5908 Federal Register / Vol. 81, No. 23 / Thursday, February 4, 2016 / Rules and Regulations 

Paperwork Reduction Act 

This rule does not impose any new 

information collections subject to the 

Paperwork Reduction Act, 44 U.S.C., 

Chapter 35. The Department anticipates 

between 100 and 4,100 additional 

nonimmigrant visa applicants per year 

as a result of this rulemaking. The 

current burden for this information 

collection (OMB Control No. 1405– 

0182) is 13,875,345 hours, with 

11,100,276 respondents. The burden per 

response is 75 minutes. The top 

estimate for the number of additional 

respondents would add approximately 

5,000 hours to a burden that is almost 

14 million hours. Therefore, the 

addition of these respondents does not 

significantly increase the burden 

associated with this information 

collection. 

List of Subjects in 22 CFR Part 41 

Aliens, Foreign officials, Immigration, 

Nonimmigrants, Passports and visas. 

For the reasons stated in the 

preamble, the Department of State is 

amending 22 CFR part 41 to read as 

follows: 

PART 41—[AMENDED] 

■ 1. The authority citation for part 41 is 

revised to read as follows: 

Authority: 22 U.S.C. 2651a; 8 U.S.C. 1104; 

Pub. L. 105–277, 112 Stat. 2681–795 through 

2681–801; 8 U.S.C. 1185 note (section 7209 

of Pub. L. 108–458, as amended by section 

546 of Pub. L. 109–295). 

■ 2. Amend § 41.2 as follows: 

■ a. Remove paragraph (e). 

■ b. Redesignate paragraphs (f) through 

(m) as paragraphs (e) through (l). 

■ c. Revise redesignated paragraph 

(e)(2)(iv). 

The revisions read as follows: 

§ 41.2 Exemption or waiver by Secretary of 

State and Secretary of Homeland Security 

of passport and/or visa requirements for 

certain categories of nonimmigrants. 

* * * * * 

(e) * * * 

(2) * * * 

(iv) Presents a current certificate 

issued by the Royal Virgin Islands 

Police Force indicating that he or she 

has no criminal record. 

* * * * * 

Dated: January 22, 2016. 

David T. Donahue, 

Acting Assistant Secretary for Consular 

Affairs, Department of State. 

[FR Doc. 2016–02191 Filed 2–3–16; 8:45 am] 

BILLING CODE 4710–06–P 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Part 1 

[TD 9748] 

RIN 1545–BM57 

Allocation of Creditable Foreign Taxes 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final and temporary 

regulations. 

SUMMARY: This document contains 

temporary regulations that provide 

guidance relating to the allocation by a 

partnership of creditable foreign tax 

expenditures. These temporary 

regulations are necessary to improve the 

operation of an existing safe harbor rule 

that is used for determining whether 

allocations of creditable foreign tax 

expenditures are deemed to be in 

accordance with the partners’ interests 

in the partnership. The text of these 

temporary regulations also serves as the 

text of the proposed regulations set forth 

in the notice of proposed rulemaking 

(REG–100861–15) published in the 

Proposed Rules section in this issue of 

the Federal Register. These regulations 

affect partnerships that pay or accrue 

foreign income taxes, and their partners. 

DATES: Effective Date: These regulations 

are effective on February 4, 2016. 

Applicability Dates: For dates of 

applicability, see §§ 1.704– 

1T(b)(1)(ii)(b)(1) and (b)(1)(ii)(b)(3)(B). 

FOR FURTHER INFORMATION CONTACT: 

Suzanne M. Walsh, (202) 317–4908 (not 

a toll-free call). 

SUPPLEMENTARY INFORMATION: 

Background and Explanation of 

Provisions 

Allocations of creditable foreign tax 

expenditures (‘‘CFTEs’’) do not have 

substantial economic effect, and 

accordingly a CFTE must be allocated in 

accordance with the partners’ interests 

in the partnership. See § 1.704– 

1(b)(4)(viii). Section 1.704–1(b)(4)(viii) 

provides a safe harbor under which 

CFTE allocations are deemed to be in 

accordance with the partners’ interests 

in the partnership. In general, the 

purpose of the safe harbor is to match 

allocations of CFTEs with the income to 

which the CFTEs relate. 

In order to apply the safe harbor, a 

partnership must (1) determine the 

partnership’s ‘‘CFTE categories,’’ (2) 

determine the partnership’s net income 

in each CFTE category, and (3) allocate 

the partnership’s CFTEs to each 

category. Section 1.704– 

1(b)(4)(viii)(c)(2) requires a partnership 

to assign its income to activities and 

provides for the grouping of a 

partnership’s activities into one or more 

CFTE categories based generally on 

whether net income from the activities 

is allocated to partners in the same 

sharing ratios. Section 1.704– 

1(b)(4)(viii)(c)(3) provides rules for 

determining the partnership’s net 

income (for U.S. federal income tax 

purposes) in a CFTE category, including 

rules for allocating and apportioning 

expenses, losses, and other deductions 

to gross income. Section 1.704– 

1(b)(4)(viii)(d) assigns CFTEs to the 

CFTE category that includes the related 

income under the principles of § 1.904– 

6, with certain modifications. In order to 

satisfy the safe harbor, partnership 

allocations of CFTEs in a CFTE category 

must be in proportion to the allocations 

of the partnership’s net income in the 

CFTE category. 

I. Effect of Section 743(b) Adjustments 

Section 1.704–1(b)(4)(viii)(c)(3)(i) of 

the current final regulations provides 

that a partnership determines its net 

income in a CFTE category by taking 

into account all partnership items 

attributable to the relevant activity or 

group of activities, including items of 

gross income, gain, loss, deduction, and 

expense, and items allocated pursuant 

to section 704(c). The current final 

regulations do not state whether an 

adjustment under section 743(b) is taken 

into account in computing the 

partnership’s net income in a CFTE 

category. 

In the case of a transfer of a 

partnership interest that results in an 

adjustment under section 743(b) 

(because the partnership has a section 

754 election in effect, or because there 

is a substantial built-in loss (as defined 

in section 743(d)) in the partnership), 

the partnership must adjust the basis of 

partnership property with respect to the 

transferee partner only (a section 743(b) 

adjustment). No adjustment is made to 

the common basis of partnership 

property, and the section 743(b) 

adjustment has no effect on the 

partnership’s computation of any item 

under section 703. § 1.743–1(j)(1). 

The Treasury Department and the IRS 

believe that a transferee partner’s 

section 743(b) adjustment with respect 

to its interest in a partnership should 

not be taken into account in computing 

such partnership’s net income in a 

CFTE category because the basis 

adjustment is unique to the transferee 

partner and because the basis 

adjustment ordinarily would not be 

taken into account by a foreign 

jurisdiction in computing its foreign 


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taxable base. As such, taking a 

transferee partner’s section 743(b) 

adjustment into account for purposes of 

computing the partnership’s net income 

in a CFTE category could change the 

partners’ relative shares of net income 

in a CFTE category and their allocable 

shares of CFTEs under the safe harbor 

solely as a result of the transfer of the 

partnership interest and not as a result 

of a change to the allocation of any 

partnership items under the partnership 

agreement. Accordingly, § 1.704– 

1T(b)(4)(viii)(c)(3)(i) of these temporary 

regulations provides that, for purposes 

of computing a partnership’s net income 

in a CFTE category, the partnership 

determines its items without regard to 

any section 743(b) adjustments that its 

partners may have to the basis of 

property of the partnership. 

A partnership that is a transferee 

partner may have a section 743(b) 

adjustment in its capacity as a direct or 

indirect partner in a lower-tier 

partnership. Under § 1.704– 

1T(b)(4)(viii)(c)(3)(i), such section 

743(b) adjustment of the partnership is 

taken into account in determining the 

partnership’s net income in a CFTE 

category. Nevertheless, in the case of a 

section 743(b) adjustment of a 

partnership that is a transferee partner, 

it may be appropriate to alter the way 

in which the section 743(b) adjustment 

is taken into account in determining the 

partnership’s net income in a CFTE 

category when the section 743(b) 

adjustment gives rise to basis 

differences subject to section 901(m). 

The Treasury Department and the IRS 

intend to address section 901(m) in a 

separate guidance project. 

No inference is intended from 

§ 1.704–1T(b)(4)(viii)(c)(3)(i) as to how a 

section 743(b) adjustment is taken into 

account for other federal income tax 

purposes. The Treasury Department and 

the IRS request comments regarding 

whether final regulations should 

provide further guidance on how to 

compute a partnership’s net income in 

a CFTE category, including how other 

types of items or adjustments to 

distributive shares that are specific to a 

partner should be taken into account in 

computing a partnership’s net income in 

a CFTE category (for example, where 

property is contributed with a built-in 

loss and the built-in loss is taken into 

account only in determining the amount 

of items allocated to the contributing 

partner under section 704(c)(1)(C)). The 

Treasury Department and the IRS also 

request comments on whether, and the 

extent to which, the application of the 

safe harbor should differ with respect to 

CFTEs that are determined by taking 

into account partner-specific 

adjustments that are similar to those 

that apply for U.S. tax purposes in 

computing the foreign taxable base of a 

partnership. 

II. Special Rules for Deductible 

Allocations and Nondeductible 

Guaranteed Payments 

For purposes of the safe harbor, 

§ 1.704–1(b)(4)(viii)(c)(3)(ii) provides, 

among other rules, a special rule that 

reduces the partnership’s net income in 

a CFTE category to the extent foreign 

law allows a deduction for an allocation 

(or payment of an allocated amount) to 

a partner, for example, because foreign 

law characterizes a preferential 

allocation of gross income as deductible 

interest expense. The basis for this rule 

is that a CFTE category should not 

include income of the partnership that 

has not been included in a foreign 

taxable base due to the fact that an 

allocation (or payment of an allocated 

amount) to a partner of that income 

results in a foreign law deduction. 

Because the income out of which the 

allocation is made was not included in 

the taxable base of the foreign 

jurisdiction that allowed the deduction, 

no CFTEs are imposed on that income; 

therefore, the allocation of that income 

should not be taken into account in 

testing whether allocations of CFTEs of 

that jurisdiction match related income 

allocations for purposes of the safe 

harbor. 

Deductible guaranteed payments 

under section 707(c) reduce the 

partnership’s net income in a CFTE 

category. Therefore, in the case of a 

guaranteed payment that results in a 

deduction under both U.S. and foreign 

law, no special rule reducing the 

partnership’s net income in a CFTE 

category is necessary. However, to the 

extent that foreign law does not allow a 

deduction for a guaranteed payment that 

is deductible under U.S. law, § 1.704– 

1(b)(4)(viii)(c)(3)(ii) provides another 

special rule that requires an upward 

adjustment to the partnership’s net 

income in a CFTE category (this rule, 

together with the special rule described 

in the preceding paragraph, are referred 

to in this preamble as the ‘‘special 

rules’’). Adding the amount of a 

guaranteed payment that is not 

deductible under foreign law to the 

partnership’s net income in a CFTE 

category results in CFTEs attributable to 

tax imposed on the income out of which 

the guaranteed payment is made 

following the payment for purposes of 

the safe harbor. An additional rule in 

§ 1.704–1(b)(4)(viii)(c)(4) treats the 

guaranteed payment as a distributive 

share of the partnership’s net income in 

a CFTE category to the extent of the 

upward adjustment. Together, these 

rules for guaranteed payments provide a 

more appropriate matching under the 

safe harbor of CFTEs and the income to 

which they relate. 

However, the current final regulations 

do not expressly address situations in 

which an allocation or distribution of an 

allocated amount or guaranteed 

payment gives rise to a deduction for 

purposes of one foreign tax, but is made 

out of income subject to another tax 

imposed by the same or a different 

foreign jurisdiction. For example, a 

partnership may make a preferential 

allocation of gross income that is 

deductible in the foreign jurisdiction in 

which the partnership is a resident 

(foreign jurisdiction X) but that is made 

out of income earned by a disregarded 

entity or branch owned by the 

partnership that is subject to net basis 

tax in the jurisdiction in which the 

disregarded entity or branch is located 

(foreign jurisdiction Y). In this case, the 

Treasury Department and the IRS are 

aware that some taxpayers have 

suggested that § 1.704– 

1(b)(4)(viii)(c)(3)(ii) may be interpreted 

to provide that the income related to the 

preferential allocation should not be 

included in a CFTE category because it 

is not included in the foreign 

jurisdiction X base, even though there 

are foreign jurisdiction Y CFTEs that 

clearly relate to the income out of which 

the preferential allocation is made. This 

interpretation is inconsistent with the 

purpose of the special rules to apply the 

safe harbor in a manner that matches 

income with the related CFTEs. 

The special rules were not intended to 

permit taxpayers to adjust or fail to 

adjust income in a CFTE category in a 

manner that distorts a partner’s share of 

the income to which the CFTEs assigned 

to that category relate. Therefore, these 

temporary regulations revise the special 

rules to address situations in which 

allocations (or distributions of allocated 

amounts) and guaranteed payments that 

give rise to foreign law deductions are 

made out of income with related CFTEs. 

Specifically, § 1.704– 

1T(b)(4)(viii)(c)(4)(ii) provides that a 

partnership’s net income in a CFTE 

category from which a guaranteed 

payment that is not deductible in a 

foreign jurisdiction is made shall be 

increased by the amount of the 

guaranteed payment that is deductible 

for U.S. federal income tax purposes, 

and such amount shall be treated as an 

allocation to the recipient of the 

guaranteed payment for purposes of 

determining the partners’ shares of 

income in the CFTE category, but only 

for purposes of testing allocations of 

CFTEs attributable to a foreign tax that 


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5910 Federal Register / Vol. 81, No. 23 / Thursday, February 4, 2016 / Rules and Regulations 

does not allow a deduction for the 

guaranteed payment. However, for 

purposes of testing allocations of CFTEs 

attributable to a foreign tax that does 

allow a deduction for the guaranteed 

payment, a partnership’s net income in 

a CFTE category is increased only to the 

extent that the amount of the guaranteed 

payment that is deductible for U.S. 

federal income tax purposes exceeds the 

amount allowed as a deduction for 

purposes of that foreign tax, and such 

excess is treated as an allocation to the 

recipient of the guaranteed payment for 

purposes of determining the partners’ 

shares of income in the CFTE category. 

Similarly, § 1.704– 

1T(b)(4)(viii)(c)(4)(iii) provides that, to 

the extent that a foreign tax allows a 

deduction from its taxable base for an 

allocation (or distribution of an 

allocated amount) to a partner, then 

solely for purposes of testing allocations 

of CFTEs attributable to that foreign tax, 

the partnership’s net income in the 

CFTE category from which the 

allocation is made is reduced by the 

amount of the foreign law deduction, 

and that amount is not treated as an 

allocation for purposes of determining 

the partners’ shares of income in the 

CFTE category. For purposes of testing 

allocations of CFTEs attributable to a 

foreign tax that does not allow a 

deduction for an allocation (or 

distribution of an allocated amount) to 

a partner, the partnership’s net income 

in a CFTE category is not reduced. 

Finally, the current final regulations 

provide that the adjustment to income 

attributable to an activity for a 

preferential allocation depends on 

whether the allocation of the item of 

income (or payment thereof) ‘‘results’’ 

in a deduction under foreign law. This 

rule was intended to apply even if the 

foreign law deduction occurred in a 

different taxable year (for example, 

because the foreign jurisdiction allowed 

a deduction only upon a subsequent 

payment of accrued interest). These 

temporary regulations at § 1.704– 

1T(b)(4)(viii)(c)(4)(ii) and (iii) clarify 

that a guaranteed payment or 

preferential allocation is considered 

deductible under foreign law for 

purposes of the special rules if the 

foreign jurisdiction allows a deduction 

from its taxable base either in the 

current year or in a different taxable 

year. 

III. Inter-Branch Payments 

For taxable years beginning before 

January 1, 2012, the special rules under 

§ 1.704–1(b)(4)(viii)(c)(3)(ii) included a 

cross-reference confirming that certain 

inter-branch payments that were 

described in § 1.704–1(b)(4)(viii)(d)(3) 

(the ‘‘inter-branch payment rule’’) were 

not subject to the special rules. On 

February 14, 2012, temporary 

regulations (TD 9577) were published in 

the Federal Register (77 FR 8127) 

addressing situations in which foreign 

income taxes have been separated from 

the related income. As part of those 

regulations, the inter-branch payment 

rule was removed because it allowed 

taxpayers to separate foreign income 

taxes and related income. In 

conjunction with the removal of the 

inter-branch payment rule, the crossreference to the eliminated rule was 

removed from § 1.704– 

1(b)(4)(viii)(c)(3)(ii). 

The Treasury Department and the IRS 

have become aware that some taxpayers 

claim that the inclusion and subsequent 

removal of the cross-reference created 

uncertainty regarding the application of 

the special rules under § 1.704– 

1(b)(4)(viii)(c)(3)(ii) to disregarded 

payments among branches of a 

partnership. As explained above, the 

purpose of the special rules is to match 

preferential allocations and guaranteed 

payments to partners with CFTEs that 

relate to the income out of which the 

allocation or guaranteed payment is 

made, and also to ensure proper testing 

of CFTE allocations when no CFTEs 

relate to such income. The special rules 

accomplish this matching by treating 

preferential allocations and guaranteed 

payments as distributive shares of 

income, but only for purposes of 

allocating CFTEs attributable to taxes 

imposed by a foreign jurisdiction that 

does not allow deductions for such 

allocations and payments. Because an 

inter-branch payment is not made to a 

partner, it can never be treated as a 

distributive share, and is outside the 

scope of the special rules. By its terms, 

current § 1.704–1(b)(4)(viii)(c)(3)(ii) 

applies only to partnership allocations 

that are deductible under foreign law, 

guaranteed payments that are not 

deductible under foreign law, and (not 

discussed herein) income that is 

excluded from a foreign tax base as a 

result of the status of a partner. The 

inclusion and subsequent removal of the 

cross-reference did not change the 

purpose of current § 1.704– 

1(b)(4)(viii)(c)(3)(ii) or expand its scope 

to provide for reductions in income in 

a CFTE category if a partnership makes 

a disregarded payment that is 

deductible under foreign law. These 

regulations under § 1.704– 

1T(b)(4)(viii)(c)(4)(iii) clarify that the 

special rule for preferential allocations 

applies only to allocations (or 

distributions of allocated amounts) to a 

partner that are deductible under 

foreign law, and not to other items that 

give rise to deductions under foreign 

law. For example, the special rule does 

not apply to reduce income in a CFTE 

category by reason of a disregarded 

inter-branch payment, even if the 

income out of which the inter-branch 

payment is made is not subject to tax in 

any foreign jurisdiction. 

In addition, the Treasury Department 

and the IRS are aware of transactions 

involving serial disregarded payments 

in which taxpayers take the position 

that withholding taxes assessed on the 

first payment in a series of back-to-back 

disregarded payments do not need to be 

apportioned among the CFTE categories 

that include the income out of which 

the payment is made. These regulations 

include new examples clarifying that 

under § 1.704–1(b)(4)(viii)(d)(1) 

withholding taxes must be apportioned 

among the CFTE categories that include 

the related income. See § 1.704–1T(b)(5) 

Example 36 and Example 37. 

IV. Other Non-Substantive Clarifications 

These regulations make certain 

organizational and other nonsubstantive changes that clarify how 

items of income under U.S. federal 

income tax law are assigned to an 

activity and how a partnership’s net 

income in a CFTE category is 

determined. 

For the avoidance of doubt, § 1.704– 

1(b)(4)(viii)(c)(2)(iii) is revised to more 

clearly describe when income from a 

divisible part of a single activity must be 

treated as income from a separate 

activity. Section 1.704– 

1(b)(4)(viii)(c)(2)(iii) provides that 

whether a partnership has one or more 

activities, and the scope of each activity, 

is determined in a reasonable manner 

taking into account all the facts and 

circumstances, with the principal 

consideration being whether the 

proposed determination has the effect of 

separating CFTEs from the related 

foreign income. The rule also provides 

that income from a divisible part of a 

single activity is treated as income from 

a separate activity if necessary to 

prevent separating CFTEs from the 

related foreign income. Example 24(iii) 

of § 1.704–1(b)(5) illustrates that if a 

partnership agreement makes a special 

allocation of income earned by a 

disregarded entity (DE1) in order to 

reflect a disregarded inter-branch 

payment paid by DE1 to a second 

disregarded entity, then the payment is 

treated as a divisible part of an activity 

and treated as a separate activity. These 

regulations confirm this result by 

adding language in § 1.704– 

1T(b)(4)(viii)(c)(2)(iii) clarifying that 

income from a divisible part of a single 


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Federal Register / Vol. 81, No. 23 / Thursday, February 4, 2016 / Rules and Regulations 5911 

activity is treated as income from a 

separate activity whenever the income 

is subject to different allocations. 

These regulations also confirm in 

§ 1.704–1T(b)(4)(viii)(c)(2)(iii) that a 

guaranteed payment or preferential 

allocation of income that is determined 

by reference to all the income from a 

single activity generally will not result 

in dividing a single activity into 

separate activities. This clarification is 

consistent with the rule in § 1.704– 

1(b)(4)(viii)(c)(2)(ii), which generally 

provides that a guaranteed payment, 

gross income allocation, or other 

preferential allocation that is 

determined by reference to income from 

all of the partnership’s activities does 

not result in different allocations of 

income from separate activities. For an 

illustration of the application of 

§ 1.704–1(b)(4)(viii)(c)(2)(iii) prior to 

this clarification, see § 1.704–1(b)(5) 

Example 22 and Example 25, the latter 

of which has also been updated as part 

of these temporary regulations. 

In order to more clearly explain how 

the rules for determining a partnership’s 

net income in a CFTE category operate 

and to assist taxpayers in applying these 

rules, these temporary regulations 

reorganize § 1.704–1(b)(4)(viii)(c)(3) and 

provide an introductory paragraph at 

§ 1.704–1T(b)(4)(viii)(c)(3)(i) that 

describes the steps for computing a 

partnership’s net income in a CFTE 

category. 

The current final regulations provide 

that only items of gross income 

recognized by a branch for U.S. income 

tax purposes are taken into account to 

determine net income attributable to 

any activity of a branch. Example 24 in 

§ 1.704–1(b)(5) further illustrates that a 

disregarded inter-branch payment does 

not move income from one activity to 

another. These temporary regulations 

confirm at § 1.704–1T(b)(4)(viii)(c)(3)(iv) 

that disregarded payments are never 

taken into account in determining the 

amount of net income attributable to an 

activity (although, as noted above, a 

special allocation of income used to 

make a disregarded payment may result 

in that income being treated as a 

divisible part of the activity giving rise 

to the income), and that therefore an 

item of gross income is assigned to the 

activity that generates the item of 

income that is recognized for U.S. 

federal income tax purposes. 

In addition, the current final 

regulations use the term ‘‘distributive 

share of income,’’ which has a general 

meaning under subchapter K but is used 

for a different purpose under § 1.704– 

1(b)(4)(viii)(c)(4). To avoid confusion, 

these temporary regulations at § 1.704– 

1T(b)(4)(viii)(c)(4)(i) revise the term 

‘‘distributive share of income’’ to ‘‘CFTE 

category share of income.’’ No 

difference in meaning or purpose is 

intended by the change in terminology. 

The Treasury Department and the IRS 

will update Examples 20, 21, 22, 23, 24, 

26, and 27 in § 1.704–1(b)(5) (which are 

not revised under these temporary 

regulations) to reflect the new 

terminology when these temporary 

regulations are finalized. In the interim, 

any reference to ‘‘distributive share of 

income’’ under the current final 

regulations should be treated as a 

reference to a ‘‘CFTE category share of 

income’’ as defined in § 1.704– 

1T(b)(4)(viii)(c)(4)(i). 

V. Effective Date 

These temporary regulations apply for 

partnership taxable years that both 

begin on or after January 1, 2016, and 

end after February 4, 2016. The 

temporary regulations also modify an 

existing transition rule with respect to 

certain inter-branch payments for 

partnerships whose agreements were 

entered into prior to February 14, 2012. 

The current transition rule provides that 

if there has been no material 

modification to their partnership 

agreements on or after February 14, 

2012, then, for tax years beginning on or 

after January 1, 2012, these partnerships 

may apply the provisions of §§ 1.704– 

1(b)(4)(viii)(c)(3)(ii) and 1.704– 

1(b)(4)(viii)(d)(3) (revised as of April 1, 

2011). That transition rule is modified 

to provide that for tax years that both 

begin on or after January 1, 2016, and 

end after February 4, 2016, these 

partnerships may continue to apply the 

provisions of § 1.704–1(b)(4)(viii)(d)(3) 

(revised as of April 1, 2011) but must 

apply the provisions of § 1.704– 

1T(b)(4)(viii)(c)(3)(ii). See § 1.704– 

1T(b)(1)(ii)(b)(3)(B). For purposes of this 

transition rule, any change in ownership 

constitutes a material modification to 

the partnership agreement. This 

transition rule does not apply to any 

taxable year (and all subsequent taxable 

years) in which persons bearing a 

relationship to each other that is 

specified in section 267(b) or section 

707(b) collectively have the power to 

amend the partnership agreement 

without the consent of any unrelated 

party. 

No inference is intended as to the 

application of the provisions amended 

by these temporary regulations under 

current law. The IRS may, where 

appropriate, challenge transactions, 

including those described in these 

temporary regulations and this 

preamble, under currently applicable 

Code or regulatory provisions or judicial 

doctrines. 

Special Analyses 

Certain IRS regulations, including this 

one, are exempt from the requirements 

of Executive Order 12866, as 

supplemented and reaffirmed by 

Executive Order 13563. Therefore, a 

regulatory impact assessment is not 

required. It has also been determined 

that section 553(b) of the Administrative 

Procedure Act (5 U.S.C. chapter 5) does 

not apply to these regulations, and 

because the regulations do not impose a 

collection of information on small 

entities, the Regulatory Flexibility Act 

(5 U.S.C. chapter 6) does not apply. 

Pursuant to section 7805(f) of the Code, 

these regulations have been submitted 

to the Chief Counsel for Advocacy of the 

Small Business Administration for 

comment on its impact on small 

business. 

Drafting Information 

The principal author of these 

regulations is Suzanne M. Walsh of the 

Office of Chief Counsel (International). 

However, other personnel from the 

Treasury Department and the IRS 

participated in their development. 

List of Subjects in 26 CFR Part 1 

Income taxes, Reporting and 

recordkeeping requirements. 

Amendments to the Regulations 

Accordingly, 26 CFR part 1 is 

amended as follows: 

PART 1—INCOME TAXES 

Paragraph 1. The authority citation 

for part 1 continues to read in part as 

follows: 

Authority: 26 U.S.C. 7805 * * * 

■ Par. 2. Section 1.704–1 is amended as 

follows: 

■ 1. In Paragraph (b)(0): 

■ i. Add an entry for § 1.704– 

1(b)(1)(ii)(b)(1). 

■ ii. Revise the entries for § 1.704– 

1(b)(4)(viii)(c)(1) through (4) and 

(b)(4)(viii)(d)(1). 

■ 2. Revise paragraphs (b)(1)(ii)(b)(1), 

(b)(1)(ii)(b)(3)(B), (b)(4)(viii)(a)(1), 

(b)(4)(viii)(c)(1), (b)(4)(viii)(c)(2)(ii) and 

(iii), (b)(4)(viii)(c)(3) and (4), 

(b)(4)(viii)(d)(1), and Example 25 of 

paragraph (b)(5). 

■ 3. Add Examples 36 and 37 to 

paragraph (b)(5). 

The revisions and additions read as 

follows: 

§ 1.704–1 Partner’s distributive share. 

* * * * * 

(b) Determination of partner’s 

distributive share–(0) Cross-references. 


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Heading Section 

* * * * * 

[Reserved] ............. 1.704–1(b)(1)(ii)(b)(1) 

* * * * * 

[Reserved] ............. 1.704–1(b)(4)(viii)(c)(1) 

[Reserved] ............. 1.704–1(b)(4)(viii)(c)(2) 

[Reserved] ............. 1.704–1(b)(4)(viii)(c)(3) 

[Reserved] ............. 1.704–1(b)(4)(viii)(c)(4) 

* * * * * 

[Reserved] ............. 1.704–1(b)(4)(viii)(d)(1) 

* * * * * 

(1) * * * 

(ii) * * * 

(b) Rules relating to foreign tax 

expenditures. (1) [Reserved]. For further 

guidance, see § 1.704–1T(b)(1)(ii)(b)(1). 

* * * * * 

(3) * * * 

(B) [Reserved]. For further guidance, 

see § 1.704–1T(b)(1)(ii)(b)(3)(B). 

* * * * * 

(4) * * * 

(viii) * * * 

(a) * * * 

(1) [Reserved]. For further guidance, 

see § 1.704–1T(b)(4)(viii)(a)(1). 

* * * * * 

(c) Income to which CFTEs relate. (1) 

[Reserved]. For further guidance, see 

§ 1.704–1T(b)(4)(viii)(c)(1). 

(2) * * * 

(ii) and (iii) [Reserved]. For further 

guidance, see § 1.704– 

1T(b)(4)(viii)(c)(2)(ii) and (iii). 

(3) [Reserved]. For further guidance, 

see § 1.704–1T(b)(4)(viii)(c)(3). 

(4) [Reserved]. For further guidance, 

see § 1.704–1T(b)(4)(viii)(c)(4). 

* * * * * 

(d) Allocation and apportionment of 

CFTEs to CFTE categories. (1) 

[Reserved]. For further guidance, see 

§ 1.704–1T(b)(4)(viii)(d)(1). 

* * * * * 

(5) * * * 

Example 25. [Reserved]. For further 

guidance, see § 1.704–1T(b)(5) Example 25. 

* * * * * 

Example 36. [Reserved]. For further 

guidance, see § 1.704–1T(b)(5) Example 36. 

Example 37. [Reserved]. For further 

guidance, see § 1.704–1T(b)(5) Example 37. 

* * * * * 

■ Par. 3. Section 1.704–1T is added to 

read as follows: 

§ 1.704–1T Partner’s distributive share 

(temporary). 

(a) through (b)(1)(ii)(a) [Reserved]. For 

further guidance, see § 1.704–1(a) 

through (b)(1)(ii)(a). 

(b) Rules relating to foreign tax 

expenditures—(1) In general. Except as 

otherwise provided in this paragraph 

(b)(1)(ii)(b)(1), the provisions of 

paragraphs (b)(3)(iv) and (b)(4)(viii) of 

this section (regarding the allocation of 

creditable foreign taxes) apply for 

partnership taxable years beginning on 

or after October 19, 2006. The rules that 

apply to allocations of creditable foreign 

taxes made in partnership taxable years 

beginning before October 19, 2006 are 

contained in § 1.704–1T(b)(1)(ii)(b)(1) 

and (b)(4)(xi) as in effect prior to 

October 19, 2006 (see 26 CFR part 1 

revised as of April 1, 2005). However, 

taxpayers may rely on the provisions of 

paragraphs (b)(3)(iv) and (b)(4)(viii) of 

this section for partnership taxable years 

beginning on or after April 21, 2004. 

The provisions of paragraphs 

(b)(4)(viii)(a)(1), (b)(4)(viii)(c)(1), 

(b)(4)(viii)(c)(2)(ii) and (iii), 

(b)(4)(viii)(c)(3) and (4), (b)(4)(viii)(d)(1), 

and Examples 25, 36, and 37 of 

paragraph (b)(5) of this section apply for 

partnership taxable years that both 

begin on or after January 1, 2016, and 

end after February 4, 2016. For the rules 

that apply to partnership taxable years 

beginning on or after October 19, 2006, 

and before January 1, 2016, and to 

taxable years that both begin on or after 

January 1, 2016, and end on or before 

February 4, 2016, see § 1.704– 

1(b)(1)(ii)(b), (b)(4)(viii)(a)(1), 

(b)(4)(viii)(c)(1), (b)(4)(viii)(c)(2)(ii) and 

(iii), (b)(4)(viii)(c)(3) and (4), 

(b)(4)(viii)(d)(1), and (b)(5), Example 25 

(as contained in 26 CFR part 1 revised 

as of April 1, 2015). 

(b)(1)(ii)(b)(2) through 

(b)(1)(ii)(b)(3)(A) [Reserved]. For further 

guidance, see § 1.704–1(b)(1)(ii)(b)(2) 

through (b)(1)(ii)(b)(3)(A). 

(B) Transition rule. Transition relief is 

provided herein to partnerships whose 

agreements were entered into prior to 

February 14, 2012. In such cases, if 

there has been no material modification 

to the partnership agreement on or after 

February 14, 2012, then, for taxable 

years beginning on or after January 1, 

2012, and before January 1, 2016, and 

for taxable years that both begin on or 

after January 1, 2012, and end on or 

before February 4, 2016, these 

partnerships may apply the provisions 

of § 1.704–1(b)(4)(viii)(c)(3)(ii) (see 26 

CFR part 1 revised as of April 1, 2011) 

and § 1.704–1(b)(4)(viii)(d)(3) (see 26 

CFR part 1 revised as of April 1, 2011). 

For taxable years that both begin on or 

after January 1, 2016, and end after 

February 4, 2016, these partnerships 

may apply the provisions of § 1.704– 

1(b)(4)(viii)(d)(3) (see 26 CFR part 1 

revised as of April 1, 2011). For 

purposes of this paragraph 

(b)(1)(ii)(b)(3), any change in ownership 

constitutes a material modification to 

the partnership agreement. This 

transition rule does not apply to any 

taxable year in which persons bearing a 

relationship to each other that is 

specified in section 267(b) or section 

707(b) collectively have the power to 

amend the partnership agreement 

without the consent of any unrelated 

party (and all subsequent taxable years). 

(b)(1)(iii) through (b)(4)(viii)(a) 

[Reserved]. For further guidance, see 

§ 1.704–1(b)(1)(iii) through 

(b)(4)(viii)(a). 

(1) The CFTE is allocated (whether or 

not pursuant to an express provision in 

the partnership agreement) to each 

partner and reported on the partnership 

return in proportion to the partners’ 

CFTE category shares of income to 

which the CFTE relates; and 

(b)(4)(viii)(a)(2) through (b)(4)(viii)(b) 

[Reserved]. For further guidance, see 

§ 1.704–1(b)(4)(viii)(a)(2) through 

(b)(4)(viii)(b). 

(c) Income to which CFTEs relate—(1) 

In general. For purposes of paragraph 

(b)(4)(viii)(a) of this section, CFTEs are 

related to net income in the 

partnership’s CFTE category or 

categories to which the CFTE is 

allocated and apportioned in 

accordance with the rules of paragraph 

(b)(4)(viii)(d) of this section. Paragraph 

(b)(4)(viii)(c)(2) of this section provides 

rules for determining a partnership’s 

CFTE categories. Paragraph 

(b)(4)(viii)(c)(3) of this section provides 

rules for determining the net income in 

each CFTE category. Paragraph 

(b)(4)(viii)(c)(4) of this section provides 

rules for determining a partner’s CFTE 

category share of income, including 

rules that require adjustments to net 

income in a CFTE category for purposes 

of determining the partners’ CFTE 

category share of income with respect to 

certain CFTEs. Paragraph 

(b)(4)(viii)(c)(5) of this section provides 

a special rule for allocating CFTEs when 

a partnership has no net income in a 

CFTE category. 

(2)(i) [Reserved]. For further guidance, 

see § 1.704–1(b)(4)(viii)(c)(2)(i). 

(ii) Different allocations. Different 

allocations of net income (or loss) 

generally will result from provisions of 

the partnership agreement providing for 

different sharing ratios for net income 

(or loss) from separate activities. 

Different allocations of net income (or 

loss) from separate activities generally 

will also result if any partnership item 

is shared in a different ratio than any 

other partnership item. A guaranteed 

payment described in paragraph 

(b)(4)(viii)(c)(4)(ii) of this section, gross 

income allocation, or other preferential 

allocation will result in different 

allocations of net income (or loss) from 


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separate activities only if the amount of 

the payment or the allocation is 

determined by reference to income from 

less than all of the partnership’s 

activities. 

(iii) Activity. Whether a partnership 

has one or more activities, and the scope 

of each activity, is determined in a 

reasonable manner taking into account 

all the facts and circumstances. In 

evaluating whether aggregating or 

disaggregating income from particular 

business or investment operations 

constitutes a reasonable method of 

determining the scope of an activity, the 

principal consideration is whether the 

proposed determination has the effect of 

separating CFTEs from the related 

foreign income. Relevant considerations 

include whether the partnership 

conducts business in more than one 

geographic location or through more 

than one entity or branch, and whether 

certain types of income are exempt from 

foreign tax or subject to preferential 

foreign tax treatment. In addition, 

income from a divisible part of a single 

activity is treated as income from a 

separate activity if necessary to prevent 

separating CFTEs from the related 

foreign income, such as when income 

from divisible parts of a single activity 

is subject to different allocations. A 

guaranteed payment, gross income 

allocation, or other preferential 

allocation of income that is determined 

by reference to all the income from a 

single activity generally will not result 

in the division of an activity into 

divisible parts. See Examples 22 and 25 

of paragraph (b)(5) of this section. The 

partnership’s activities must be 

determined consistently from year to 

year absent a material change in facts 

and circumstances. 

(3) Net income in a CFTE category— 

(i) In general. A partnership computes 

net income in a CFTE category as 

follows: First, the partnership 

determines for U.S. federal income tax 

purposes all of its partnership items, 

including items of gross income, gain, 

loss, deduction, and expense, and items 

allocated pursuant to section 704(c). For 

this purpose, the items of the 

partnership are determined without 

regard to any adjustments under section 

743(b) that its partners may have to the 

basis of property of the partnership. 

However, if the partnership is a 

transferee partner that has a basis 

adjustment under section 743(b) in its 

capacity as a direct or indirect partner 

in a lower-tier partnership, the 

partnership does take such basis 

adjustment into account. Second, the 

partnership must assign those 

partnership items to its activities 

pursuant to paragraph 

(b)(4)(viii)(c)(3)(ii) of this section. Third, 

partnership items attributable to each 

activity are aggregated within the 

relevant CFTE category as determined 

under paragraph (b)(4)(viii)(c)(2) of this 

section in order to compute the net 

income in a CFTE category. 

(ii) Assignment of partnership items 

to activities. The items of gross income 

attributable to an activity must be 

determined in a consistent manner 

under any reasonable method taking 

into account all the facts and 

circumstances. Except as otherwise 

provided in paragraph 

(b)(4)(viii)(c)(3)(iii) of this section, 

expenses, losses, or other deductions 

must be allocated and apportioned to 

gross income attributable to an activity 

in accordance with the rules of 

§§ 1.861–8 and 1.861–8T. Under these 

rules, if an expense, loss, or other 

deduction is allocated to gross income 

from more than one activity, such 

expense, loss, or deduction must be 

apportioned among each such activity 

using a reasonable method that reflects 

to a reasonably close extent the factual 

relationship between the deduction and 

the gross income from such activities. 

See § 1.861–8T(c). For the effect of 

disregarded payments in determining 

the amount of net income attributable to 

an activity, see paragraph 

(b)(4)(viii)(c)(3)(iv) of this section. 

(iii) Interest expense and research and 

experimental expenditures. The 

partnership’s interest expense and 

research and experimental expenditures 

described in section 174 may be 

allocated and apportioned under any 

reasonable method, including but not 

limited to the methods prescribed in 

§§ 1.861–9 through 1.861–13T (interest 

expense) and § 1.861–17 (research and 

experimental expenditures). 

(iv) Disregarded payments. An item of 

gross income is assigned to the activity 

that generates the item of income that is 

recognized for U.S. federal income tax 

purposes. Consequently, disregarded 

payments are not taken into account in 

determining the amount of net income 

attributable to an activity, although a 

special allocation of income used to 

make a disregarded payment may result 

in the subdivision of an activity into 

divisible parts. See paragraph 

(b)(4)(viii)(c)(2)(iii) of this section and 

Examples 24, 36, and 37 of paragraph 

(b)(5) of this section (relating to interbranch payments). 

(4) CFTE category share of income— 

(i) In general. CFTE category share of 

income means the portion of the net 

income in a CFTE category, determined 

in accordance with paragraph 

(b)(4)(viii)(c)(3) of this section as 

modified by paragraphs 

(b)(4)(viii)(c)(4)(ii) through (iv) of this 

section, that is allocated to a partner. To 

the extent provided in paragraph 

(b)(4)(viii)(c)(4)(ii) of this section, a 

guaranteed payment is treated as an 

allocation to the recipient of the 

guaranteed payment for this purpose. If 

more than one partner receives positive 

income allocations (income in excess of 

expenses) from a CFTE category, which 

in the aggregate exceed the total net 

income in the CFTE category, then such 

partner’s CFTE category share of income 

equals the partner’s positive income 

allocation from the CFTE category, 

divided by the aggregate positive 

income allocations from the CFTE 

category, multiplied by the net income 

in the CFTE category. Paragraphs 

(b)(4)(viii)(c)(4)(ii) through (iv) of this 

section require adjustments to the net 

income in a CFTE category for purposes 

of determining the partners’ CFTE 

category share of income if one or more 

foreign jurisdictions impose a tax that 

provides for certain exclusions or 

deductions from the foreign taxable 

base. Such adjustments apply only with 

respect to CFTEs attributable to the 

taxes that allow such exclusions or 

deductions. Thus, net income in a CFTE 

category may vary for purposes of 

applying paragraph (b)(4)(viii)(a)(1) of 

this section to different CFTEs within 

that CFTE category. 

(ii) Guaranteed payments. Except as 

otherwise provided in this paragraph 

(b)(4)(viii)(c)(4)(ii), solely for purposes 

of applying the safe harbor provisions of 

paragraph (b)(4)(viii)(a)(1) of this 

section, net income in the CFTE 

category from which a guaranteed 

payment (within the meaning of section 

707(c)) is made is increased by the 

amount of the guaranteed payment that 

is deductible for U.S. federal income tax 

purposes, and such amount is treated as 

an allocation to the recipient of such 

guaranteed payment for purposes of 

determining the partners’ CFTE category 

shares of income. If a foreign tax allows 

(whether in the current or in a different 

taxable year) a deduction from its 

taxable base for a guaranteed payment, 

then solely for purposes of applying the 

safe harbor provisions of paragraph 

(b)(4)(viii)(a)(1) of this section to 

allocations of CFTEs that are 

attributable to that foreign tax, net 

income in the CFTE category is 

increased only to the extent that the 

amount of the guaranteed payment that 

is deductible for U.S. federal income tax 

purposes exceeds the amount allowed 

as a deduction for purposes of the 

foreign tax, and such excess is treated as 

an allocation to the recipient of the 

guaranteed payment for purposes of 


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determining the partners’ CFTE category 

shares of income. See Example 25 of 

paragraph (b)(5) of this section. 

(iii) Preferential allocations. To the 

extent that a foreign tax allows (whether 

in the current or in a different taxable 

year) a deduction from its taxable base 

for an allocation (or distribution of an 

allocated amount) to a partner, then 

solely for purposes of applying the safe 

harbor provisions of paragraph 

(b)(4)(viii)(a)(1) of this section to 

allocations of CFTEs that are 

attributable to that foreign tax, the net 

income in the CFTE category from 

which the allocation is made is reduced 

by the amount of the allocation, and that 

amount is not treated as an allocation 

for purposes of determining the 

partners’ CFTE category shares of 

income. See Example 25 of paragraph 

(b)(5) of this section. 

(iv) Foreign law exclusions due to 

status of partner. If a foreign tax 

excludes an amount from its taxable 

base as a result of the status of a partner, 

then solely for purposes of applying the 

safe harbor provisions of paragraph 

(b)(4)(viii)(a)(1) of this section to 

allocations of CFTEs that are 

attributable to that foreign tax, the net 

income in the relevant CFTE category is 

reduced by the excluded amounts that 

are allocable to such partners. See 

Example 27 of paragraph (b)(5) of this 

section. 

(b)(4)(viii)(c)(5) [Reserved]. For 

further guidance, see § 1.704– 

1(b)(4)(viii)(c)(5). 

(d) Allocation and apportionment of 

CFTEs to CFTE categories—(1) In 

general. CFTEs are allocated and 

apportioned to CFTE categories in 

accordance with the principles of 

§ 1.904–6. Under these principles, a 

CFTE is related to income in a CFTE 

category if the income is included in the 

base upon which the foreign tax is 

imposed. See Examples 36 and 37 of 

paragraph (b)(5) of this section, which 

illustrate the application of this 

paragraph in the case of serial 

disregarded payments subject to 

withholding tax. In accordance with 

§ 1.904–6(a)(1)(ii) as modified by this 

paragraph (b)(4)(viii)(d), if the foreign 

tax base includes income in more than 

one CFTE category, the CFTEs are 

apportioned among the CFTE categories 

based on the relative amounts of taxable 

income computed under foreign law in 

each CFTE category. For purposes of 

this paragraph (b)(4)(viii)(d), references 

in § 1.904–6 to a separate category or 

separate categories mean ‘‘CFTE 

category’’ or ‘‘CFTE categories’’ and the 

rules in § 1.904–6(a)(1)(ii) are modified 

as follows: 

(b)(4)(viii)(d)(1)(i) through (b)(5) 

Example 24 [Reserved]. For further 

guidance, see § 1.704– 

1(b)(4)(viii)(d)(1)(i) through (b)(5) 

Example 24. 

Example 25. (i) A contributes $750,000 

and B contributes $250,000 to form AB, a 

country X eligible entity (as defined in 

§ 301.7701–3(a) of this chapter) treated as a 

partnership for U.S. federal income tax 

purposes. AB operates business M in country 

X. Country X imposes a 20 percent tax on the 

net income from business M, which tax is a 

CFTE. In 2016, AB earns $300,000 of gross 

income, has deductible expenses of $100,000, 

and pays or accrues $40,000 of country X tax. 

Pursuant to the partnership agreement, the 

first $100,000 of gross income each year is 

specially allocated to A as a preferred return 

on excess capital contributed by A. All 

remaining partnership items, including 

CFTEs, are split evenly between A and B (50 

percent each). The gross income allocation is 

not deductible in determining AB’s taxable 

income under country X law. Assume that 

allocations of all items other than CFTEs are 

valid. 

(ii) AB has a single CFTE category because 

all of AB’s net income is allocated in the 

same ratio. See paragraph (b)(4)(viii)(c)(2) of 

this section. Under paragraph (b)(4)(viii)(c)(3) 

of this section, the net income in the single 

CFTE category is $200,000. The $40,000 of 

taxes is allocated to the single CFTE category 

and, thus, is related to the $200,000 of net 

income in the single CFTE category. In 2016, 

AB’s partnership agreement results in an 

allocation of $150,000 or 75 percent of the 

net income to A ($100,000 attributable to the 

gross income allocation plus $50,000 of the 

remaining $100,000 of net income) and 

$50,000 or 25 percent of the net income to 

B. AB’s partnership agreement allocates the 

country X taxes in accordance with the 

partners’ shares of partnership items 

remaining after the $100,000 gross income 

allocation. Therefore, AB allocates the 

country X taxes 50 percent to A ($20,000) 

and 50 percent to B ($20,000). AB’s 

allocations of country X taxes are not deemed 

to be in accordance with the partners’ 

interests in the partnership under paragraph 

(b)(4)(viii) of this section because they are not 

in proportion to the allocations of the CFTE 

category shares of income to which the 

country X taxes relate. Accordingly, the 

country X taxes will be reallocated according 

to the partners’ interests in the partnership. 

Assuming that the partners do not reasonably 

expect to claim a deduction for the CFTEs in 

determining their U.S. federal income tax 

liabilities, a reallocation of the CFTEs under 

paragraph (b)(3) of this section would be 75 

percent to A ($30,000) and 25 percent to B 

($10,000). If the reallocation of the CFTEs 

causes the partners’ capital accounts not to 

reflect their contemplated economic 

arrangement, the partners may need to 

reallocate other partnership items to ensure 

that the tax consequences of the partnership’s 

allocations are consistent with their 

contemplated economic arrangement over the 

term of the partnership. 

(iii) The facts are the same as in paragraph 

(i) of this Example 25, except that country X 

allows a deduction for the $100,000 

allocation of gross income and, as a result, 

AB pays or accrues only $20,000 of foreign 

tax. Under paragraph (b)(4)(viii)(c)(4)(iii) of 

this section, the net income in the single 

CFTE category is $100,000, determined by 

reducing the net income in the CFTE 

category by the $100,000 of gross income that 

is allocated to A and for which country X 

allows a deduction in determining AB’s 

taxable income. Pursuant to the partnership 

agreement, AB allocates the country X tax 50 

percent to A ($10,000) and 50 percent to B 

($10,000). This allocation is in proportion to 

the partners’ CFTE category shares of the 

$100,000 net income. Accordingly, AB’s 

allocations of country X taxes are deemed to 

be in accordance with the partners’ interests 

in the partnership under paragraph 

(b)(4)(viii)(a) of this section. 

(iv) The facts are the same as in paragraph 

(iii) of this Example 25, except that, in 

addition to $20,000 of country X tax, AB is 

subject to $30,000 of country Y withholding 

tax with respect to the $300,000 of gross 

income that it earns in 2016. Country Y does 

not allow any deductions for purposes of 

determining the withholding tax. As 

described in paragraph (ii) of this Example 

25, there is a single CFTE category with 

respect to AB’s net income. Both the $20,000 

of country X tax and the $30,000 of country 

Y withholding tax relate to that income and 

are therefore allocated to the single CFTE 

category. Under paragraph 

(b)(4)(viii)(c)(4)(iii) of this section, however, 

net income in a CFTE category is reduced by 

the amount of an allocation for which a 

deduction is allowed in determining a 

foreign taxable base, but only for purposes of 

applying paragraph (b)(4)(viii)(a) of this 

section to allocations of CFTEs that are 

attributable to that foreign tax. Accordingly, 

because the $100,000 allocation of gross 

income is deductible for country X tax 

purposes but not for country Y tax purposes, 

the allocations of the CFTEs attributable to 

country X tax and country Y tax are analyzed 

separately. For purposes of applying 

paragraph (b)(4)(viii)(a)(1) of this section to 

allocations of the CFTEs attributable to the 

$20,000 tax imposed by country X, the 

analysis described in paragraph (iii) of this 

Example 25 applies. For purposes of 

applying paragraph (b)(4)(viii)(a)(1) of this 

section to allocations of the CFTEs 

attributable to the $30,000 tax imposed by 

country Y, which did not allow a deduction 

for the $100,000 gross income allocation, the 

net income in the single CFTE category is 

$200,000. Pursuant to the partnership 

agreement, AB allocates the country Y tax 50 

percent to A ($15,000) and 50 percent to B 

($15,000). These allocations are not deemed 

to be in accordance with the partners’ 

interests in the partnership under paragraph 

(b)(4)(viii) of this section because they are not 

in proportion to the partners’ CFTE category 

shares of the $200,000 of net income in the 

category, which is allocated 75 percent to A 

and 25 percent to B under the partnership 

agreement. Accordingly, the country Y taxes 

will be reallocated according to the partners’ 

interests in the partnership as described in 

paragraph (ii) of this Example 25. 

(v) The amount of net income in the single 

CFTE category of AB for purposes of 


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applying paragraph (b)(4)(viii)(a)(1) of this 

section to allocations of CFTEs would be the 

same as in the fact patterns described in 

paragraphs (ii), (iii) and (iv) if, rather than 

being a preferential gross income allocation, 

the $100,000 was a guaranteed payment to A 

within the meaning of section 707(c). See 

paragraph (b)(4)(viii)(c)(4)(ii) of this section. 

(b)(5) Examples 26 through 35 

[Reserved]. For further guidance, see 

§ 1.704–1(b)(5) Examples 26 through 35. 

Example 36. (i) A, B, and C form ABC, an 

eligible entity (as defined in § 301.7701–3(a) 

of this chapter) treated as a partnership for 

U.S. federal income tax purposes. ABC owns 

three entities, DEX, DEY, and DEZ, which are 

organized in, and treated as corporations 

under the laws of, countries X, Y, and Z, 

respectively, and as disregarded entities for 

U.S. federal income tax purposes. DEX 

operates business X in country X, DEY 

operates business Y in country Y, and DEZ 

operates business Z in country Z. Businesses 

X, Y, and Z relate to the licensing and 

sublicensing of intellectual property owned 

by DEZ. During 2016, DEX earns $100,000 of 

royalty income from unrelated payors on 

which it pays no withholding taxes. Country 

X imposes a 30 percent tax on DEX’s net 

income. DEX makes royalty payments of 

$90,000 during 2016 to DEY that are 

deductible by DEX for country X purposes 

and subject to a 10 percent withholding tax 

imposed by country X. DEY earns no other 

income in 2016. Country Y does not impose 

income or withholding taxes. DEY makes 

royalty payments of $80,000 during 2016 to 

DEZ. DEZ earns no other income in 2016. 

Country Z does not impose income or 

withholding taxes. The royalty payments 

from DEX to DEY and from DEY to DEZ are 

disregarded for U.S. federal income tax 

purposes. 

As a result of these payments, DEX has 

taxable income of $10,000 for country X 

purposes on which $3,000 of taxes are 

imposed, and DEY has $90,000 of income for 

country X withholding tax purposes on 

which $9,000 of withholding taxes are 

imposed. Pursuant to the partnership 

agreement, all partnership items from 

business X, excluding CFTEs paid or accrued 

by business X, are allocated 80 percent to A 

and 10 percent each to B and C. All 

partnership items from business Y, excluding 

CFTEs paid or accrued by business Y, are 

allocated 80 percent to B and 10 percent each 

to A and C. All partnership items from 

business Z, excluding CFTEs paid or accrued 

by business Z, are allocated 80 percent to C 

and 10 percent each to A and B. Because only 

business X has items that are regarded for 

U.S. federal income tax purposes (the 

$100,000 of royalty income), only business X 

has partnership items. Accordingly A is 

allocated 80 percent of the income from 

business X ($80,000) and B and C are each 

allocated 10 percent of the income from 

business X ($10,000 each). There are no 

partnership items of income from business Y 

or Z to allocate. 

(ii) Because the partnership agreement 

provides for different allocations of 

partnership net income attributable to 

businesses X, Y, and Z, the net income 

attributable to each of businesses X, Y, and 

Z is income in separate CFTE categories. See 

paragraph (b)(4)(viii)(c)(2) of this section. 

Under paragraph (b)(4)(viii)(c)(3)(iv) of this 

section, an item of gross income that is 

recognized for U.S. federal income tax 

purposes is assigned to the activity that 

generated the item, and disregarded interbranch payments are not taken into account 

in determining net income attributable to an 

activity. Consequently, all $100,000 of ABC’s 

income is attributable to the business X 

activity for U.S. federal income tax purposes, 

and no net income is in the business Y or Z 

CFTE category. Under paragraph 

(b)(4)(viii)(d)(1) of this section, the $3,000 of 

country X taxes imposed on DEX is allocated 

to the business X CFTE category. The 

additional $9,000 of country X withholding 

tax imposed with respect to the inter-branch 

payment to DEY is also allocated to the 

business X CFTE category because for U.S. 

federal income tax purposes the related 

$90,000 of income on which the country X 

withholding tax is imposed is in the business 

X CFTE category. Therefore, $12,000 of taxes 

($3,000 of country X income taxes and $9,000 

of the country X withholding taxes) is related 

to the $100,000 of net income in the business 

X CFTE. See paragraph (b)(4)(viii)(c)(1) of 

this section. The allocations of country X 

taxes will be in proportion to the CFTE 

category shares of income to which they 

relate and will be deemed to be in 

accordance with the partners’ interests in the 

partnership if such taxes are allocated 80 

percent to A and 10 percent each to B and 

C. 

Example 37. (i) Assume that the facts are 

the same as in paragraph (i) of Example 36 

of this section, except that in order to reflect 

the $90,000 payment from DEX to DEY and 

the $80,000 payment from DEY to DEZ, the 

partnership agreement treats only $10,000 of 

the gross income as attributable to the 

business X activity, which the partnership 

agreement allocates 80 percent to A and 10 

percent each to B and C. Of the remaining 

$90,000 of gross income, the partnership 

agreement treats $10,000 of the gross income 

as attributable to the business Y activity, 

which the partnership agreement allocates 80 

percent to B and 10 percent each to A and 

C; and the partnership agreement treats 

$80,000 of the gross income as attributable to 

the business Z activity, which the 

partnership agreement allocates 80 percent to 

C and 10 percent each to A and B. In 

addition, the partnership agreement allocates 

the country X taxes among A, B, and C in 

accordance with which disregarded entity is 

considered to have paid the taxes for country 

X purposes. The partnership agreement 

allocates the $3,000 of country X income 

taxes 80 percent to A and 10 percent to each 

of B and C, and allocates the $9,000 of 

country X withholding taxes 80 percent to B 

and 10 percent to each of A and C. Thus, 

ABC allocates the country X taxes $3,300 to 

A (80 percent of $3,000 plus 10 percent of 

$9,000), $7,500 to B (10 percent of $3,000 

plus 80 percent of $9,000), and $1,200 to C 

(10 percent of $3,000 plus 10 percent of 

$9,000). 

(ii) In order to prevent separating the 

CFTEs from the related foreign income, the 

special allocations of the $10,000 and 

$80,000 treated under the partnership 

agreement as attributable to the business Y 

and the business Z activities, respectively, 

which do not follow the allocation ratios that 

otherwise apply under the partnership 

agreement to items of income in the business 

X activity, are treated as divisible parts of the 

business X activity and, therefore, as separate 

activities. See paragraph (b)(4)(viii)(c)(2)(iii) 

of this section. Because the divisible part of 

the business X activity attributable to the 

portion of the disregarded payment received 

by DEY and not paid on to DEZ ($10,000) and 

the net income from the business Y activity 

($0) are both shared 80 percent to B and 10 

percent each to A and C, that divisible part 

of the business X activity and the business 

Y activity are treated as a single CFTE 

category. Because the divisible part of the 

business X activity attributable to the 

disregarded payment paid to DEZ ($80,000) 

and the net income from the business Z 

activity ($0) are both shared 80 percent to C 

and 10 percent each to A and B, that divisible 

part of the business X activity and the 

business Z activity are also treated as a single 

CFTE category. See paragraph 

(b)(4)(viii)(c)(2)(i) of this section. 

Accordingly, $10,000 of net income 

attributable to business X is in the business 

X CFTE category, $10,000 of net income of 

business X attributable to the net disregarded 

payments of DEY is in the business Y CFTE 

category, and $80,000 of net income of 

business X attributable to the disregarded 

payment to DEZ is in the business Z CFTE 

category. Under paragraph (b)(4)(viii)(d)(1) of 

this section, the $3,000 of country X tax 

imposed on DEX’s income is allocated to the 

business X CFTE category. Because the 

$90,000 on which the country X withholding 

tax is imposed is split between the business 

Y CFTE category and the business Z CFTE 

category, those withholding taxes are 

allocated on a pro rata basis, $1,000 [$9,000 

× ($10,000/$90,000)] to the business Y CFTE 

category and $8,000 [$9,000 × ($80,000/

$90,000)] to the business Z CFTE category. 

See paragraph (b)(4)(viii)(d)(1) of this section. 

To satisfy the safe harbor of paragraph 

(b)(4)(viii) of this section, the $3,000 of 

country X taxes allocated to the business X 

CFTE category must be allocated in 

proportion to the CFTE category shares of 

income to which they relate, and therefore 

would be deemed to be in accordance with 

the partners’ interests in the partnership if 

such taxes were allocated 80 percent to A 

and 10 percent each to B and C. The 

allocation of the $1,000 of country X 

withholding taxes allocated to the business Y 

CFTE category would be in proportion to the 

CFTE category shares of income to which 

they relate, and therefore would be deemed 

to be in accordance with the partners’ 

interests in the partnership if such taxes were 

allocated 80 percent to B and 10 percent each 

to A and C. The allocation of the $8,000 of 

country X withholding taxes allocated to the 

business Z CFTE category would be in 

proportion to the CFTE category shares of 

income to which they relate, and therefore 

would be deemed to be in accordance with 

the partners’ interests in the partnership if 

such taxes were allocated 80 percent to C and 


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5916 Federal Register / Vol. 81, No. 23 / Thursday, February 4, 2016 / Rules and Regulations 

10 percent each to A and B. Thus, to satisfy 

the safe harbor, ABC must allocate the 

country X taxes $3,300 to A (80 percent of 

$3,000 plus 10 percent of $1,000 plus 10 

percent of $8,000), $1,900 to B (10 percent of 

$3,000 plus 80 percent of $1,000 plus 10 

percent of $8,000), and $6,800 to C (10 

percent of $3,000 plus 10 percent of $1,000 

plus 80 percent of $8,000). ABC’s allocations 

of country X taxes are not deemed to be in 

accordance with the partners’ interests in the 

partnership under paragraph (b)(4)(viii) of 

this section because they are not in 

proportion to the partners’ CFTE category 

shares of income to which the country X 

taxes relate. Accordingly, the country X taxes 

will be reallocated according to the partners’ 

interests in the partnership. 

(c) through (e) [Reserved]. For further 

guidance, see § 1.704–1(c) through (e). 

(f) Expiration date. The applicability 

of this section expires on February 4, 

2019. 

John Dalrymple, 

Deputy Commissioner for Services and 

Enforcement. 

Approved: January 14, 2016. 

Mark J. Mazur, 

Assistant Secretary of the Treasury (Tax 

Policy). 

[FR Doc. 2016–01949 Filed 2–3–16; 8:45 am] 

BILLING CODE 4830–01–P 

DEPARTMENT OF HOMELAND 

SECURITY 

Coast Guard 

33 CFR Part 117 

[Docket No. USCG–2016–0076] 

Drawbridge Operation Regulation; 

Columbia River, Vancouver, WA 

AGENCY: Coast Guard, DHS. 

ACTION: Notice of deviation from 

drawbridge regulations. 

SUMMARY: The Coast Guard has issued a 

temporary deviation from the operating 

schedule that governs the Burlington 

Northern Santa Fe (BNSF) Railway 

Bridge across the Columbia River, mile 

105.6, at Vancouver, WA. This deviation 

is necessary to accommodate 

maintenance to replace movable rail 

joints. This deviation allows the bridge 

to remain in the closed position during 

maintenance activities. 

DATES: This deviation is effective from 

7 a.m. on March 8, 2016, to 7 p.m. on 

March 17, 2016. 

ADDRESSES: The docket for this 

deviation, [USCG–2016–0076] is 

available at http://www.regulations.gov. 

Type the docket number in the 

‘‘SEARCH’’ box and click ‘‘SEARCH.’’ 

Click on Open Docket Folder on the line 

associated with this deviation. 

FOR FURTHER INFORMATION CONTACT: If 

you have questions on this temporary 

deviation, call or email Mr. Steven 

Fischer, Bridge Administrator, 

Thirteenth Coast Guard District; 

telephone 206–220–7282, email d13-pfd13bridges@uscg.mil. 

SUPPLEMENTARY INFORMATION: BNSF 

requested that the BNSF Swing Bridge 

across the Columbia River, mile 105.6, 

remain closed to vessel traffic to remove 

and replace rail joints. During this 

installation period, the swing span of 

the bridge will be in the closed-tonavigation position; however, the span 

may be opened for maritime 

emergencies, but any emergency 

opening will necessitate a time 

extension to the approved dates. The 

BNSF Swing Bridge, mile 105.6, 

provides 39 feet of vertical clearance 

above Columbia River Datum 0.0 while 

in the closed position. The current 

operations for the swing bridge is in 33 

CFR 117.5. This deviation allows the 

swing span of the BNSF Railway Bridge 

across the Columbia River, mile 105.6, 

to remain in the closed-to-navigation 

position, and need not open for 

maritime traffic from 7 a.m. to 7 p.m. on 

March 8, March 10, March 15, March 16 

and March 17, 2016. These dates 

coincide with the Columbia River 

Bonneville lock and the Dalles lock. The 

bridge shall operate in accordance to 33 

CFR 117.5 at all other times. Waterway 

usage on this part of the Columbia River 

includes vessels ranging from 

commercial tug and tow vessels to 

recreational pleasure craft including 

cabin cruisers and sailing vessels. 

Vessels able to pass through the 

bridge in the closed positions may do so 

at anytime. For the duration of the 

repair work, vessels will not be allowed 

to pass through the bridge. The bridge 

will be able to open for emergencies and 

there is no immediate alternate route for 

vessels to pass. The bridge can be 

opened for emergency vessels in 

response to a call, however, if an 

opening for emergencies is needed, an 

extension of this deviation will be 

required to complete the work. No 

immediate alternate route for vessels to 

pass is available on this part of the river. 

The Coast Guard will also inform the 

users of the waterways through our 

Local and Broadcast Notices to Mariners 

of the change in operating schedule for 

the bridge so that vessels can arrange 

their transits to minimize any impact 

caused by the temporary deviation. 

In accordance with 33 CFR 117.35(e), 

the drawbridge must return to its regular 

operating schedule immediately at the 

end of the designated time period. This 

deviation from the operating regulations 

is authorized under 33 CFR 117.35. 

Dated: January 29, 2016. 

Steven M. Fischer, 

Bridge Administrator, Thirteenth Coast Guard 

District. 

[FR Doc. 2016–02098 Filed 2–3–16; 8:45 am] 

BILLING CODE 9110–04–P 

DEPARTMENT OF HOMELAND 

SECURITY 

Coast Guard 

33 CFR Part 117 

[Docket No. USCG–2016–0057] 

Drawbridge Operation Regulation; 

James River, Isle of Wight and 

Newport News, VA 

AGENCY: Coast Guard, DHS. 

ACTION: Notice of deviation from 

drawbridge regulation. 

SUMMARY: The Coast Guard has issued a 

temporary deviation from the operating 

schedule that governs the James River 

Bridge (US17) across the James River, 

mile 5.0, at Isle of Wight and Newport 

News, VA. The deviation is necessary to 

perform bridge maintenance and 

repairs. This deviation allows the bridge 

to remain in the closed-to-navigation 

position. 

DATES: This deviation is effective from 

5 a.m. on February 7, 2016 to 7 p.m. on 

February 14, 2016. 

ADDRESSES: The docket for this 

deviation, [USCG–2016–0057] is 

available at http://www.regulations.gov. 

Type the docket number in the 

‘‘SEARCH’’ box and click ‘‘SEARCH’’. 

Click on Open Docket Folder on the line 

associated with this deviation. 

FOR FURTHER INFORMATION CONTACT: If 

you have questions on this temporary 

deviation, call or email Hal R. Pitts, 

Bridge Administration Branch Fifth 

District, Coast Guard, telephone 757– 

398–6222, email Hal.R.Pitts@uscg.mil. 

SUPPLEMENTARY INFORMATION: The 

Virginia Department of Transportation, 

that owns and operates the James River 

Bridge (US17), has requested a 

temporary deviation from the current 

operating regulations to perform repairs 

to the aerial electrical cable connecting 

the north tower to the south tower. The 

bridge is a vertical lift draw bridge and 

has a vertical clearance in the closed 

position of 60 feet above mean high 

water. 

The current operating schedule is 

open on signal as set out in 33 CFR 

117.5. Under this temporary deviation, 

the bridge will remain in the closed-toVerDate Sep<11>2014 16:15 Feb 03, 2016 Jkt 238001 PO 00000 Frm 00036 Fmt 4700 Sfmt 4700 E:\FR\FM\04FER1.SGM 04FER1

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