Partnership Aspects of Final FDII Regulations

July 12, 2020

by Monte A. Jackel

I put together this brief outline with highlights and the pertinent provisions of the final FDII regulations as they relate to partnerships and partners. https://jackeltaxlaw.com/wp-content/uploads/2020/07/Proposed-250-regs.docx. Thought it would be of interest. The highlights of these regulations as they relate to partnerships and partners follow.

1. With respect to partnerships and partners, the inclusion rule refers to distributive shares. The regulatory examples assume validity under section 704. This means that if the principal partners are related, section 704’s SEE test will not effectively police the allocations. Those allocations can easily meet the section 704 tests but flunk section 482. This means that the FDII elements should be easily manipulated.The inclusion rule does not tie into the GILTI final rule or the subpart F proposed rule relating to US shareholder-partners of US partnerships. The latter rule looks to proportionate interests in the partnership under section 958(a)(2) and the former rule looks to 704 and the allocations need not be proportionate to partnership capital. Thus, special allocations should work under the FDII rule and deviate from capital percentages but the GILTI and subpart F amounts will work off of economic interests, both capital and income. This can result in the same partner owning differing shares of the partnership for GILTI and subpart F, on the one hand, and FDII on the other hand.
2. In other words, a less than 10% domestic corporate partner can obtain a FDII deduction but for GILTI the domestic corporate partner must be a US shareholder-partner with a 10% or greater interest. There is also no separate treatment of foreign partnerships as compared to domestic partnerships.
3. Reporting through tiered partnerships to domestic corporate partners is required. The modified affiliated group can include foreign corporations and partnerships controlling foreign corporations.
4. A partnership is treated as an entity under the related party and income from property and services rules and not as an aggregate under the general property and income inclusion rules. However, the partnership can be treated as an aggregate under one of the FDII regulatory anti-abuse rules. But disregarded entities are treated as aggregates and so there could be a huge difference in treatment between a DRE and a 99-1 partnership.