exam- ple 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 Regis- ter 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 Regis- ter of the Treasury decision adopting this rule as a final regulation constitutes an acquisition of the property on or after that date.

See § 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.

(Filed by the Office of the Federal Register on October 31, 2016, 4:15 p.m., and published in the issue of the Federal Register for November 03, 2016 81 F.R. 76497)

Partial Withdrawal of Notice of Proposed Rulemaking

Treatment of Related Person Factoring Income; Certain Investments in United States Property; and Stock Redemptions through Related Corporations

REG–122387–16

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Partial withdrawal of notice of proposed rulemaking.

SUMMARY: This document withdraws portions of a notice of proposed rulemaking (INTL–49–86, subsequently converted to REG–209001–86) published in the Federal Register (53 FR 22186) on June 14, 1988, (the 1988 NPRM). The withdrawn portions relate to stock redemptions through related corporations, the application of section 956 to United States property indirectly held by a controlled foreign corporation (CFC), and certain related party factoring transac

tions, as well as the definition of the term “obligation” for purposes of section 956.

DATES: Sections 1.304–4, 1.956–1(b) (4), 1.956–2(d)(2), and 1.956–3(b)(2)(ii) of proposed rules published in the Fed- eral Register on June 14, 1988, are withdrawn as of November 3, 2016.

FOR FURTHER INFORMATION CONTACT: Rose E. Jenkins, (202) 317-6934 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

On June 14, 1988, the Department of Treasury (Treasury Department) and the IRS published in the Federal Register proposed regulations (INTL–49–86, subsequently converted to REG–209001–86, 53 FR 22186), including: (i) proposed 1.304–4, which provides a special rule regarding the use of a related corporation to acquire for property the stock of another commonly owned corporation; (ii) proposed § 1.956–1(b)(4), which describes United States property indirectly held by a CFC for purposes of section 956; (iii) proposed § 1.956–2(d)(2), which sets forth the definition of “obligation” for purposes of section 956; and (iv) proposed § 1.956–3, which provides guidance on the treatment of certain trade or service receivables received in factoring transactions as United States property for purposes of section 956, including rules in proposed § 1.956–3(b)(2)(ii) that address the acquisition of a trade or service receivable by a nominee or pass-through entity. The regulations were proposed by crossreference to temporary regulations in §§ 1.304–4T, 1.956–1T(b)(4), 1.956– 2T(d), and 1.956–3T that were published in the same issue of the Federal Register (TD 8209, 53 FR 22163). This document withdraws certain of these proposed regulations because the rules in the proposed regulations are supplanted by final regulations or other proposed regulations.

Specifically, in the Rules and Regulations section of this issue of the Bulletin, the Treasury Department and the IRS are issuing final regulations that contain rules in § 1.956–1(b) concerning United States property indirectly held by a CFC for purposes of section 956, and rules in § 1.956–3(b)(2)(ii) concerning the acqui

Bulletin No. 2016–48 779 November 28, 2016

sition by a nominee, pass-through entity, or related foreign corporation for purposes of the section 956 rules governing factoring transactions. The final regulations in §§ 1.956–1(b) and 1.956–3(b)(2)(ii) were included in a notice of proposed rulemaking (REG–155164–09) published in the Federal Register on September 2, 2015 (80 FR 53058, as corrected at 80 FR 66485). Thus, the rules in proposed §§ 1.956–1(b)(4) and 1.956–3(b)(2)(ii) provided in the 1988 NPRM are withdrawn. As described in the preamble to the final regulations published in the Rules and Regulations section of this issue of the Bulletin, the remainder of the rules in § 1.956–3 proposed in the 1988 NPRM also are included in the final regulations, with minor modifications.

Additionally, on December 30, 2009, the Treasury Department and the IRS published in the Federal Register proposed regulations (74 FR 69043), which contain in proposed § 1.304–4 special rules regarding the use of related corporations to avoid the application of section 304 that supplant the rules set forth in the 1988 NPRM. On December 26, 2012, final regulations including § 1.304–4 as proposed in 2009 were published in the Federal Register (TD 9606, 77 FR 75844). Accordingly, the rule in the 1988 NPRM that addresses section 304 is withdrawn.

Furthermore, on April 8, 2016, the Treasury Department and the IRS published in the Federal Register proposed regulations (81 FR 20588), which contain in proposed § 1.956–2(d) a definition of obligation for purposes of section 956, as

well as several exceptions from the definition, including those set forth in the 1988 NPRM. Accordingly, the rule in the 1988 NPRM that addresses the definition of obligation is withdrawn.

Partial Withdrawal of a Notice of Proposed Rulemaking

Accordingly, under the authority of 26 U.S.C. 7805, §§ 1.304–4, 1.956–1(b)(4), 1.956–2(d)(2), and 1.956–3(b)(2)(ii) of the notice of proposed rulemaking (INTL–49–86) published in the Federal Register on June 14, 1988, (53 FR 22186) are withdrawn.

John M Dalrymple Deputy Commissioner for Services and Enforcement.

(Filed by the Office of the Federal Register on November 02, 2016, 8:45 a.m., and published in the issue of the Federal Register for November 03, 2016, 81 F.R. 76544)

Deletions From Cumulative List of Organizations, Contributions to Which are Deductible Under Section 170 of the Code

Announcement 2016–41

The Internal Revenue Service has revoked its determination that the organizations listed below qualify as organizations described in sections 501(c)(3) and

170(c)(2) of the Internal Revenue Code of 1986. Generally, the IRS will not disallow deductions for contributions made to a listed organization on or before the date of announcement in the Internal Revenue Bulletin that an organization no longer qualifies. However, the IRS is not precluded from disallowing a deduction for any contributions made after an organization ceases to qualify under section 170(c) (2) if the organization has not timely filed a suit for declaratory judgment under section 7428 and if the contributor (1) had knowledge of the revocation of the ruling or determination letter, (2) was aware that such revocation was imminent, or (3) was in part responsible for or was aware of the activities or omissions of the organization that brought about this revocation.

If on the other hand a suit for declaratory judgment has been timely filed, contributions from individuals and organizations described in section 170(c)(2) that are otherwise allowable will continue to be deductible. Protection under section 7428(c) would begin on November 28, 2016 and would end on the date the court first determines the organization is not described in section 170(c)(2) as more particularly set for in section 7428(c)(1). For individual contributors, the maximum deduction protected is $1,000, with a husband and wife treated as one contributor. This benefit is not extended to any individual, in whole or in part, for the acts or omissions of the organization that were the basis for revocation.

Tri-County Behavioral Health Providers Effective Date of Revocation 1/1/2013

Portland, Oregon

Gregory’s Journey Effective Date of Revocation 7/1/2013

Williamsport, PA

November 28, 2016 780 Bulletin No. 2016–48