Washington (April 23, 2004) -- The Treasury Department and the Internal Revenue Service have issued temporary regulations requiring partnerships to allocate foreign taxes in the same manner as they allocate the income to which those taxes relate.


The regulations target certain transactions in which U.S. partners (or U.S. shareholders of partners that are controlled foreign corporations) attempt, through special partnership allocations, to claim foreign tax credits that aren't matched by income subject to U.S. tax.


"As we discussed in Notice 2004-19, we will use all of the tools available to us to address inappropriate foreign tax credit transactions," said acting assistant secretary for tax policy Greg Jenner. "Allocations by partnerships of foreign taxes without the corresponding income do not give rise to the double taxation that is the economic basis for the foreign tax credit. These types of allocations should not be allowed."


The provisions of the regs generally apply to partnership tax years beginning on or after April 21, 2004 -- the date they were published in the Federal Register. The regs also provide a transition rule for existing partnerships, according to Selva Ozelli, a CPA and international tax attorney with RIA, a Thomson business.


"Under the transition rule, if a partnership agreement was entered into before April 21, then the partnership may apply the provisions of Section 1.704-1(b), as if the temporary regulations had not been issued, until any subsequent material modification to the agreement, including any change in ownership, occurs," she said.


Ozelli added, "However, the transition rule does not apply if, as of April 20, 2004, persons related to each other within the meaning of Code Section 267(b) and 707(b) collectively have the power to amend the partnership agreement without the consent of any unrelated party."


-- Roger Russell

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