[Federal Register: April 21, 2004 (Volume 69, Number 77)]
[Rules and Regulations]
[Page 21405-21409]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21ap04-7]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9121]
RIN 1545-BD11
Partner's Distributive Share: Foreign Tax Expenditures
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: The temporary regulations provide rules for the proper
allocation of partnership expenditures for foreign taxes. The temporary
regulations affect partnerships and their partners. The text of the
temporary regulations also serves as the text of the proposed
regulations set forth in the notice of proposed rulemaking on this
subject in the Proposed Rules section of this issue of the Federal
Register. The final regulations consist of technical revisions to
reflect the issuance of the temporary regulations.
DATES: Effective Date: These regulations are effective April 21, 2004.
Applicability Date: For dates of applicability, see Sec. 1.704-
1(b)(1)(ii).
FOR FURTHER INFORMATION CONTACT: Beverly Katz at 202-622-3050 (not a
toll-free number.
SUPPLEMENTARY INFORMATION:
Background
Subchapter K is intended to permit taxpayers to conduct joint
business activities through a flexible economic arrangement without
incurring an entity-level tax. To achieve this goal of a flexible
economic arrangement, partners are generally permitted to decide among
themselves how a partnership's items will be allocated. Section 704(a)
of the Internal Revenue Code (Code) provides that a partner's
distributive share of income, gain, loss, deduction, or credit shall,
except as otherwise provided, be determined by the partnership
agreement.
Section 704(b) places a significant limitation on the general
flexibility of section 704(a). Specifically, section 704(b) provides
that a partner's distributive share of income, gain, loss, deduction,
or credit (or item thereof) shall be determined in accordance with the
partner's interest in the partnership (determined by taking into
account all facts and circumstances) if the allocation to a partner
under the partnership agreement of income, gain, loss, deduction, or
credit (or item thereof) does not have substantial economic effect.
Thus, the statute provides that partnership allocations either must
have substantial economic effect or must be in accordance with the
partners' interests in the partnership.
Section 1.704-1(b)(2)(i) provides that the determination of whether
an allocation of income, gain, loss, or deduction to a partner has
substantial economic effect involves a two-part analysis that is made
as of the end of the partnership taxable year to which the allocation
relates. First, the allocation must have economic effect within the
meaning of Sec. 1.704-1(b)(2)(ii). Second,
[[Page 21406]]
the economic effect of the allocation must be substantial within the
meaning of Sec. 1.704-1(b)(2)(iii).
For an allocation to have economic effect, it must be consistent
with the underlying economic arrangement of the partners. This means
that, in the event that there is an economic benefit or burden that
corresponds to the allocation, the partner to whom the allocation is
made must receive such economic benefit or bear such economic burden.
Sec. 1.704-1(b)(2)(ii). Generally, an allocation of income, gain,
loss, or deduction (or item thereof) to a partner will have economic
effect if, and only if, throughout the full term of the partnership,
the partnership agreement provides: (1) For the determination and
maintenance of the partners' capital accounts in accordance with Sec.
1.704-1(b)(2)(iv); (2) for liquidating distributions to the partners to
be made in accordance with the positive capital account balances of the
partners; and (3) for each partner to be unconditionally obligated to
restore the deficit balance in the partner's capital account following
the liquidation of the partner's partnership interest. In lieu of
satisfying the third criterion, the partnership may satisfy the
qualified income offset rules set forth in Sec. 1.704-1(b)(2)(ii)(d).
Section 1.704-1(b)(2)(iii)(a) provides as a general rule that the
economic effect of an allocation (or allocations) is substantial if
there is a reasonable possibility that the allocation (or allocations)
will affect substantially the dollar amounts to be received by the
partners from the partnership, independent of tax consequences. The
section further provides that, even if the allocation affects
substantially the dollar amounts, the economic effect of the allocation
(or allocations) is not substantial if, at the time the allocation (or
allocations) becomes part of the partnership agreement, (1) the after-
tax economic consequences of at least one partner may, in present value
terms, be enhanced compared to such consequences if the allocation (or
allocations) were not contained in the partnership agreement, and (2)
there is a strong likelihood that the after-tax economic consequences
of no partner will, in present value terms, be substantially diminished
compared to such consequences if the allocation (or allocations) were
not contained in the partnership agreement.
The regulations under section 704(b) provide that the allocation of
certain items cannot have substantial economic effect, and accordingly
provide guidance on allocating those items in a manner that will be
deemed to be in accordance with the partners' interests in the
partnership. Items that cannot be allocated with substantial economic
effect include tax credits, nonrecourse deductions, and recapture
amounts. These items are addressed in Sec. Sec. 1.704-1(b)(4) and
1.704-2.
Explanation of Provisions
1. Clarifying the Allocation of Expenditures for Foreign Taxes
Section 901(b)(5) provides that an individual who is a partner
will, subject to certain limitations, qualify for the foreign tax
credit for his proportionate share of taxes of the partnership paid or
accrued during the taxable year to a foreign country or to any
possession of the United States. Section 702(a)(6) provides that each
partner shall take into account separately his distributive share of
the partnership's taxes, described in section 901, paid or accrued to
foreign countries and to possessions of the United States. Section
703(a)(2)(B) provides that the partnership is not entitled to the
deduction for taxes provided in section 164(a) with respect to taxes,
described in section 901, paid or accrued to foreign countries and to
possessions of the United States. Section 703(b)(3) provides that
elections affecting the computation of taxable income derived from a
partnership shall be made by the partnership, except that any election
under section 901 (relating to taxes of foreign countries and
possessions of the United States), will be made by each partner
separately.
These temporary regulations clarify the application of the
regulations under section 704 to creditable foreign tax expenditures
for which the partnership bears legal liability as described in Sec.
1.901-2(f). Unlike most other trade or business expenses, foreign taxes
described in section 901 or 903 are fully creditable against a
partner's U.S. tax liability, subject to certain limitations, including
primarily the foreign tax credit limitation under section 904. For this
reason, the temporary regulations provide that partnership allocations
of creditable foreign tax expenditures cannot have substantial economic
effect and, therefore, must be allocated in accordance with the
partners' interests in the partnership. A creditable foreign tax is a
foreign tax paid or accrued for U.S. tax purposes by a partnership and
that is eligible for a credit under section 901(a). A foreign tax is a
creditable foreign tax for these purposes without regard to whether a
partner receiving an allocation of such foreign tax elects to claim a
credit for such amount.
The temporary regulations establish a safe harbor under which
partnership allocations of foreign tax expenditures will be deemed to
be in accordance with the partners' interests in the partnership. Under
this safe harbor, if the partnership agreement satisfies the
requirements of Sec. 1.704-1(b)(2)(ii)(b) or (d) (i.e., capital
account maintenance, liquidation according to capital accounts, and
either deficit restoration obligations or qualified income offsets),
then an allocation of a foreign tax expenditure that is proportionate
to a partner's distributive share of the partnership income to which
such taxes relate (including income allocated pursuant to section
704(c)) will be deemed to be in accordance with the partners' interests
in the partnership. This rule is consistent with the underlying
purposes of the foreign tax credit, which is to avoid double taxation
of foreign source income, and the foreign tax credit limitation, which
is to prevent foreign tax credits from offsetting tax liability on a
taxpayer's U.S. source income. Also, this rule achieves greater parity
between entities that are taxed under foreign law at the partner level
and entities that are taxed under foreign law at the entity level. If a
partnership were taxed under foreign law at the partner level, then the
amount of foreign taxes imposed on a partner generally would be
proportionate to the partner's share of the income subject to the
foreign tax. The partner would take into account this amount of foreign
tax in computing U.S. tax liability. Likewise, for partnerships that
are taxed under foreign law at the entity level, the safe harbor
provides that a partner is allowed to take into account in computing
U.S. tax liability the share of the partnership's foreign tax
expenditures that is proportionate to the partner's share of the income
to which such taxes relate.
If the taxpayer does not satisfy this safe harbor, then the
taxpayer's allocations will be tested under the partners' interests in
the partnership standard set forth in Sec. 1.704-1(b)(3). Under that
standard, the determination of a partner's interest in a partnership is
made by taking into account all facts and circumstances relating to the
economic arrangement of the partners. Among the facts to be considered
are: (a) The partners' relative contributions to the partnership; (b)
the interests of the partners in economic profits and losses (if
different than their interests in taxable income or loss); (c) the
interests of the partners in cash flow and other non-liquidating
distributions; and (d)
[[Page 21407]]
the rights of the partners to distributions of capital upon
liquidation. Ultimately, the partners' interests in the partnership
signify the manner in which the partners have agreed to share the
economic benefit or burden (if any) corresponding to the income, gain,
loss, deduction, or credit (or item thereof) that is allocated. The
sharing arrangement with respect to a particular item may or may not
correspond to the overall economic arrangement of the partners. Thus, a
partnership's allocation of a foreign tax expenditure that does not
satisfy the safe harbor contained in these temporary regulations, may,
in unusual circumstances (such as where there is substantial certainty
that U.S partners will deduct, rather than credit, foreign taxes) be in
accordance with partners' interests in the partnership under Sec.
1.704-1(b)(3).
2. Application of Sec. 1.704-1(b)(2)(iii) Substantiality Requirement
Where Partnership Allocation Has Tax Effect on Owners of Partners
As discussed above, in determining if the economic effect of a
partnership allocation is substantial, the partnership must consider
the after-tax economic consequences to the partners. The IRS and
Treasury have become aware that some partnerships are taking the
position that, in determining if the economic effect of a partnership
allocation is substantial, they need not consider any tax consequences
to an owner of the partner that result from the allocation. The IRS and
Treasury believe that such a position is inconsistent with the policies
underlying the substantial economic effect rules, because it would
allow a partnership to make tax-advantaged allocations if the tax
advantages of the allocations were to accrue to an owner of a partner,
rather than to the partner itself. The IRS and Treasury are planning to
issue guidance on the application of the section 704(b) regulations to
these situations.
3. Effective Date
The provisions of these regulations generally apply for partnership
taxable years beginning on or after the date that the temporary
regulations are published in the Federal Register. A transition rule is
also provided for existing partnerships. Under the transition rule, if
a partnership agreement was entered into before April 21, 2004, then
the partnership may apply the provisions of Sec. 1.704-1(b), as if the
amendments made by this temporary regulation had not occurred, until
any subsequent material modification to the partnership agreement,
which includes any change in ownership, occurs. This transition rule
does not apply if, as of April 20, 2004, persons that are related to
each other (within the meaning of section 267(b) and 707(b))
collectively have the power to amend the partnership agreement without
the consent of any unrelated party. No inference regarding the
treatment of allocations of foreign taxes under Sec. 1.704-1(b) (prior
to the amendments made by this temporary regulation) is intended.
Special Analyses
It has been determined that this Treasury Decision is not a
significant regulatory action as defined in Executive Order 12866.
Therefore, a regulatory assessment is not required. It also has been
determined that section 553(b) of the Administrative Procedure Act (5
U.S.C. chapter 5) does not apply to these regulations. For the
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6),
refer to the Special Analyses section of the preamble to the notice of
proposed rulemaking on this subject published in the Proposed Rules
section of this issue of the Federal Register. Pursuant to section
7805(f) of the Code, this notice of rulemaking will be 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 this regulation is Beverly M. Katz, Office
of the Associate Chief Counsel (Passthroughs & Special Industries).
However, other personnel from the IRS and Treasury Department
participated in its development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Adoption of Amendments to the Regulations
0
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
1. The authority citation for part 1 continues to read, in part, as
follows:
Authority: 26 U.S.C. 7805 * * *
0
2. Section 1.704-1 is amended as follows:
0
1. Paragraph (b)(0) is amended by adding entries for Sec. Sec. 1.704-
1(b)(1)(ii)(a), 1.704-1(b)(1)(ii)(b), 1.704-1(b)(4)(viii), 1.704-
1(b)(4)(ix), 1.704-1(b)(4)(x), and 1.704-1(b)(4)(xi).
0
2. The text of paragraph (b)(1)(ii) is redesignated as paragraph
(b)(1)(ii)(a).
0
3. A heading is added to newly designated paragraph (b)(1)(ii)(a).
0
4. Paragraphs (b)(1)(ii)(b), (b)(4)(viii), (b)(4)(ix), (b)(4)(x), and
(b)(4)(xi) are added.
0
5. Paragraph (b)(5) is amended by adding Example 20 through Example 28.
0
6. The additions read as follows:
Sec. 1.704-1 Partner's distributive share.
* * * * *
(b) Determination of partner's distributive share--(0) Cross-
references.
* * * * *
Generally........................... 1.704-1(b)(1)(ii)(a)
Foreign tax expenditures............ 1.704-1(b)(1)(ii)(b)
* * * * *
[Reserved].......................... 1.704-1(b)(4)(viii)
[Reserved].......................... 1.704-1(b)(4)(ix)
[Reserved].......................... 1.704-1(b)(4)(x)
Allocation of creditable foreign 1.704-1(b)(4)(xi)
taxes.
* * * * *
(1) * * *
(ii) * * * (a) Generally.
(b) Foreign tax expenditures. [Reserved]. For further guidance, see
Sec. 1.704-1T(b)(1)(ii)(b).
* * * * *
(4) * * *
(viii) [Reserved].
(ix) [Reserved].
(x) [Reserved].
(xi) Allocation of creditable foreign taxes. [Reserved]. For
further guidance, see Sec. 1.704-1T(b)(4)(xi).
(5) * * *
Examples (20) through (24). [Reserved].
Examples (25) through (28). [Reserved]. For further guidance, see
Sec. 1.704-1T(b)(5), Examples (25) through (28).
* * * * *
0
3. Section 1.704-1T is added to read as follows:
Sec. 1.704-1T Partner's distributive share (temporary).
(a) through (b)(1)(ii)(a) [Reserved]. For further guidance, see
Sec. 1.704-1(a) through (b)(1)(ii)(a).
(b)(1)(ii)(b) Rules relating to foreign tax expenditures--(1) In
general. The provisions of paragraphs (b)(4)(xi) (regarding the
allocation of foreign tax expenditures) apply for partnership taxable
years beginning on or after April 21, 2004.
(2) Transition rule. If a partnership agreement was entered into
before April 21, 2004, then the partnership may apply the provisions of
this paragraph (b) as if the amendments made by this temporary
regulation had not occurred,
[[Page 21408]]
until any subsequent material modification to the partnership
agreement, which includes any change in ownership, occurs. This
transition rule does not apply if, as of April 20, 2004, persons that
are related to each other (within the meaning of section 267(b) and
707(b)) collectively have the power to amend the partnership agreement
without the consent of any unrelated party.
(b)(1)(iii) through (b)(4)(vii) [Reserved]. For further guidance,
see Sec. 1.704-1(b)(1)(iii) through (b)(4)(vii).
(b)(4)(viii) through (b)(4)(x) [Reserved].
(b)(4)(xi) Allocations of creditable foreign taxes--(a) In general.
Allocations of creditable foreign taxes cannot have substantial
economic effect and, accordingly, such expenditures must be allocated
in accordance with the partners' interests in the partnership. An
allocation of a creditable foreign tax will be deemed to be in
accordance with the partners' interests in the partnership if--
(1) The requirements of either paragraph (b)(2)(ii)(b) or
(b)(2)(ii)(d) of this section are satisfied (i.e., capital accounts are
maintained in accordance with paragraph (b)(2)(iv) of this section,
liquidating distributions are required to be made in accordance with
positive capital account balances, and each partner either has an
unconditional deficit restoration obligation or agrees to a qualified
income offset); and
(2) The partnership agreement provides for the allocation of the
creditable foreign tax in proportion to the partners' distributive
shares of income (including income allocated pursuant to section
704(c)) to which the creditable foreign tax relates.
(b) Creditable foreign taxes. A creditable foreign tax is a foreign
tax paid or accrued for U.S. tax purposes by a partnership and that is
eligible for a credit under section 901(a). A foreign tax is a
creditable foreign tax for these purposes without regard to whether a
partner receiving an allocation of such foreign tax elects to claim a
credit for such amount.
(c) Income related to foreign taxes. A foreign tax is related to
income if the income is included in the base upon which the taxes are
imposed, which determination must be made in accordance with the
principles of Sec. 1.904-6. See Examples (25) through (28) of
paragraph (b)(5) of this section.
(b)(5) * * *
Examples 1 through 19 [Reserved]. For further guidance, see Sec.
1.704-1(b)(5), Examples 1 through 19.
Examples 20 through 24 [Reserved].
Example 25. (i) A and B form AB, an eligible entity (as defined
in Sec. 301.7701-3(a) of this chapter), treated as a partnership
for U.S. tax purposes. AB's partnership agreement (within the
meaning of paragraph (b)(2)(ii)(j) of this section) provides that
the partners' capital accounts will be determined and maintained in
accordance with paragraph (b)(2)(iv) of this section, that
liquidation proceeds will be distributed in accordance with the
partners' positive capital account balances, and that any partner
with a deficit balance in his capital account following the
liquidation of his interest must restore that deficit to the
partnership. AB operates business M and earns income from passive
investments in country X. Assume that country X imposes a 40 percent
tax on business M income, which tax is a creditable foreign tax, but
exempts from tax income from passive investments. In year 1, AB
earns $100 of income from business M and $30 from passive
investments and pays or accrues $40 of country X taxes. For purposes
of section 904(d), the income from business M is general limitation
income and the income from the passive investments is passive
income. Pursuant to the partnership agreement, all partnership
items, including creditable foreign taxes, from business M are
allocated 60 percent to A and 40 percent to B, and all partnership
items, including creditable foreign taxes, from passive investments
are allocated 80 percent to A and 20 percent to B. Accordingly, A is
allocated 60 percent of the business M income ($60) and 60 percent
of the country X taxes ($24), and B is allocated 40 percent of the
business M income ($40) and 40 percent of the country X taxes ($16).
(ii) Under paragraph (b)(4)(xi) of this section, the $40 of
taxes is related to the $100 of general limitation income and no
portion of the taxes is related to the passive income. Because AB's
partnership agreement allocates the general limitation income 60/40
and the country X taxes 60/40, the allocations of the country X
taxes are in proportion to the allocation of the income to which the
foreign tax relates. Because AB satisfies the requirement of
paragraph (b)(4)(xi) of this section, the allocations of the country
X taxes are deemed to be in accordance with the partners' interests
in the partnership.
Example 26. (i) A and B form AB, an eligible entity (as defined
in Sec. 301.7701-3(a) of this chapter), treated as a partnership
for U.S. tax purposes. AB's partnership agreement (within the
meaning paragraph (b)(2)(ii)(j) of this section) provides that the
partners' capital accounts will be determined and maintained in
accordance with paragraph (b)(2)(iv) of this section, that
liquidation proceeds will be distributed in accordance with the
partners' positive capital account balances, and that any partner
with a deficit balance in his capital account following the
liquidation of his interest must restore that deficit to the
partnership. AB operates business M in country X and business N in
country Y. Assume that country X imposes a 40 percent tax on
business M income, country Y imposes a 20 percent tax on business N
income, and the country X and country Y taxes are creditable foreign
taxes. In year 1, AB has $100 of income from business M and $50 of
income from business N. Country X imposes $40 of tax on the income
from business M and country Y imposes $10 of tax on the income of
business N. Pursuant to the partnership agreement, all partnership
items, including creditable foreign taxes, from business M are
allocated 75 percent to A and 25 percent to B, and all partnership
items, including creditable foreign taxes, from business N are split
evenly between A and B (50/50). Accordingly, A is allocated 75
percent of the income from business M ($75), 75 percent of the
country X taxes ($30), 50 percent of the income from business N
($25), and 50 percent of the country Y taxes ($5). B is allocated 25
percent of the income from business M ($25), 25 percent of the
country X taxes ($10), 50 percent of the income from business N
($25), and 50 percent of the country Y taxes ($5).
(ii) Because the income from business M and business N is
general limitation income and the partnership agreement provides for
different allocations with respect to such income, it is necessary
to determine which foreign taxes are related to the business M
income and which foreign taxes are related to the business N income.
Under paragraph (b)(4)(xi) of this section, the $40 of country X
taxes is related to business M and the $10 of country Y taxes is
related to business N. Because AB's partnership agreement allocates
the $40 of country X taxes in the same proportion as the general
limitation income from business M, and the $10 of country Y taxes in
the same proportion as the general limitation income from business
N, the allocations of the country X taxes and the country Y taxes
are in proportion to the allocation of the income to which the
foreign taxes relate. Because AB satisfies the requirements of
paragraph (b)(4)(xi), the allocations of the country X and country Y
taxes are deemed to be in accordance with the partners' interests in
the partnership.
Example 27. (i) The facts are the same as in Example 26, except
that AB does not actually receive the $50 accrued with respect to
business N until year 2. Also assume that A, B and AB each report
taxable income on an accrual basis for U.S. tax purposes and AB
reports taxable income on a cash basis for country X and country Y
purposes. In year 1, AB pays country X taxes of $40. In year 2, AB
pays country Y taxes of $10. Pursuant to the partnership agreement,
in year 1, A is allocated 75 percent of business M income ($75) and
country X taxes ($30) and 50 percent of business N income ($25). B
is allocated 25 percent of business M income ($25) and country X
taxes ($10) and 50 percent of business N income ($25). In year 2, A
and B will each be allocated 50 percent of the country Y taxes ($5).
(ii) Because the income from business M and business N is
general limitation income and the partnership agreement provides for
different allocations with respect to such income, it is necessary
to determine which foreign taxes are related to business M income
and which foreign taxes are related to business N income. Under
paragraph (b)(4)(xi) of this section, $40 of country X taxes is
related to the $100 of general
[[Page 21409]]
limitation income from business M. Under paragraph (b)(4)(xi), the
country Y tax imposed in year 2 is allocable to the $50 of business
N income AB recognizes in year 2 under country Y law and is treated
as paid in year 2 on the $50 of business N income recognized for
U.S. tax purposes in year 1. See Sec. 1.904-6(a)(1)(iv) and (c),
Example 5. Accordingly, the $10 of country Y taxes is related to the
$50 of general limitation income from business N. Because AB's
partnership agreement allocates the $40 of country X taxes in
proportion to the general limitation income from business M, and the
$10 of country X taxes from business N in proportion to the year 1
general limitation income from business N, the allocations of the
country X and country Y taxes are in proportion to the allocation of
the income to which the foreign taxes relate. Therefore, AB's
partnership agreement satisfies the requirement of paragraph
(b)(4)(xi)(a)(2) of this section. Because AB also satisfies the
requirements of paragraph (b)(4)(xi)(a)(1) of this section, the
allocations of the country X and Y taxes are deemed to be in
accordance with the partners' interests in the partnership under
paragraph (b)(4)(xi) of this section.
Example 28. (i) A and B form AB, an eligible entity (as defined
in Sec. 301.7701-3(a) of this chapter), treated as a partnership
for U.S. tax purposes. AB's partnership agreement provides that the
partners' capital accounts will be determined and maintained in
accordance with paragraph (b)(2)(iv) of this section, that
liquidation proceeds will be distributed in accordance with the
partners' positive capital account balances, and that any partner
with a deficit balance in his capital account following the
liquidation of his interest must restore that deficit to the
partnership. AB operates business M in country X. Assume that
country X imposes a 20 percent tax on the net income from business
M, which tax is a creditable foreign tax. In year 1, AB earns $300
of gross income, has deductible expenses, exclusive of creditable
foreign taxes, of $100, and pays or accrues $40 of country X tax.
For purposes of section 904(d), all income from business M is
general limitation income. Pursuant to the partnership agreement,
the first $100 of gross income each year is allocated to A as a
return on excess capital contributed by A. All remaining partnership
items, including creditable foreign taxes, are split evenly (50/50)
between A and B. Assume that the gross income allocation is not
deductible for country X purposes.
(ii) Under paragraph (b)(4)(xi) of this section, the $40 of
taxes is related to the $200 of general limitation net income. In
year 1, AB's partnership agreement allocates $150 or 75 percent of
the general limitation income to A ($100 attributable to the gross
income allocation plus $50 of the remaining $100 of net income) and
$50 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 gross income
allocation. Therefore, AB allocates the country X taxes 50 percent
to A ($20) and 50 percent to B ($20). Under paragraph (b)(4)(xi) of
this section, the allocation of country X taxes cannot have
substantial economic effect and must be allocated in accordance with
the partners' interests in the partnership. 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)(xi) of
this section, because they are not in proportion to the allocation
of the income to which the country X taxes relates.
(c) through (e)(4)(ii)(b) [Reserved]. For further guidance, see
Sec. 1.704-1(c) through (e)(4)(ii)(b).
John M. Dalrymple,
Acting Deputy Commissioner for Services and Enforcement.
Approved: March 25, 2004.
Gregory F. Jenner,
Acting Assistant Secretary of the Treasury.
[FR Doc. 04-8704 Filed 4-20-04; 8:45 am]
BILLING CODE 4830-01-P