The Treasury Department and the Internal Revenue Service today issued temporary regulations requiring partnerships to allocate foreign taxes in the same manner as they allocate the income to which those taxes relate. These 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 are not 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 temporary regulations generally apply to taxable years beginning on or after today. No inference is intended as to the treatment of partnership allocations of foreign taxes under the existing regulations.