James F. McDonough
Of Counsel
732-568-8360 jmcdonough@sh-law.comCFCs, Disregarded Entities, Partnerships and Subpart F Income.
Author: James F. McDonough|January 23, 2014
CFCs, Disregarded Entities, Partnerships and Subpart F Income.
Taxpayers adopt different structures when conducting business around. PLR 201330006 contains such an example where using various entities and the regulations avoids Subpart F inclusions.
A U.S. taxpayer was a “U.S. shareholder” in a foreign company, formed in country A, treated as a corporation for U.S. tax purposes (CFC). U.S. shareholders are required to take into income any Subpart F income of CFC. An unrelated company (“U”) and CFC owned all of the interests in a partnership (“P”). P, in turn, owned all of the disregarded entity (“DE”) for U.S. tax purposes. DE was building a plant and would operate it selling in country A all of its production pursuant to output contracts at a market price. P and DE were also formed in country A.
Whether the income generated by DE is Subpart F income requires an analysis of Foreign Base Company income, which consists of several categories. The relevant ones for this analysis include Foreign Personal Holding Company Income (“FPHCI”), foreign base company services income (FBC Services) performed for a related person, or foreign base company sales income (FBC Sales).
The general rule applied to a partnership distributive income is that it is Subpart F income if it would be so classified if the income is received by the CFC directly. Note the focus is on the activities or property of the CFC.
Three categories were analyzed. First, sales of DE’s output did not occur outside of country A, where CFC was incorporated. Therefore, there was no FBC Sales income. Second, FBC Services income is derived from substantial technical assistance provided by a related person outside of the country of organization of the CFC. Again, the technical assistance was rendered by P in country A where the CFC was formed. In each instance, the focus is on the characterization of the income as if it is received by the CFC directly. Third, FPHCI includes virtually all types of passive income but excludes commodities that are inventory, depreciable property and consumable supplies.
An exception to FPHCI treatment exists if the income would not be FPHCI if CFC earned the income directly, taking into account the activities and property of the partnership, not the CFC. The difference is that the activities of P, the partnership, are the focus, unlike FBC Sales and FBC Service where the test is applied as if the CFC received the income directly.
The plan used a corporation, partnership and disregarded entity to achieve the desired result of avoiding Subpart F income in the U.S. return
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CFCs, Disregarded Entities, Partnerships and Subpart F Income.
Author: James F. McDonough
Taxpayers adopt different structures when conducting business around. PLR 201330006 contains such an example where using various entities and the regulations avoids Subpart F inclusions.
A U.S. taxpayer was a “U.S. shareholder” in a foreign company, formed in country A, treated as a corporation for U.S. tax purposes (CFC). U.S. shareholders are required to take into income any Subpart F income of CFC. An unrelated company (“U”) and CFC owned all of the interests in a partnership (“P”). P, in turn, owned all of the disregarded entity (“DE”) for U.S. tax purposes. DE was building a plant and would operate it selling in country A all of its production pursuant to output contracts at a market price. P and DE were also formed in country A.
Whether the income generated by DE is Subpart F income requires an analysis of Foreign Base Company income, which consists of several categories. The relevant ones for this analysis include Foreign Personal Holding Company Income (“FPHCI”), foreign base company services income (FBC Services) performed for a related person, or foreign base company sales income (FBC Sales).
The general rule applied to a partnership distributive income is that it is Subpart F income if it would be so classified if the income is received by the CFC directly. Note the focus is on the activities or property of the CFC.
Three categories were analyzed. First, sales of DE’s output did not occur outside of country A, where CFC was incorporated. Therefore, there was no FBC Sales income. Second, FBC Services income is derived from substantial technical assistance provided by a related person outside of the country of organization of the CFC. Again, the technical assistance was rendered by P in country A where the CFC was formed. In each instance, the focus is on the characterization of the income as if it is received by the CFC directly. Third, FPHCI includes virtually all types of passive income but excludes commodities that are inventory, depreciable property and consumable supplies.
An exception to FPHCI treatment exists if the income would not be FPHCI if CFC earned the income directly, taking into account the activities and property of the partnership, not the CFC. The difference is that the activities of P, the partnership, are the focus, unlike FBC Sales and FBC Service where the test is applied as if the CFC received the income directly.
The plan used a corporation, partnership and disregarded entity to achieve the desired result of avoiding Subpart F income in the U.S. return
