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New regulations affect U.S. shareholders of CFCs transacting with foreign partnerships

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Treasury and the IRS released temporary regulations (T.D. 9733) (temporary regulations) on Sept. 2 with regard to the treatment of property held by a controlled foreign corporation (CFC) in connection with certain transactions involving partnerships under Section 956. In addition, the temporary regulations provide rules regarding when a CFC is considered to derive rents and royalties in the active conduct of a trade or business (active rents and royalties exception) for purposes of determining foreign personal holding company income.

Proposed regulations (REG-155164-09) (proposed regulations) released concurrently with the temporary regulations provide rules regarding the treatment as U.S. property of property held by a CFC in connection with certain transactions involving partnerships. The temporary regulations included in T.D. 9733 serve as the text for certain provisions of the proposed regulations.

These rules may significantly affect certain taxpayers that are U.S. shareholders of CFCs. Taxpayers with transactions involving partnerships and CFCs, and taxpayers relying on the active rents and royalties exception should carefully evaluate the impact of these regulations. In particular, this guidance in large part addresses the treatment of loans from a CFC to a foreign partnership under Section 956.