The effect of the T.C.J.A. continues to be encountered in unexpected ways during the second year after its enactment. Examples are the final and proposed G.I.L.T.I. regulations (the "2019 Final G.I.L.T.I. Regulations" and the "2019 Proposed G.I.L.T.I. Regulations") issued by the I.R.S. earlier this year in an attempt to bring order out of the chaos created by proposed G.I.L.T.I. regulations released in September 2018 (the "2018 Proposed G.I.L.T.I. Regulations").
This article discusses the approaches to be followed when determining those U.S. Persons that are considered to be U.S. Shareholders for G.I.L.T.I. and Subpart F purposes when a domestic partnership is a shareholder in a controlled foreign corporation. For those who follow the debate of whether a partnership is an aggregate of the partners or an entity that is separate from the partners, chalk up a victory to the proponents of the aggregate approach.
PARTNERSHIPS: AGGREGATE OR ENTITY FOR SUBPART F INCLUSION PRIOR TO THE T.C.J.A.
Depending on the operative Code section, a partnership can treated either as an entity that is distinct and separate from its partners ("entity approach") or as an aggregate of all partners, meaning that each partner takes into account a pro rata share of each tax item on the tax return filed by that partner ("aggregate approach").
Prior to the newly proposed G.I.L.T.I. regulations, the approach to identify a U.S. Shareholder of a controlled foreign corporation ("C.F.C.") in the context of an investor partnership depended on whether the investor partnership was domestic or foreign. For Subpart F purposes, a domestic partnership was treated as an entity separate and distinct from its partners, and the partnership – not the partners – was treated as the owner of partnership assets including the stock in a foreign corporation. As a result, each partner of the partnership included a distributive share of the partnership's Subpart F inclusion, even if the partner held less than a 10% indirect interest in the C.F.C. Each U.S. member of the domestic partnership would pay tax on the amount included in that member's distributive share of the Subpart F Income. Each foreign member of the partnership would be taxed only in the rare event that the Subpart F Income constituted effectively connected income.