IRS tweaks attribution rules for determining whether a person is related to a CFC

Tax Hot Topics newsletter The IRS issued proposed regulations (REG-125135-15) on May 17 providing rules regarding the attribution of stock for purposes of determining whether a person is a “related person” with respect to a Controlled Foreign Corporation (CFC) under Section 954(d)(3). The package of proposed rules also contains guidance with respect to the active rents exception for Foreign Personal Holding Company Income (FPHCI).

In general, Section 954(d)(3) defines related person for purposes of the foreign base company income rules of Section 954, in addition to other provisions which define the term by reference to the paragraph. A person is related with respect to a CFC if the person controls or is controlled by a CFC. In this context, control means greater than 50% owned. To determine ownership the statute applies rules substantially similar to the constructive ownership rules of Section 958(b), which in turn applies Section 318 with some modifications.

The proposed regulations limit the scope of attribution for purposes of applying the Section 954(d)(3) related party rules. As a result of this limitation, the downward attribution rules of Section 318(a)(3) do not apply in determining if a person is a related person under Section 954. This change is applicable for tax years of CFCs ending on or after the date the final regulations are published. The proposed regulations also include anti-abuse rules limiting option attribution under Section 318(a)(4). The rules adopted prior guidance provided in Notice 2007-9. The rules generally look to limit attribution via options where taxpayers could effectively elect related person status with certain structured option arrangements.

Finally, the proposed regulations modify the active rent exception to foreign personal holding company income. A new proposed rule provides that for purposes of applying the exception all amounts paid or incurred by a CFC for the right to use property that generated rental income are excluded from the definition of active leasing expenses and reduce the CFC’s gross income for purposes of determining adjusted leasing profit. This rule is effective for tax years of CFCs ending on or after the date the final regulations are published.

David Sites
Washington National Tax Office
T +1 202 861 4104

David Zaiken
Managing Director
Washington National Tax Office
T +1 202 521 1543

Cory Perry
Senior Manager
Washington National Tax Office
T +1 202 521 1509

Mike Del Medico
Washington National Tax Office
T +1 202 521 1522

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