United States Property Held by Controlled Foreign Corporations in Transactions Involving Partnerships; Rents and Royalties Derived in the Active Conduct of a Trade or Business, 53058-53068 [2015-21572]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 80, Number 170 (Wednesday, September 2, 2015)]
[Proposed Rules]
[Pages 53058-53068]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-21572]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-155164-09]
RIN 1545-BJ48


United States Property Held by Controlled Foreign Corporations in 
Transactions Involving Partnerships; Rents and Royalties Derived in the 
Active Conduct of a Trade or Business

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking; notice of proposed rulemaking by 
cross-reference to temporary regulation.

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SUMMARY: This document contains proposed regulations that provide rules 
regarding the treatment as United States property of property held by a 
controlled foreign corporation (CFC) in connection with certain 
transactions involving partnerships. In addition, in the Rules and 
Regulations section of this issue of the Federal Register, the 
Department of Treasury (Treasury Department) and the IRS are issuing 
temporary regulations under sections 954 and 956, the text of which 
also serves as the text of certain provisions of these proposed 
regulations. The proposed regulations affect United States shareholders 
of CFCs.

DATES: Written or electronic comments and requests for a public hearing 
must be received by December 1, 2015.

ADDRESSES: Send submissions to: CC:PA:LPD:PR (REG-155164-09), Room 
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-
155164-09), Courier's Desk, Internal Revenue Service, 1111 Constitution 
Avenue NW., Washington, DC, or sent electronically via the Federal 
eRulemaking Portal at https://www.regulations.gov (IRS REG-155164-09).

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 numbers).

SUPPLEMENTARY INFORMATION: 

Background

    This document contains proposed amendments to 26 CFR part 1 under 
section 956. 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 amount 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

[[Page 53059]]

subject. See section 956(a) and Sec.  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. In addition, section 956(d) 
grants the Secretary authority to prescribe regulations pursuant to 
which a CFC that is a pledgor or guarantor of an obligation of a United 
States person is considered to hold the obligation.
    The current regulations under section 956 do not specifically 
address when the obligations of a foreign partnership will be treated 
as United States property. The preamble to proposed regulations under 
section 954(i) (REG-106418-05), published in the Federal Register on 
January 17, 2006 (71 FR 2496), requested comments regarding the 
application of section 956 to loans made by a CFC to a foreign 
partnership in which one or more partners are United States 
shareholders of the CFC. After considering the comments received, the 
Treasury Department and the IRS have determined to issue these 
regulations that propose new rules concerning the treatment of 
obligations of, and United States property held by, a foreign 
partnership for purposes of section 956.
    The temporary regulations in the Rules and Regulations section of 
this issue of the Federal Register amend the Income Tax Regulations (26 
CFR part 1) relating to sections 954 and 956. The text of the temporary 
regulations also serves as the text of certain provisions of the 
proposed regulations herein. The preamble to the temporary regulations 
explains the temporary regulations and the corresponding proposed 
regulations.

Explanation of Provisions

1. Obligations of Foreign Partnerships

A. General Rule
    Comments received in response to the request for comments in the 
preamble to the proposed regulations under section 954(i) recommended 
that the general rule under section 956 should treat an obligation of a 
foreign partnership held by a CFC as an obligation of a foreign person, 
rather than as an obligation of its partners, including any partners 
that are United States persons. Those comments noted that the inclusion 
of a domestic partnership in the definition of a United States person 
in section 7701 causes an obligation of a domestic partnership to be 
treated as an obligation of a United States person for purposes of 
section 956. Based on that observation, the comments asserted that 
section 956 implicitly treats both domestic and foreign partnerships as 
entities, rather than as aggregates of their partners, for purposes of 
determining whether an obligation of a partnership is United States 
property, such that an obligation of a foreign partnership with one or 
more partners that are United States persons should not be treated as 
an obligation of a United States person for purposes of section 956. 
The comments further stated that a general rule that treated an 
obligation of a foreign partnership as an obligation of a foreign 
person, rather than a United States person, would be consistent with 
the purposes of section 956.
    The definition of United States person in section 7701(a)(30) 
includes a domestic partnership, such that an obligation of a domestic 
partnership generally is an obligation of a United States person for 
purposes of section 956. In contrast, section 7701 contains no 
corresponding definition of foreign person that includes a foreign 
partnership, nor any residual definition treating a person that is not 
a United States person as a foreign person. Moreover, section 956 does 
not address the status of an obligation of a foreign partnership as an 
obligation of a United States person or as United States property. 
Section 956(e), however, provides that the Secretary shall prescribe 
such regulations as may be necessary to carry out the purposes of 
section 956, including regulations to prevent the avoidance of section 
956. Additionally, the Code and Regulations alternately treat 
partnerships either as aggregates of their partners or as entities, 
depending on the context and relevant policy considerations. For 
example, current law under section 956 employs both approaches with 
regard to domestic partnerships, applying an aggregate approach with 
respect to United States property held through a domestic partnership 
and an entity approach with respect to the obligations of a domestic 
partnership.
    Section 956 is intended to prevent a United States shareholder of a 
CFC from inappropriately deferring U.S. taxation of CFC earnings and 
profits by ``prevent[ing] the repatriation of income to the United 
States in a manner which does not subject it to U.S. taxation.'' H.R. 
Rep. No. 87-1447, 87th Cong., 2d Sess., at 58 (1962). In the absence of 
section 956, a United States shareholder of a CFC could access the 
CFC's funds (untaxed earnings and profits) in a variety of ways other 
than by the payment of an actual taxable dividend, such that there 
would be no reason for the United States shareholder to incur the 
dividend tax. Section 956 ensures that, to the extent CFC earnings are 
made available for use in the United States or for use by the United 
States shareholder, the United States shareholder of the CFC is subject 
to current U.S. taxation with respect to such amounts. Accordingly, 
under section 956, the investment by a CFC of its earnings and profits 
in United States property is ``taxed to the [CFC's] shareholders on the 
grounds that this is substantially the equivalent of a dividend.'' S. 
Rep. No. 87-1881, 87th Cong., 2d Sess., at 88 (1962).
    The Treasury Department and the IRS have determined that failing to 
treat an obligation of a foreign partnership as an obligation of its 
partners could allow deferral of U.S. taxation of CFC earnings and 
profits in a manner inconsistent with the purposes of section 956. When 
a United States shareholder can conduct operations through a foreign 
partnership using deferred CFC earnings, those earnings effectively 
have been made available to the United States shareholder. 
Additionally, because assets of a partnership generally are available 
to the partners without additional U.S. tax, a United States 
shareholder potentially could directly access deferred CFC earnings 
lent to a foreign partnership in which the United States shareholder is 
a partner without those earnings becoming subject to current U.S. tax 
by causing the partnership to make a distribution.
    In light of these considerations, these proposed regulations treat 
an obligation of a foreign partnership as an obligation of its partners 
for purposes of section 956, subject to the exception described in Part 
I.B of this preamble for obligations of foreign partnerships in which 
neither the lending CFC nor any person related to the lending CFC is a 
partner. More specifically, proposed Sec.  1.956-4(c)(1) generally 
treats an obligation of a foreign partnership as an obligation of the 
partners to the extent of each partner's share of the obligation as 
determined in accordance with the partner's interest in partnership 
profits. The Treasury Department and the IRS have considered various 
methods for determining a partner's share of a partnership obligation, 
including the regulations under section 752 for determining a partner's 
share of partnership liabilities, the partner's liquidation value 
percentage (discussed in Part 3 of this preamble), and the partner's 
interest in partnership profits. Using the partner's interest in 
partnership profits to determine a partner's share of a partnership 
obligation is consistent with the observation that, to the extent the

[[Page 53060]]

proceeds of a partnership borrowing are used by the partnership to 
invest in profit-generating activities, partners in the partnership 
(including service partners with limited or no partnership capital) 
will benefit from the partnership obligation to the extent of their 
interests in the partnership profits. Taking this into account along 
with considerations of administrability, the Treasury Department and 
the IRS believe that it is appropriate to determine a partner's share 
of a foreign partnership's obligation in accordance with the partner's 
interest in partnership profits. However, the Treasury Department and 
the IRS solicit comments on whether the liquidation value percentage 
method or another method would be a more appropriate basis for 
determining a partner's share of a foreign partnership's obligation.
    The determination of a partner's share of the obligation will be 
made as of the close of each quarter of the CFC's taxable year in 
connection with the calculation of the amount of United States property 
held by the CFC for purposes of section 956(a)(1)(B). Thus, for 
example, if a partner in a foreign partnership is a United States 
shareholder of a CFC, an obligation of the partnership that is held by 
the CFC will be treated as United States property (subject to the 
exception described in Part 1.B of this preamble for obligations of 
foreign partnerships in which neither the lending CFC nor any person 
related to the lending CFC is a partner) to the extent of the United 
States shareholder partner's share of the obligation as determined in 
accordance with the partner's interest in partnership profits as of the 
close of each quarter of the CFC's taxable year.
    The general rule in proposed Sec.  1.956-4(c)(1) also applies to 
determine the extent to which a CFC guarantees or otherwise supports an 
obligation of a related United States person when the related United 
States person is a partner in a foreign partnership that incurred the 
obligation that is the subject of the CFC's credit enhancement. 
Likewise, if a CFC is a partner in a foreign partnership that owns 
property that would be United States property if held by the CFC, and 
the property is subject to a liability that would constitute a specific 
charge within the meaning of Sec.  1.956-1(e)(1), the CFC's share of 
the liability, as determined under proposed Sec.  1.956-4(c)(1), would 
be treated as a specific charge that, under Sec.  1.956-1(e)(1), could 
reduce the amount taken into account by the CFC in determining the 
amount of its share of the United States property, as determined under 
proposed Sec.  1.956-4(b).
    One commenter asserted that if a United States shareholder of a CFC 
is a partner in a foreign partnership and is treated as having an 
inclusion under section 956 when the CFC makes a loan to the 
partnership, as can occur under these proposed regulations, and that 
partner later receives an actual distribution from the partnership, the 
partner could have an inappropriate second inclusion when it is deemed 
to receive a distribution from the partnership upon the partnership's 
repayment of the loan. The second inclusion in this fact pattern could 
arise under subchapter K to the extent the partner is required to 
reduce its basis in its partnership interest under section 733 on the 
actual distribution and again reduce its basis as a result of a deemed 
distribution under section 752(b) when its share of the loan is repaid. 
If the distributions exceed the partner's basis in its partnership, 
including the increase to basis under section 752(a) when the 
partnership originally undertook the obligation, the partner could 
recognize gain under section 731. The commenter suggested that having 
inclusions under both section 956 and subchapter K in this fact pattern 
is inappropriate and that changes should be made to the subchapter K 
rules to prevent this result.
    The Treasury Department and the IRS have determined that these 
proposed regulations and the existing rules under subchapter K and 
section 959 provide the appropriate result in the fact pattern 
described in the comment. The potential for gain under subchapter K in 
the fact pattern exists regardless of the application of section 956. 
The required inclusion under these proposed regulations to the extent a 
CFC is treated as holding an obligation of a United States person 
reflects policy considerations distinct from the policy considerations 
underlying the potential results under subchapter K. Moreover, in the 
fact pattern, the United States property held by the CFC in connection 
with its loan to the partnership generates previously taxed earnings 
and profits described in section 959(c)(1)(A) that, in general, are 
available for distribution by the CFC to its United States shareholder 
without further U.S. tax on the distributed amount. Accordingly, these 
proposed regulations do not include rules under subchapter K to address 
this comment.
B. Exception for Obligations of Partnerships in Which Neither the 
Lending CFC Nor Any Person Related to the Lending CFC Is a Partner
    The Treasury Department and the IRS have determined that certain 
obligations of foreign partnerships should not be treated as United 
States property. Under section 956(c)(2)(L), obligations of a domestic 
partnership are excluded from the definition of United States property 
if neither the CFC nor any related person (as defined in section 
954(d)(3)) is a partner in the domestic partnership immediately after 
the acquisition by the CFC of any obligation of the partnership. The 
Treasury Department and the IRS have determined that the policy 
considerations underlying this rule are also relevant for comparable 
foreign partnerships. See H.R. Conf. Rep. No. 108-755, 108th Cong., 2d 
Sess., at 391 (2004); H.R. Rep. No. 108-548, 108th Cong., 2d Sess., at 
198 (2004); S. Rep. No 108-192, 108th Cong., 1st Sess., at 46 (2003). 
Accordingly, proposed Sec.  1.956-4(c)(2) provides that an obligation 
of a foreign partnership is treated as an obligation of the foreign 
partnership (and not as an obligation of its partners) for purposes of 
determining whether a CFC holds United States property if neither the 
CFC nor any person related to the CFC (within the meaning of section 
954(d)(3)) is a partner in the partnership.
C. Special Obligor Rule in the Case of Certain Distributions
    The proposed regulations include a special rule that increases the 
amount of a foreign partnership obligation that is treated as United 
States property under the general rule when the following requirements 
are satisfied: (i) a CFC lends funds (or guarantees a loan) to a 
foreign partnership whose obligation is, in whole or in part, United 
States property with respect to the CFC pursuant to proposed Sec.  
1.956-4(c)(1); (ii) the partnership distributes the proceeds to a 
partner that is related to the CFC (within the meaning of section 
954(d)(3)) and whose obligation would be United States property if held 
by the CFC; (iii) the foreign partnership would not have made the 
distribution but for a funding of the partnership through an obligation 
held (or treated as held) by the CFC; and (iv) the distribution exceeds 
the partner's share of the partnership obligation as determined in 
accordance with the partner's interest in partnership profits. When 
these requirements are satisfied, proposed Sec.  1.956-4(c)(3) provides 
that the amount of the partnership obligation that is treated as an 
obligation of the distributee partner (and thus as United States 
property held by the CFC) is the lesser of the amount of the 
distribution that would not have been made but for the funding of the 
partnership and the amount of the partnership obligation.

[[Page 53061]]

For example, assume a United States shareholder of a CFC that is 
related to the CFC within the meaning of section 954(d)(3) has a 60 
percent interest in the profits of a foreign partnership and the CFC 
lends $100 to the partnership. If the partnership, in turn, distributes 
$100 to the United States shareholder in a distribution that would not 
have been made but for the funding by the CFC, the CFC will be treated 
as holding United States property in the amount of $100.
    Section 1.956-1T(b)(5) of the temporary regulations published 
elsewhere in the Rules and Regulations section of this issue of the 
Federal Register under section 956 also addresses the funded 
distribution fact pattern discussed above. That temporary rule also 
provides that the obligation of the foreign partnership is treated as 
an obligation of the distributee partner when similar conditions are 
satisfied. The Treasury Department and the IRS expect to withdraw Sec.  
1.956-1T(b)(5) as unnecessary when proposed Sec.  1.956-4(c), including 
Sec.  1.956-4(c)(3), is adopted as a final regulation.

2. Pledges and Guarantees

    Existing Sec.  1.956-2(c)(1) provides that, subject to an 
exception, any obligation of a United States person with respect to 
which a CFC is a pledgor or guarantor is considered for purposes of 
section 956 to be United States property held by the CFC. In order to 
better align the regulations with the statutory text of section 956(d), 
these regulations propose to revise Sec.  1.956-2(c)(1) to clarify that 
a CFC that is a pledgor or guarantor of an obligation of a United 
States person is treated as holding the obligation. Accordingly, under 
the proposed rule, the general exceptions to the definition of United 
States property would apply to the obligation treated as held by the 
CFC.
A. Pledges and Guarantees of Foreign Partnership Obligations by CFCs
    These proposed regulations provide that the pledge and guarantee 
rules under Sec.  1.956-2(c) apply to a CFC that directly or indirectly 
guarantees an obligation of a foreign partnership that is treated as an 
obligation of a United States person under proposed Sec.  1.956-4(c). 
Accordingly, if an obligation of a foreign partnership is treated as an 
obligation of a United States person pursuant to proposed Sec.  1.956-
4(c) and a CFC directly or indirectly guarantees the partnership 
obligation, the CFC will be treated as holding an obligation of the 
United States person.
B. Pledges and Guarantees of United States Persons' Obligations by 
Domestic or Foreign Partnerships
    These proposed regulations extend the pledge and guarantee rule in 
Sec.  1.956-2(c)(1) to pledges and guarantees made by partnerships. 
Thus, proposed Sec.  1.956-2(c)(1) provides that a partnership that 
guarantees an obligation of a United States person will be treated as 
holding the obligation for purposes of section 956. As a result, as 
discussed in Parts 2.D and 3 of this preamble, proposed Sec.  1.956-
4(b) will then treat the partners of the partnership that is the 
pledgor or guarantor as holding shares of that obligation. For example, 
if a partnership with one CFC partner guarantees an obligation of the 
CFC's United States shareholder, the CFC will be treated as holding a 
share of the obligation under proposed Sec. Sec.  1.956-1(e)(2), 1.956-
2(c)(1), and 1.956-4(b).
    Under current Sec.  1.956-2(c)(2), a CFC is treated as a pledgor or 
guarantor of an obligation of a United States person if its assets 
serve at any time, even though indirectly, as security for the 
performance of the obligation. Consistent with this rule, a partnership 
should be considered a pledgor or guarantor of an obligation of a 
United States person if the partnership's assets serve indirectly as 
security for the performance of the obligation, for example, because 
the partnership agrees to purchase the obligation at maturity if the 
United States person does not repay it. Thus, proposed Sec.  1.956-
2(c)(2) applies the indirect pledge or guarantee rule to domestic and 
foreign partnerships.
    In the case of a partnership that is considered a pledgor or 
guarantor of an obligation under proposed Sec.  1.956-2(c)(2), however, 
it would not be appropriate to separately apply Sec.  1.956-2(c)(2) 
directly to a CFC partner in the partnership to treat the partner as a 
pledgor or guarantor (in addition to treating the partnership as a 
pledgor or guarantor) solely as a result of the partnership's indirect 
pledge or guarantee. Therefore, proposed Sec.  1.956-2(c)(2) provides 
that when a partnership is considered a pledgor or guarantor of an 
obligation, a CFC that is a partner in the partnership will not be 
treated as a pledgor or guarantor of the obligation solely as a result 
of its ownership of an interest in the partnership. Accordingly, the 
CFC will be treated under proposed Sec.  1.956-4(b) as holding its 
share of the obligation to which the pledge or guarantee relates as 
described in Part 2.D of this preamble but will not also be treated as 
a separate indirect pledgor or guarantor of the obligation. As a 
result, the CFC will not be treated as holding more than its share of 
the obligation, as determined under Sec.  1.956-4(b).
C. Pledges and Guarantees of United States Persons' Obligations by CFC 
Partners
    As discussed in Part 1.A of this preamble, under proposed Sec.  
1.956-4(c) an obligation of a foreign partnership generally is treated 
as an obligation of the partners in the partnership. In addition, as 
discussed in Part 3 of this preamble, a partner in a partnership is 
treated as holding its attributable share of property held by the 
partnership. The application of these two rules and the proposed 
indirect pledge or guarantee rule could create uncertainty. For 
example, if a CFC and a related United States person were the only 
partners in a foreign partnership that borrowed from a person unrelated 
to the partners, an issue could arise as to whether the partnership 
assets attributed to the CFC under proposed Sec.  1.956-4(b) are 
considered under proposed Sec.  1.956-2(c)(2) to indirectly serve as 
security for the performance of the portion of the partnership 
obligation that is treated as an obligation of the United States person 
under proposed Sec.  1.956-4(c).
    A CFC that is a partner in a partnership should not be treated as a 
pledgor or guarantor of an obligation of the partnership merely because 
the CFC partner is treated under proposed Sec.  1.956-4(b) as owning a 
portion of the partnership assets that support an obligation that is 
allocated under proposed Sec.  1.956-4(c) to a partner that is a United 
States person. Accordingly, proposed Sec.  1.956-4(d) provides that, 
for purposes of section 956 and proposed Sec.  1.956-2(c)(2), if a CFC 
is a partner in a partnership, the attribution of the assets of the 
partnership to the CFC under proposed Sec.  1.956-4(b) does not in and 
of itself give rise to an indirect pledge or an indirect guarantee of 
an obligation of the partnership that is allocated under proposed Sec.  
1.956-4(c) to a partner that is a United States person. This rule is 
consistent with the new rule under proposed Sec.  1.956-2(c)(2) 
providing that a CFC that is a partner in a partnership will not be 
treated, solely as a result of its interest in the partnership, as a 
pledgor or guarantor of an obligation with respect to which the 
partnership is considered to be a pledgor or guarantor. However, as 
under current law, the determination of whether a CFC's assets serve as 
security for the performance of an obligation for purposes of proposed 
Sec.  1.956-2(c)(2) is based on all of the facts and circumstances. In 
appropriate

[[Page 53062]]

circumstances, the existence of other factors, such as the use of 
proceeds from a partnership borrowing, the use of partnership assets as 
security for a partnership borrowing, or special allocations of 
partnership income or gain, may result in a CFC partner being 
considered a pledgor or guarantor of an obligation of the partnership 
pursuant to proposed Sec.  1.956-2(c)(2) when taken into account in 
conjunction with the attribution of the assets of the partnership to 
the CFC.
D. Amount Taken Into Account With Respect to Pledges or Guarantees
    Under existing Sec.  1.956-1(e)(2), the amount taken into account 
by a CFC in determining the amount of its United States property with 
respect to a pledge or guarantee described in Sec.  1.956-2(c)(1) is 
the unpaid principal amount of the obligation with respect to which the 
CFC is a pledgor or guarantor. In connection with the proposed revision 
to Sec.  1.956-2(c)(1), which treats a partnership as holding an 
obligation with respect to which it is a pledgor or guarantor (as 
discussed in Part 2.B of this preamble), these regulations propose to 
revise Sec.  1.956-1(e)(2) to also apply in cases in which partnerships 
are pledgors or guarantors of an obligation.
    Accordingly, under proposed Sec.  1.956-1(e)(2), as under current 
law, each pledgor or guarantor is treated as holding the entire unpaid 
principal amount of the obligation to which its pledge or guarantee 
relates. As a result, in cases in which there are, with respect to a 
single obligation, multiple pledgors or guarantors that are CFCs or 
partnerships in which a CFC is a partner, the aggregate amount of 
United States property treated as held by CFCs may exceed the unpaid 
principal amount of the obligation. To the extent that the CFCs have 
sufficient earnings and profits, there could be multiple section 951 
inclusions with respect to the same obligation that exceed, in the 
aggregate, the unpaid principal amount of the obligation.
    The Treasury Department and the IRS are considering whether to 
exercise the authority granted under section 956(e) to prescribe 
regulations as may be necessary to carry out the purposes of section 
956 to allocate the amount of the obligation among the relevant CFCs so 
as to eliminate the potential for multiple inclusions and, instead, 
limit the aggregate inclusions to the unpaid principal amount of the 
obligation. Comments are requested on whether the Treasury Department 
and the IRS should adopt such a limitation, and if such a limitation 
were adopted, on methods to implement the limitation. One approach to 
implementing such a limitation would be to allow a taxpayer to allocate 
the unpaid principal amount of the obligation among the guarantor CFCs 
and partnerships based on any consistently applied, reasonable method 
selected by the taxpayer that results in aggregate section 951 
inclusions equal to the unpaid principal amount.
    Alternatively, the Treasury Department and the IRS could seek to 
establish a generally applicable method for allocating the unpaid 
principal amount of the obligation among the various guarantors. 
Allocating the unpaid principal amount of the obligation among multiple 
CFCs and partnerships in accordance with their available credit 
capacities measured, for example, by the relative net values of their 
assets might be broadly consistent with a creditor's analysis of the 
support for the obligation, but such an approach would give rise to 
administrability concerns. A more administrable option would be to 
require taxpayers to allocate the unpaid principal amount of the 
obligation based on the earnings and profits of the CFCs that are 
treated as holding the obligation (or portion thereof). Several 
allocation methods based on earnings and profits are possible, 
including methods that allocate the unpaid principal amount of the 
obligation: (i) to all of the CFCs in accordance with their applicable 
earnings; (ii) to all of the CFCs in accordance with their earnings and 
profits described in section 959(c)(3); or (iii) first to the CFCs with 
only earnings and profits described in section 959(c)(3) (in accordance 
with their section 959(c)(3) earnings and profits), and then to the 
remainder of the CFCs, based on applicable earnings. All of these 
approaches could result in aggregate section 951 inclusions (for the 
year) totaling less than the unpaid principal amount of the obligation 
(for example, where one or more CFCs has previously taxed earnings and 
profits that reduce its section 951 inclusion).
    In considering the options, the Treasury Department and the IRS 
will consider whether it is appropriate to select a method that could 
result in aggregate section 951 inclusions for a year totaling less 
than the unpaid principal amount of the obligation, the extent to which 
a particular method creates planning opportunities inconsistent with 
the policies underlying sections 956 and 959, and how administrable and 
effective the method is over multiple years. In particular, the 
Treasury Department and the IRS are concerned that certain proration 
methods could create an incentive for taxpayers to include as 
additional pledgors or guarantors of an obligation CFCs with 
substantial amounts of previously taxed earnings and profits, solely to 
allocate substantial portions of the obligation to these CFCs and 
thereby minimize the current section 951 inclusions. There are also a 
number of complexities that could affect the application of a rule that 
limits multiple inclusions, including differences in taxable years 
among the relevant CFCs and fluctuations in the unpaid principal amount 
of the obligation as well as the earnings and profits of the CFCs. The 
Treasury Department and the IRS request that comments on potential 
allocation methods address the issues described in this paragraph.

3. Partnership Property Indirectly Held by a CFC Partner

    Under current Sec.  1.956-2(a)(3), if a CFC is a partner in a 
partnership that holds property that would be United States property if 
held directly by the CFC partner, the CFC partner is treated as holding 
an interest in the property based on its interest in the partnership. 
These proposed regulations provide rules on the determination of the 
amount that the CFC partner is treated as holding under this rule, 
which is redesignated in these proposed regulations as proposed Sec.  
1.956-4(b).
    Under proposed Sec.  1.956-4(b), a CFC partner will be treated as 
holding its share of partnership property determined in accordance with 
the CFC partner's liquidation value percentage, taking into account any 
special allocation of income, or, where appropriate, gain from that 
property that is not disregarded or reallocated under section 704(b) or 
any other Code section, regulation, or judicial doctrine and that does 
not have a principal purpose of avoiding the purposes of section 956. 
See Sec.  1.704-1(b)(1)(iii). This rule serves, in general, as a 
reasonable measure of a partner's interest in property held by a 
partnership because it generally results 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.
    These proposed regulations include examples illustrating the 
application of this proposed rule, including an example that 
illustrates a case in which it is appropriate to take into account a 
special allocation of gain because the property is anticipated to 
appreciate in value but generate relatively little income. Although, 
proposed Sec.  1.956-4(b) would apply only to property

[[Page 53063]]

acquired on or after publication in the Federal Register of the 
Treasury decision adopting the rule as a final regulation, it generally 
would be reasonable to use the method set forth in proposed Sec.  
1.956-4(b) to determine a partner's interest in property acquired prior 
to finalization.
    Although the method provided by proposed Sec.  1.956-4(b) generally 
should reflect a partner's economic interest in partnership property, 
the Treasury Department and the IRS solicit comments on whether there 
may be situations in which the method would not reflect the partners' 
economic interest in the partnership or its property, and, if so, 
whether there are alternative measures or rules to better address such 
circumstances. Furthermore, the Treasury Department and the IRS solicit 
comments on whether a single method should be used as the general rule 
for determining both a partner's share of a partnership obligation (as 
determined under proposed Sec.  1.956-4(c)), discussed in Part 1.A of 
this preamble) and a partner's share of partnership assets, and, if so, 
whether the appropriate measure would be a partner's interest in 
partnership profits, a partner's liquidation value percentage, or an 
alternative measure.

4. Trade or Service Receivables Acquired From Related United States 
Persons

    Section 956(c)(3) provides that United States property generally 
includes trade or service receivables acquired from a related United 
States person in a factoring transaction when the obligor with respect 
to the receivables is a United States person. Section 1.956-3T(b)(2) 
provides rules for determining whether a trade or service receivable 
has been indirectly acquired from a related United States person for 
purposes of section 956(c)(3). These provisions include a rule that 
applies to receivables held on a CFC's behalf by a partnership in which 
the CFC owns (directly or indirectly) a beneficial interest. See Sec.  
1.956-3T(b)(2)(ii)(A). This rule is similar to the rule in both current 
Sec.  1.956-2(a)(3) and proposed Sec.  1.956-4(b). Section 1.956-
3T(b)(2) also includes a rule that applies to receivables held on a 
CFC's behalf by another foreign corporation controlled by the CFC if 
one of the principal purposes for creating, organizing, or funding such 
other foreign corporation (through capital contributions or debt) is to 
avoid the application of section 956. See Sec.  1.956-3T(b)(2)(ii)(B). 
This rule is similar to a rule in Sec.  1.956-1T(b)(4).
    The Treasury Department and the IRS have determined that the rules 
in Sec.  1.956-3T(b)(2)(ii) applicable to factoring transactions 
involving partnerships should be consistent with the rules provided in 
Sec.  1.956-1T(b)(4) and proposed Sec.  1.956-4(b), which generally 
apply when partnerships own property that would be United States 
property in the hands of a CFC partner. Accordingly, these proposed 
regulations propose to revise the rules governing factoring 
transactions so that rules similar to the rules in current Sec.  1.956-
1T(b)(4) and proposed Sec.  1.956-4(b) apply to factoring transactions 
involving partnerships. These proposed regulations also propose to 
revise the rules governing factoring transactions to remove the 
reference to S corporations, which are treated as partnerships for 
purposes of subpart F, including section 956. See section 1373(a).

5. Obligations of Disregarded Entities and Domestic Partnerships

    The Treasury Department and the IRS understand that issues have 
arisen as to the proper treatment under section 956 of obligations of 
entities that are disregarded as entities separate from their owner for 
federal tax purposes. Accordingly, these proposed regulations state 
explicitly in proposed Sec.  1.956-2(a)(3) that, for purposes of 
section 956, an obligation of a disregarded entity is treated as an 
obligation of the owner of the disregarded entity. Thus, for example, 
an obligation of a disregarded entity that is owned by a domestic 
corporation is treated as an obligation of the domestic corporation for 
purposes of section 956. The rule in proposed Sec.  1.956-2(a)(3) 
follows from the application of the entity classification rules of 
Sec.  301.7701-3 and is therefore not a change from current law.
    In addition, proposed Sec.  1.956-4(e) confirms that, for purposes 
of section 956, an obligation of a domestic partnership is an 
obligation of a United States person, regardless of whether the 
partners in the partnership are United States persons. Under section 
956(c)(1)(C), an obligation of a United States person generally is 
United States property for purposes of section 956 unless an exception 
in section 956(c)(2) applies to the obligation. For example, as noted 
in Part 1.B of this preamble, section 956(c)(2)(L) would apply to 
exclude an obligation of a domestic partnership held by a CFC from the 
definition of United States property if neither the CFC nor a person 
related to the CFC (within the meaning of section 954(d)(3)) were a 
partner in the partnership.

6. Proposed Effective/Applicability Dates

    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 these rules as final 
regulations, and taxable years of United States shareholders in which 
or with which such taxable years end. Most of these rules are proposed 
to apply to property acquired, or pledges or guarantees entered into, 
on or after September 1, 2015, including property considered acquired, 
or pledges or guarantees considered entered into, on or after September 
1, 2015 as a result of a deemed exchange pursuant to section 1001. See 
proposed Sec.  1.956-4(c) (dealing with obligations of foreign 
partnerships, described in Part 1 of this preamble); proposed 
Sec. Sec.  1.956-2(c), 1.956-4(d), and 1.956-1(e)(2) (dealing with 
pledges or guarantees, including pledges or guarantees either by a 
partnership or with respect to obligations of a foreign partnership, 
described in Part 2 of this preamble); and proposed Sec.  1.956-3 
(dealing with trade or service receivables acquired from related United 
States persons, described in Part 4 of this preamble). Two rules, 
however, are proposed to apply to obligations held on or after the date 
of publication in the Federal Register of the Treasury decision 
adopting these rules as final regulations. See proposed Sec. Sec.  
1.956-2(a)(3) and 1.956-4(e) (dealing with obligations of disregarded 
entities and domestic partnerships, respectively, described in Part 5 
of this preamble). Finally, proposed Sec.  1.956-4(b) (dealing with 
partnership property indirectly held by a CFC, described in Part 3 of 
this preamble) is proposed to apply to property acquired on or after 
the date of publication in the Federal Register of the Treasury 
decision adopting these rules as final regulations. No inference is 
intended as to the application of the provisions proposed to be amended 
by these proposed regulations under current law, including in 
transactions involving obligations of foreign partnerships. The IRS 
may, where appropriate, challenge transactions under currently 
applicable Code or regulatory provisions or judicial doctrines.

Special Analyses

    Certain IRS regulations, including this one, 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

[[Page 53064]]

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. Treasury 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 authors of these proposed regulations are Barbara E. 
Rasch and 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.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding 
entries in numerical order to read in part as follows:

    Authority:  26 U.S.C. 7805.
* * * * *

    Section 1.956-1 also issued under 26 U.S.C. 956(d) and 956(e).
    Section 1.956-2 also issued under 26 U.S.C. 956(d) and 956(e).
    Section 1.956-3 also issued under 26 U.S.C. 864(d)(8) and 
956(e).
    Section 1.956-4 also issued under 26 U.S.C. 956(d) and 956(e).

* * * * *
0
Par. 2. Section 1.954-2 is amended by revising paragraphs (c)(1)(i), 
(c)(1)(iv), (c)(2)(ii), (c)(2)(iii)(E), (c)(2)(viii), (d)(1)(i) and 
(ii), (d)(2)(ii), (d)(2)(iii)(E), (d)(2)(v), and (j) to read as 
follows:


Sec.  1.954-2  Foreign personal holding company income.

* * * * *
    (c) * * *
    (1) * * *
    (i) [The text of proposed amendments to Sec.  1.954-2(c)(1)(i) is 
the same as the text of Sec.  1.954-2T(c)(1)(i) published elsewhere in 
this issue of the Federal Register].
* * * * *
    (iv) [The text of proposed amendments to Sec.  1.954-2(c)(1)(iv) is 
the same as the text of Sec.  1.954-2T(c)(1)(iv) published elsewhere in 
this issue of the Federal Register].
    (2) * * *
    (ii) [The text of proposed amendments to Sec.  1.954-2(c)(2)(ii) is 
the same as the text of Sec.  1.954-2T(c)(2)(ii) published elsewhere in 
this issue of the Federal Register].
    (iii) * * *
    (E) [The text of proposed amendments to Sec.  1.954-2(c)(2)(iii)(E) 
is the same as the text of Sec.  1.954-2T(c)(2)(iii)(E) published 
elsewhere in this issue of the Federal Register].
* * * * *
    (viii) [The text of proposed amendments to Sec.  1.954-
2(c)(2)(viii) is the same as the text of Sec.  1.954-2T(c)(2)(viii) 
published elsewhere in this issue of the Federal Register].
* * * * *
    (d) * * *
    (1) * * *
    (i) [The text of proposed amendments to Sec.  1.954-2(d)(1)(i) is 
the same as the text of Sec.  1.954-2T(d)(1)(i) published elsewhere in 
this issue of the Federal Register].
    (ii) [The text of proposed amendments to Sec.  1.954-2(d)(1)(ii) is 
the same as the text of Sec.  1.954-2T(d)(1)(ii) published elsewhere in 
this issue of the Federal Register].
    (2) * * *
    (ii) [The text of proposed amendments to Sec.  1.954-2(d)(2)(ii) is 
the same as the text of Sec.  1.954-2T(d)(2)(ii) published elsewhere in 
this issue of the Federal Register].
    (iii) * * *
    (E) [The text of proposed amendments to Sec.  1.954-2(d)(2)(iii)(E) 
is the same as the text of Sec.  1.954-2T(d)(2)(iii)(E) published 
elsewhere in this issue of the Federal Register].
* * * * *
    (v) [The text of proposed amendments to Sec.  1.954-2(d)(2)(v) is 
the same as the text of Sec.  1.954-2T(d)(2)(v) published elsewhere in 
this issue of the Federal Register].
* * * * *
    (j) [The text of proposed amendments to Sec.  1.954-2(j) is the 
same as the text of Sec.  1.954-2T(j) published elsewhere in this issue 
of the Federal Register].

0
Par. 3. Section 1.956-1 is amended by revising paragraphs (b)(4) and 
(5), (e)(2), and (g), to read as follows:


Sec.  1.956-1  Shareholder's pro rata share of a controlled foreign 
corporation's increase in earnings invested in United States property.

* * * * *
    (b) * * *
    (4) [The text of proposed amendments to Sec.  1.956-1(b)(4) is the 
same as the text of Sec.  1.956-1T(b)(4) published elsewhere in this 
issue of the Federal Register].
    (5) [The text of proposed amendments to Sec.  1.956-1(b)(5) is the 
same as the text of Sec.  1.956-1T(b)(5) published elsewhere in this 
issue of the Federal Register].
* * * * *
    (e) * * *
    (2) Rule for pledges and guarantees. For purposes of this section, 
the amount of an obligation treated as held (before application of 
Sec.  1.956-4(b)) as a result of a pledge or guarantee described in 
Sec.  1.956-2(c) is the unpaid principal amount of the obligation on 
the applicable determination date.
* * * * *
    (g) through (g)(2) [The text of proposed amendments to Sec.  1.956-
1(g) through (g)(2) is the same as the text of Sec.  1.956-1T(g) 
through (g)(2) published elsewhere in this issue of the Federal 
Register].
    (3) Paragraph (e)(2) of this section applies 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 pledges or guarantees entered into on or after September 1, 
2015. For purposes of this paragraph (g)(3), a pledgor or guarantor is 
treated as entering into a pledge or guarantee when there is a 
significant modification, within the meaning of Sec.  1.1001-3(e), of 
an obligation with respect to which it is a pledgor or guarantor on or 
after September 1, 2015.
* * * * *
0
Par. 4. Section 1.956-2 is amended by:
0
a. Revising paragraphs (a)(3) and (c)(1) and (2).

[[Page 53065]]

0
b. Adding Example 4 to paragraph (c)(3);
0
c. Adding reserved paragraph (g); and
0
d. Adding paragraph (h).
    The revisions and additions read as follows:


Sec.  1.956-2  Definition of United States property.

    (a) * * *
    (3) Treatment of disregarded entities. For purposes of section 956, 
an obligation of a business entity (as defined in Sec.  301.7701-2(a) 
of this chapter) that is disregarded as an entity separate from its 
owner for federal tax purposes under Sec. Sec.  301.7701-1 through 
301.7701-3 of this chapter is treated as an obligation of its owner.
* * * * *
    (c) * * * (1) General rule. Except as provided in paragraph (c)(4) 
of this section, for purposes of section 956, any obligation of a 
United States person with respect to which a controlled foreign 
corporation or a partnership is a pledgor or guarantor will be 
considered to be held by the controlled foreign corporation or the 
partnership, as the case may be. See Sec.  1.956-1(e)(2) for rules that 
determine the amount of the obligation treated as held by a pledgor or 
guarantor under this paragraph (c). For rules that treat an obligation 
of a foreign partnership as an obligation of the partners in the 
foreign partnership for purposes of section 956, see Sec.  1.956-4(c).
    (2) Indirect pledge or guarantee. If the assets of a controlled 
foreign corporation or a partnership serve at any time, even though 
indirectly, as security for the performance of an obligation of a 
United States person, then, for purposes of paragraph (c)(1) of this 
section, the controlled foreign corporation or partnership will be 
considered a pledgor or guarantor of that obligation. If a partnership 
is considered a pledgor or guarantor of an obligation, a controlled 
foreign corporation that is a partner in the partnership will not also 
be treated as a pledgor or guarantor of the obligation solely as a 
result of its ownership of an interest in the partnership. For purposes 
of this paragraph, a pledge of stock of a controlled foreign 
corporation representing at least 66 2/3 percent of the total combined 
voting power of all classes of voting stock of such corporation will be 
considered an indirect pledge of the assets of the controlled foreign 
corporation if the pledge is accompanied by one or more negative 
covenants or similar restrictions on the shareholder effectively 
limiting the corporation's discretion to dispose of assets and/or incur 
liabilities other than in the ordinary course of business. See Sec.  
1.956-4(d) for guidance on the treatment of indirect pledges or 
guarantees of an obligation of a partnership attributed to its partners 
under Sec.  1.956-4(c).
    (3) * * *
* * * * *
    Example 4.  (i) Facts. USP, a domestic corporation, owns 70% of 
the stock of FS, a controlled foreign corporation, and a 90% 
interest in FPRS, a foreign partnership. X, an unrelated foreign 
person, owns 30% of the stock of FS. Y, an unrelated foreign person, 
owns a 10% interest in FPRS. There are no special allocations in the 
FPRS partnership agreement. FPRS borrows $100x from Z, an unrelated 
person. FS pledges its assets as security for FPRS's performance of 
its obligation to repay the $100x loan. USP's share of the $100x 
FPRS obligation, determined in accordance with its interest in 
partnership profits, is $90x. Under Sec.  1.956-4(c), $90x of the 
FPRS obligation is treated as an obligation of USP for purposes of 
section 956.
    (ii) Result. For purposes of section 956, under paragraph (c)(1) 
of this section, FS is considered to hold an obligation of USP in 
the amount of $90x, and thus is treated as holding United States 
property in the amount of $90x.
* * * * *
    (h) Effective/applicability date. (1) Paragraph (a)(3) of this 
section applies 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 obligations held on or after the 
date of publication in the Federal Register of the Treasury decision 
adopting this rule as a final regulation.
    (2) Paragraphs (c)(1), (c)(2), and Example 4 of paragraph (c)(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 these rules as final regulations, and 
taxable years of United States shareholders in which or with which such 
taxable years end, with respect to pledges and guarantees entered into 
on or after September 1, 2015. For purposes of this paragraph (h)(2), a 
pledgor or guarantor is treated as entering into a pledge or guarantee 
when there is a significant modification, within the meaning of Sec.  
1.1001-3(e), of an obligation with respect to which it is a pledgor or 
guarantor on or after September 1, 2015.

0
Par. 5. Section Sec.  1.956-3 is added to read as follows:


Sec.  1.956-3  Certain trade or service receivables acquired from 
United States persons.

    (a) through (b)(2)(i) [Reserved]. For further guidance, see Sec.  
1.956-3T(a) through (b)(2)(i).
    (ii) Acquisition by nominee, pass-through entity, or related 
foreign corporation. A controlled foreign corporation is treated as 
holding a trade or service receivable that is held by a nominee on its 
behalf, or by a simple trust or other pass-through entity (other than a 
partnership) to the extent of its direct or indirect ownership or 
beneficial interest in such simple trust or other pass-through entity. 
See Sec. Sec.  1.956-1T(b)(4) and 1.956-4(b) for rules that may treat a 
controlled foreign corporation as indirectly holding a trade or service 
receivable held by a foreign corporation or partnership. A controlled 
foreign corporation that is treated as holding a trade or service 
receivable held by another person (the direct holder) (or that would be 
treated as holding the receivable if the receivable were United States 
property or would be United States property if held directly by the 
controlled foreign corporation) is considered to have acquired the 
receivable from the person from whom the direct holder acquired the 
receivable. This paragraph (b)(2)(ii) does not limit the application of 
paragraph (b)(2)(iii) of this section. The following examples 
illustrate the application of this paragraph (b)(2)(ii):

    Example 1.  (i) Facts. A domestic corporation, P, wholly owns a 
controlled foreign corporation, FS, with substantial earnings and 
profits. FS contributes $200x of cash to a partnership, PRS, in 
exchange for an 80% partnership interest. An unrelated foreign 
person contributes real estate located in a foreign country with a 
fair market value of $50x to PRS for the remaining 20% partnership 
interest. There are no special allocations in the PRS partnership 
agreement. PRS uses the $200x of cash received from FS to purchase 
trade receivables from P. The obligors with respect to the trade 
receivables are United States persons that are not related to any 
partner in PRS. The liquidation value percentage, as determined 
under Sec.  1.956-4(b), for FS with respect to PRS is 80%. A 
principal purpose of funding PRS (through FS's cash contribution) is 
to avoid the application of section 956 with respect to FS.
    (ii) Result. Under Sec.  1.956-4(b)(1), FS is treated as holding 
80% of the trade receivables acquired by PRS from P, with a basis 
equal to $160x (80% x $200x, PRS's basis in the trade receivables). 
However, because FS controls PRS and a principal purpose of FS 
funding PRS was to avoid the application of section 956 with respect 
to FS, under Sec.  1.956-1T(b)(4), if the trade receivables would be 
United States property if held directly by FS, FS additionally would 
be treated as holding the trade receivables to the extent that they 
exceed the amount of the

[[Page 53066]]

receivables it holds under Sec.  1.956-4(b), which is $40x ($200x-
$160x). Accordingly, under this paragraph (b)(2)(ii), FS is treated 
as having acquired from P, a related United States person, the trade 
receivables that it is treated as holding with a basis equal to 
$200x ($160x + $40x). Thus, FS is treated as holding United States 
property with a basis of $200x under paragraph (a) of this section.
    Example 2.  (i) Facts. A domestic corporation, P, wholly owns a 
controlled foreign corporation, FS1, that has earnings and profits 
of at least $300x. FS1 organizes a foreign corporation, FS2, with a 
$200x cash contribution. FS2 uses the cash contribution to purchase 
trade receivables from P. The obligors with respect to the trade 
receivables are unrelated United States persons. A principal purpose 
of funding FS2 (through FS1's cash contribution) is to avoid the 
application of section 956 with respect to FS1.
    (ii) Result. Under Sec.  1.956-1T(b)(4), if the trade 
receivables held by FS2 were United States property, FS1 would be 
treated as holding the trade receivables held by FS2 because FS1 
controls FS2 and a principal purpose of FS1 funding FS2 was to avoid 
the application of section 956 with respect to FS1. Accordingly, 
under this paragraph (b)(2)(ii), FS1 is treated as having acquired 
from P, a related United States person, the trade receivables that 
it would be treated as holding with a basis equal to $200x. Thus, 
FS1 is treated as holding United States property with a basis of 
$200x under paragraph (a) of this section.

    (b)(2)(iii) through (c) [Reserved]. For further guidance, see Sec.  
1.956-3T(b)(2)(iii) through (c).
    (d) Effective/applicability date. Paragraph (b)(2)(ii) of this 
section applies 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 trade or service receivables 
acquired on or after September 1, 2015. For purposes of this paragraph 
(d), a significant modification, within the meaning of Sec.  1.1001-
3(e), of a trade or service receivable on or after September 1, 2015 
constitutes an acquisition of the trade or service receivable on or 
after that date.

0
Par. 6. Section 1.956-4 is added to read as follows:


Sec.  1.956-4  Certain rules applicable to partnerships.

    (a) Overview. This section provides rules concerning the 
application of section 956 to certain obligations of and property held 
by a partnership. Paragraph (b) of this section provides rules 
concerning United States property held indirectly by a controlled 
foreign corporation through a partnership. Paragraph (c) of this 
section provides rules that generally treat obligations of a foreign 
partnership as obligations of the partners in the foreign partnership, 
as well as a special rule that treats a partner that is a United States 
person as owing additional amounts of a partnership obligation in 
certain circumstances. Paragraph (d) of this section sets forth a rule 
concerning the application of the indirect pledge or guarantee rule to 
obligations of partnerships. Paragraph (e) of this section provides 
that obligations of a domestic partnership are obligations of a United 
States person. Paragraph (f) of this section provides effective and 
applicability dates. See Sec. Sec.  1.956-1T(b)(4) and 1.956-2(c) for 
additional rules applicable to partnerships.
    (b) Property held indirectly through a partnership--(1) General 
rule. For purposes of section 956, a partner in a partnership is 
treated as holding its attributable share of any property held by the 
partnership (including an obligation that the partnership is treated as 
holding as a result of the application of Sec.  1.956-2(c)). A 
partner's attributable share of partnership property is determined 
under the rules set forth in paragraph (b)(2) of this section. An 
upper-tier partnership's attributable share of the property of a lower-
tier partnership is treated as property of the upper-tier partnership 
for purposes of applying this paragraph (b)(1) to the partners of the 
upper-tier partnership. For purposes of section 956, a partner's 
adjusted basis in the property of the partnership equals the partner's 
attributable share of the partnership's adjusted basis in the property 
(taking into account any adjustments to basis under section 743(b) 
(with respect to the partner) or section 734(b) or any similar 
adjustments to basis), as determined under the rules set forth in 
paragraph (b)(2) of this section. The rules in Sec.  1.956-1(e)(2) 
apply to determine the amount of an obligation treated as held by a 
partnership as a result of the application of Sec.  1.956-2(c). See 
Sec.  1.956-1T(b)(4) for special rules that may treat a controlled 
foreign corporation as holding a greater amount of United States 
property held by a partnership than the amount determined under this 
section.
    (2) Methodology--(i) Liquidation value percentage. Except as 
otherwise provided in paragraph (b)(2)(ii) of this section, for 
purposes of paragraph (b)(1) of this section, a partner's attributable 
share of partnership property is determined in accordance with the 
partner's liquidation value percentage. For purposes of this paragraph 
(b)(2)(i), the liquidation value of a partner's interest in a 
partnership is the amount of cash the partner would receive with 
respect to the interest if, immediately after the occurrence of the 
most recent event described in Sec.  1.704-1(b)(2)(iv)(f)(5) or Sec.  
1.704-1(b)(2)(iv)(s)(1) (a revaluation event), or, if there has been no 
revaluation event, immediately after the formation of the partnership, 
as the case may be, the partnership sold all of its assets for cash 
equal to the fair market value of such assets (taking into account 
section 7701(g)), satisfied all of its liabilities (other than those 
described in Sec.  1.752-7), paid an unrelated third party to assume 
all of its Sec.  1.752-7 liabilities in a fully taxable transaction, 
and then liquidated. A partner's liquidation value percentage, which is 
determined upon the formation of a partnership and redetermined upon 
any revaluation event, irrespective of whether the capital accounts of 
the partners are adjusted under Sec.  1.704-1(b)(2)(iv)(f), is the 
ratio (expressed as a percentage) of the liquidation value of the 
partner's interest in the partnership divided by the aggregate 
liquidation value of all of the partners' interests in the partnership.
    (ii) Special allocations. For purposes of paragraph (b)(1) of this 
section, if a partnership agreement provides for the allocation of 
income (or, where appropriate, gain) from partnership property to a 
partner that differs from 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.
    (3) Examples. The following examples illustrate the rule of this 
paragraph (b):

    Example 1.  (i) Facts. USP, a domestic corporation, wholly owns 
FS, a controlled foreign corporation, which, in turn, owns an 
interest in FPRS, a foreign partnership. The remaining interest in 
FPRS is owned by an unrelated foreign person. FPRS holds non-
depreciable property, with an adjusted basis of $100x, that would be 
United States property (``US property'') if held by FS directly. 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%. There are no special allocations in the FPRS 
partnership agreement.
    (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 the property. 
Under paragraph (b)(2) of this section, FS's

[[Page 53067]]

attributable share of FPRS's property is determined in accordance 
with FS's liquidation value percentage, which is 25%. Thus, FS's 
attributable share of property held by FPRS is 25%, and its 
attributable share of FPRS's basis in the property is $25x. 
Accordingly, for purposes of determining the amount of US property 
held by FS as of the close of quarter 1 of year 1, FS is treated as 
holding US property with an adjusted basis of $25x.
    Example 2.  (i) Facts. The facts are the same as in Example 1, 
except that the FPRS partnership agreement, which satisfies the 
requirements of section 704(b), specially allocates 80% of the 
income with respect to US property to FS. The special allocation 
does not have a principal purpose of avoiding the purposes of 
section 956.
    (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 the property. In 
general, FS's attributable share of FPRS property is determined in 
accordance with FS's liquidation value percentage. However, under 
paragraph (b)(2)(ii) of this section, FS's attributable share of US 
property is determined in accordance with its special allocation. 
FS's special allocation percentage for US property is 80%, and thus 
FS's attributable share of US property held by FPRS is 80% and its 
attributable share of FPRS's basis in US property is $80x. 
Accordingly, for purposes of determining the amount of US property 
held by FS as of the close of quarter 1 of year 1, FS is treated as 
holding US 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 an 
interest in FPRS, a foreign partnership. USP owns the remaining 
interest in FPRS. FPRS holds property (the ``FPRS property'') that 
would be United States property (``US property'') if held by FS 
directly. The FPRS property is anticipated to appreciate in value 
but generate relatively little income. The US property has an 
adjusted basis of $100x. 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 USP 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. Under paragraph (b)(2)(ii) of this section, the 
partners' attributable shares of the FPRS property are determined in 
accordance with the special allocation of gain. Accordingly, for 
purposes of determining the amount of US property held by FS in each 
year that FPRS holds FPRS property, FS's attributable share of the 
FPRS property is 80% and its attributable share of FPRS's basis in 
US property is $80x. Thus, FS is treated as holding US property with 
an adjusted basis of $80x.

    (c) Obligations of a foreign partnership--(1) In general. Except as 
provided in paragraphs (c)(2) and (3) of this section, for purposes of 
section 956, an obligation of a foreign partnership is treated as a 
separate obligation of each of the partners in the partnership to the 
extent of each partner's share of the obligation. A partner's share of 
the partnership's obligation is determined in accordance with the 
partner's interest in partnership profits. The partner's interest in 
partnership profits is determined by taking into account all facts and 
circumstances relating to the economic arrangement of the partners. An 
upper-tier partnership's share of an obligation of a lower-tier 
partnership is treated as an obligation of the upper-tier partnership 
for purposes of applying this paragraph (c)(1) to the partners of the 
upper-tier partnership.
    (2) Exception for obligations of partnerships in which neither the 
lending controlled foreign corporation nor any person related to the 
lending controlled foreign corporation is a partner. For purposes of 
applying section 956 with respect to a controlled foreign corporation, 
an obligation of a foreign partnership is treated as an obligation of a 
foreign partnership, and not as an obligation of its partners, if 
neither the controlled foreign corporation nor any person related to 
the controlled foreign corporation within the meaning of section 
954(d)(3) is a partner in the partnership. For purposes of section 956, 
an obligation treated as an obligation of a foreign partnership 
pursuant to this paragraph (c)(2) is not an obligation of a United 
States person.
    (3) Special obligor rule in the case of certain partnership 
distributions. For purposes of determining a partner's share of a 
foreign partnership's obligation under section 956, if the foreign 
partnership distributes an amount of money or property to a partner 
that is related to a controlled foreign corporation within the meaning 
of section 954(d)(3) and whose obligation would be United States 
property if held (or if treated as held) by the controlled foreign 
corporation, and the foreign partnership would not have made the 
distribution but for a funding of the partnership through an obligation 
held (or treated as held) by a controlled foreign corporation, 
notwithstanding Sec.  1.956-1(e), the partner's share of the 
partnership obligation is the greater of--
    (i) The partner's share of the partnership obligation as determined 
under paragraph (c)(1) of this section; and
    (ii) The lesser of the amount of the distribution that would not 
have been made but for the funding of the partnership and the amount of 
the obligation (as determined under Sec.  1.956-1(e)).
    (4) Examples. The following examples illustrate the rules of this 
paragraph (c):

    Example 1.  (i) Facts. USP, a domestic corporation, wholly owns 
FS, a controlled foreign corporation, and owns a 90% interest in the 
partnership profits of FPRS, a foreign partnership. X, a foreign 
person that is unrelated to USP or FS, owns a 10% interest in the 
partnership profits of FPRS. FPRS borrows $100x from FS. FS's basis 
in the FPRS obligation is $100x.
    (ii) Result. Under paragraph (c)(1) of this section, for 
purposes of section 956, the obligation of FPRS is treated as 
obligations of its partners (USP and X) to the extent of each 
partner's interest in the partnership profits of FPRS. Because USP, 
a partner in FPRS, is related to FS within the meaning of section 
954(d)(3), the exception in paragraph (c)(2) of this section does 
not apply. Based on its interest in FPRS's profits, USP's 
attributable share of the FPRS obligation is $90x. Accordingly, for 
purposes of section 956, $90x of the FPRS obligation held by FS is 
treated as an obligation of USP and is United States property within 
the meaning of section 956(c). Therefore, on the date the loan is 
made, FS is treated as holding United States property of $90x.
    Example 2.  (i) Facts. The facts are the same as in paragraph 
(i) of Example 1, except that USP owns 40% of the stock of FS and is 
not a related person (as defined in section 954(d)(3)) with respect 
to FS. Y, a United States person that is unrelated to USP or X, owns 
the remaining 60% of the stock of FS.
    (ii) Result. Because neither FS nor any person related to FS 
within the meaning of section 954(d)(3) is a partner in FPRS, the 
exception in paragraph (c)(2) of this section applies to treat the 
FPRS obligation as an obligation of a foreign partnership and not an 
obligation of a United States person. Therefore, paragraph (c)(1) of 
this section does not apply, and FS is not treated as holding United 
States property.
    Example 3.  (i) Facts. USP, a domestic corporation, wholly owns 
FS, a controlled foreign corporation. USP has a 60% interest in the 
partnership profits of FPRS, a foreign partnership. FS has a 30% 
interest in the partnership profits of FPRS. U.S.C., a domestic 
corporation that is unrelated to USP and FS, has a 10% interest in 
the partnership profits of FPRS. FPRS borrows $100x from an 
unrelated person. FS guarantees the FPRS obligation.
    (ii) Result. Under paragraph (c)(1) of this section, for 
purposes of section 956, the obligation of FPRS is treated as 
obligations of its partners (USP, FS, and U.S.C.) to the extent of 
each partner's interest in the partnership profits of FPRS. Because 
USP, a partner in FPRS, is related to FS within the meaning of 
section 954(d)(3), and because FS is a partner in FPRS, the 
exception in paragraph (c)(2) of this section does not apply. Based 
on their interests in partnership profits, USP's attributable share 
of the FPRS obligation is $60x, and U.S.C.'s attributable share of 
the FPRS obligation is $10x. For purposes of section 956, $60x of 
the FPRS obligation is treated as an obligation of USP,

[[Page 53068]]

and $10x of the FPRS obligation is treated as an obligation of 
U.S.C.. Under Sec.  1.956-2(c)(1), FS is treated as holding the 
obligations of USP and U.S.C. that FS guaranteed. All of the 
exceptions to the definition of United States property contained in 
section 956 and Sec.  1.956-2 apply to determine whether the 
obligations of USP and U.S.C. treated as held by FS constitute 
United States property. Accordingly, the obligation of U.S.C. is not 
United States property under section 956(c)(2)(F) and Sec.  1.956-
2(b)(1)(viii). The obligation of USP, however, is United States 
property within the meaning of section 956(c). Therefore, on the 
date the guarantee is made, FS is treated as holding United States 
property of $60x.
    Example 4.  (i) Facts. USP, a domestic corporation, wholly owns 
FS, a controlled foreign corporation. USP has a 70% interest in the 
partnership profits of FPRS, a foreign partnership. A domestic 
corporation that is unrelated to USP and FS has a 30% interest in 
the partnership profits of FPRS. FPRS borrows $100x from FS and 
makes a distribution of $80x to USP. FPRS would not have made the 
distribution to USP but for the funding of FPRS by FS.
    (ii) Result. Because USP, a partner in FPRS, is related to FS 
within the meaning of section 954(d)(3), the exception in paragraph 
(c)(2) of this section does not apply. Moreover, an obligation of 
USP held by FS would be United States property. USP's attributable 
share of the FPRS obligation as determined under paragraph (c)(1) of 
this section in accordance with USP's interest in partnership 
profits is $70x. Under paragraph (c)(3) of this section, USP's share 
of the FPRS obligation is the greater of (i) USP's attributable 
share of the obligation, $70x, or (ii) the lesser of the amount of 
the distribution, $80x, or the amount of the obligation, $100x. For 
purposes of section 956, therefore, $80x of the FPRS obligation is 
treated as an obligation of USP and is United States property within 
the meaning of section 956(c). Thus, on the date the loan is made, 
FS is treated as holding United States property of $80x.

    (d) Limitation on a partner's indirect pledge or guarantee. For 
purposes of section 956 and Sec.  1.956-2(c), a controlled foreign 
corporation that is a partner in a partnership is not considered a 
pledgor or guarantor of the portion of an obligation of the partnership 
attributed to its partners that are United States persons under 
paragraph (c) of this section solely as a result of the attribution of 
a portion of the partnership's assets to the controlled foreign 
corporation under paragraph (b) of this section.
    (e) Obligations of a domestic partnership. For purposes of section 
956, an obligation of a domestic partnership is an obligation of a 
United States person. See section 956(c)(2)(L) for an exception from 
the treatment of such an obligation as United States property.
    (f) Effective/applicability dates. (1) Paragraph (b) of this 
section applies to taxable years of controlled foreign corporations 
ending on or after [DATE OF PUBLICATION OF FINAL RULE], and taxable 
years of United States shareholders in which or with which such taxable 
years end, with respect to property acquired on or after [DATE OF 
PUBLICATION OF FINAL RULE]. For purposes of this paragraph (f)(1), a 
deemed exchange of property pursuant to section 1001 on or after [DATE 
OF PUBLICATION OF FINAL RULE] constitutes an acquisition of the 
property on or after that date.
    (2) Paragraph (c) of this section applies to taxable years of 
controlled foreign corporations ending on or after [DATE OF PUBLICATION 
OF FINAL RULE], and taxable years of United States shareholders in 
which or with which such taxable years end, with respect to obligations 
acquired, or pledges or guarantees entered into, on or after September 
1, 2015. For purposes of this paragraph (f)(2), a significant 
modification, within the meaning of Sec.  1.1001-3(e), of an obligation 
on or after September 1, 2015 constitutes an acquisition of the 
obligation on or after that date. Furthermore, for purposes of this 
paragraph (f)(2), a pledgor or guarantor is treated as entering into a 
pledge or guarantee when there is a significant modification, within 
the meaning of Sec.  1.1001-3(e), of an obligation with respect to 
which it is a pledgor or guarantor on or after September 1, 2015.
    (3) Paragraph (d) of this section applies to taxable years of 
controlled foreign corporations ending on or after [DATE OF PUBLICATION 
OF FINAL RULE], and taxable years of United States shareholders in 
which or with which such taxable years end, with respect to pledges or 
guarantees entered into on or after September 1, 2015. For purposes of 
this paragraph (f)(3), a pledgor or guarantor is treated as entering 
into a pledge or guarantee when there is a significant modification, 
within the meaning of Sec.  1.1001-3(e), of an obligation with respect 
to which it is a pledgor or guarantor on or after September 1, 2015.
    (4) Paragraph (e) of this section applies to taxable years of 
controlled foreign corporations ending on or after [DATE OF PUBLICATION 
OF FINAL RULE], and to taxable years of United States shareholders in 
which or with which such taxable years end, with respect to obligations 
held on or after [DATE OF PUBLICATION OF FINAL RULE].

John Dalrymple,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2015-21572 Filed 9-1-15; 8:45 am]
BILLING CODE 4830-01-P