IRC 958 Regulations Finalized: Why It Matters

What Happened

On January 25, 2022, the U.S. Department of the Treasury (Treasury) and the IRS published final regulations under Internal Revenue Code Section (IRC §) 958 that affect: (i) U.S. taxpayers that own stock of foreign corporations through U.S. partnerships, and (ii) U.S. partnerships that are U.S. shareholders of foreign corporations. The final regulations generally treat domestic partnerships as aggregates of their partners for purposes of determining income inclusions under the anti-deferral regimes of IRC §951 and §951A. For this purpose, “domestic partnerships” also include S corporations. See generally Guidance Under Section 958 on Determining Stock Ownership, 87 Fed. Reg. 3648 (January 25, 2022) (codified at Treas. Reg. §1.958-1).

Aggregate treatment is a fundamental shift from the “entity” principle that historically applied to IRC §951(a) inclusions. Aggregate treatment for U.S. taxpayers that own stock of foreign corporations through U.S. partnerships was first introduced in final regulations under the global intangible low-taxed income (GILTI) provisions of IRC §951A issued in June 2019. Concurrent with the issuance of the final regulations under IRC §951A, Treasury and the IRS issued proposed regulations that suggested extending aggregate treatment to IRC §951(a) inclusions. These proposed regulations also addressed the aggregate principle’s relationship to other provisions applicable to domestic partnerships and S corps that are U.S. shareholders of controlled foreign corporations (CFC).  

Why It Matters

The final regulations adopt aggregate treatment for IRC §951(a)(1)(A) subpart F inclusions for taxable years of foreign corporations beginning on or after January 25, 2022. For taxable years of U.S. persons in which or with which such taxable years of foreign corporations end, e.g., beginning tax year 2023 for calendar-year partnerships and S corps owning calendar-year CFCs, U.S. shareholders’ pro rata share of a CFC’s subpart F income will be determined at the partner or shareholder level rather than at the domestic partnership or S corp level.

The final regulations also address four related topics: 

• (i) application of IRC §956
• (ii) controlling domestic shareholders 
• (iii) application of IRC §1248 
• (iv) nongrantor trusts and estates

Other important topics, such as passive foreign investment companies (PFIC) and related person insurance income, are largely addressed in a 2022 PFIC proposed regulation. See Passive Foreign Investment Companies and Controlled Foreign Corporations Held by Domestic Partnerships and S Corporations and Related Person Insurance Income, 87 Fed. Reg. 3890 (January 25, 2022).

Application of IRC §956

On one hand, the final regulations clarify that aggregate treatment of domestic partnerships does not apply for purposes of IRC §956(c) (defining U.S. property), IRC §956(d) (regarding pledges and guarantees by foreign corporations), or any provisions that specifically apply to either subsection by reference. (Treas. Reg. §1.956-4(e).) On the other, aggregate treatment of domestic partnerships does apply for purposes of IRC §956(a) (regarding U.S. shareholders’ pro rata share of a CFC’s investment of earnings in U.S. property) as well as any provision that specifically applies to it by reference. (Treas. Reg. §1.958-1(d)(1) and (d)(3)(iii).) To avoid confusion regarding scope, the IRS comments that the latter aggregate treatment rule applies only to the particular provision within a Code section or regulation that applies specifically by reference to IRC §951, §951A, or §956(a) rather than the section or regulation in its entirety. See Guidance Under Section 958 on Determining Stock Ownership, 87 Fed. Reg. 3649.

Controlling Domestic Shareholders

The “controlling domestic shareholders” of a CFC make certain elections with respect to the CFC. The final regulations do not extend aggregate treatment to the determination of a CFC’s controlling domestic shareholders under Treas. Reg. §1.964-1(c)(5)(i). However, Treasury and the IRS have since changed their position. Contrary to the final regulations’ rules, Treasury and the IRS now believe that aggregate treatment should apply to domestic partnerships for purposes of determining a CFC’s controlling domestic shareholders under Treas. Reg. §1.964-1(c)(5). Pursuant to that change of heart, Treasury and the IRS issued proposed regulations that suggest extending aggregate treatment to domestic partnerships in determining the controlling domestic shareholders of a CFC. Taxpayers have an opportunity to provide comments to Treasury and the IRS regarding the proposed regulations. (Id. at 3650.)

Application of IRC §1248

The final regulations (i) clarify that the aggregate treatment of domestic partnerships does not apply for purposes of IRC §1248, and (ii) does not affect the application of Treas. Reg. §1.1248-1(a)(4). (Treas. Reg. §1.958-1(d)(2)(iv).)

Nongrantor Trusts & Estates

Treasury and the IRS agree with commentators that aggregate treatment should not be extended to domestic nongrantor trusts and domestic estates. See Guidance Under Section 958 on Determining Stock Ownership, 87 Fed. Reg. at 3650.  

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