Treasury Issues Notice Addressing Domestic Partnerships and S-corporations Filing under Proposed GILTI Regulations

August 2019

Summary

On August 22, 2019, the Department of the Treasury and the Internal Revenue Service (collectively, Treasury) issued Notice 2019-46, which announces Treasury’s plans to issue regulations that will permit a domestic partnership or S corporation to apply the rules in proposed §1.951A-5 for taxable years ending before June 22, 2019. The notice also addresses the applicability of penalties in the case of a domestic partnership or S corporation that acted consistently with proposed §1.951A-5 on or before June 21, 2019, but files a tax return consistent with the final regulations under §1.951A-1(e). To apply the rules in proposed §1.951A-5 or for penalties not to apply as discussed in the notice, a domestic partnership or S corporation must satisfy certain notification and reporting requirements as detailed further below.
 

Details

On October 10, 2018, the Treasury published in the Federal Register proposed regulations under Section 951A (REG-104390-18, 83 FR 51072) (Proposed Regulations).  The Proposed Regulations provided a hybrid approach to the treatment of a domestic partnership that is a U.S. shareholder (U.S. shareholder partnership) of a CFC (partnership CFC).  Under the hybrid approach, a U.S. shareholder partnership would determine its GILTI inclusion amount, and the partners of the partnership that were not also U.S. shareholders of the partnership CFC would take into account their distributive share of the partnership’s GILTI inclusion amount.[1] Partners that were themselves U.S. shareholders of a partnership CFC would not take into account their distributive share of the partnership’s GILTI inclusion amount, and instead would be treated as proportionately owning the stock of the partnership CFC within the meaning of Section 958(a) as if the domestic partnership were a foreign partnership.[2] For additional details regarding the Proposed Regulations, see our September 2018 tax alert.
 
On June 21, 2019, the Treasury published in the Federal Register final regulations under Section 951A (T.D. 9866, 84 FR 29288) (Final Regulations).  The Final Regulations did not adopt the hybrid approach with respect to domestic partnerships in the Proposed Regulations.  Under the Final Regulations, a domestic partnership, including a U.S. shareholder partnership, does not have a GILTI inclusion amount, and therefore no partner of the partnership has a distributive share of a GILTI inclusion amount.[3]  Rather, for purposes of determining the GILTI inclusion amount of any partner of a domestic partnership, each partner is treated as proportionately owning the stock of a CFC owned by the partnership within the meaning of Section 958(a) in the same manner as if the domestic partnership were a foreign partnership.[4]  Because only a U.S. person that is a U.S. shareholder can have a GILTI inclusion amount, a partner that is not a U.S. shareholder of a partnership CFC does not have a GILTI inclusion amount determined by reference to such partnership CFC.  Under the Final Regulations, a partner that is not a U.S. shareholder with respect to a partnership CFC has neither a distributive share of a GILTI inclusion amount nor a GILTI inclusion amount that is determined by reference to such partnership CFC. For additional details regarding the Final Regulations, see our June 2019 tax alert.
 
The Final Regulations apply to taxable years of foreign corporations beginning after December 31, 2017, and to taxable years of U.S. shareholders in which or with which such taxable years of foreign corporations end.[5]  Therefore, domestic partnerships and S corporations that file their income tax returns for the 2018 tax year after June 21, 2019, must, absent the relief provided in the notice, file income tax returns consistent with the Final Regulations and furnish Schedules K-1 to their partners and shareholders that are consistent with these income tax returns.
 
The notice provides relief for certain domestic partnerships and S corporations that furnished Schedules K-1 to their partners and shareholders on or before the date of publication of the Final Regulations on June 21, 2019, applying the Proposed Regulations and reporting a distributive share of the domestic partnership’s GILTI inclusion amount or a pro rata share of the S corporation’s GILTI inclusion amount.
 
The notice states that the forthcoming regulations will provide that a domestic partnership or S corporation may apply the rules in proposed §1.951A-5, in their entirety, for taxable years that ended before June 22, 2019.  Thus, for example, a domestic partnership that applies proposed §1.951A-5 for a taxable year ending before June 22, 2019, would file a Form 1065, including Form 8992, U.S. Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI), for such taxable year on the basis of proposed §1.951A-5 and furnish to its partners for such taxable year Schedules K-1 on the basis of proposed §1.951A-5.  Certain notification and reporting requirements detailed below must be satisfied.
 
The notice also anticipates that forthcoming regulations applicable where there is reliance on the notice will provide, regarding future distributions by a partnership CFC of a partnership or S corporation, that the amount excludible from gross income under Section 959 reflects only amounts included in income by a partner or shareholder under proposed §1.951A-5.
 
If a domestic partnership or S corporation satisfies the requirements of the notice, penalties for failures described in Sections 6698(a), 6699(a), 6722(a) or any similar provision will not apply to the domestic partnership or S corporation to the extent that such failures arise from acting consistently with proposed §1.951A-5 prior to June 22, 2019 (such as by issuing one or more Proposed Regulation Schedules K-1 and not reissuing Schedules K-1 based on the Final Regulations), including from filing a Form 1065 or Form 1120S based on the Final Regulations after June 21, 2019, that incorporates Schedules K-1 consistent with the Proposed Regulations that were issued before June 22, 2019.
 
To apply the rules in the notice, a domestic partnership or S corporation must provide notification to each partner of the partnership or shareholder of the S corporation of the following:
  • The Schedule K-1 provided to the partner or shareholder is consistent with proposed §1.951A-5.
  • Whether the domestic partnership or S corporation filed a Form 1065 or Form 1120S consistent with proposed §1.951A-5 or the Final Regulations.
  • The notification is being provided in accordance with this notice. 
 
Such notification must be provided no later than the extended due date of the domestic partnership’s or S corporation’s tax return, which is September 16, 2019, in the case of a calendar-year filer, and may be provided through any reasonable method, including via mail, e-mail, or posting on a website through which the domestic partnership or S corporation would ordinarily disseminate tax information to its partners or shareholders.  In the event that a domestic partnership or S corporation has filed its tax return and not filed for an extension of time to file its return, this notification must be provided by the date on which the return would have been due had an extension been properly requested.
 
The domestic partnership or S corporation must also attach the notification described in the previous paragraph and Form 8992 reflecting computations under proposed §1.951A-5 to any tax return with respect to which the rules described in the notice are being applied if the tax return has not been filed as of the date of publication of the notice.
 
If a domestic partnership or S corporation furnished a Schedule K-1 based on proposed §1.951A-5, the domestic partnership or S corporation must separately state on Schedules K-1 for subsequent taxable years the partner’s or shareholder’s distributive share or pro rata share of a foreign corporation’s distributions to the domestic partnership or S corporation of earnings and profits that relate to the GILTI inclusion amount of the partnership or S corporation that was reflected on the first mentioned Schedules K-1.  This information must be provided for each taxable year of the domestic partnership or S corporation following the taxable year to which the first Schedule K-1 relates.  The information could be used by a partner of a domestic partnership or a shareholder of an S corporation that receives a Schedule K-1 separately stating such distributions to calculate its gross income if such partner or shareholder filed inconsistently with the first Schedule K-1 and did not include in gross income its distributive share or pro rata share of the GILTI inclusion amount reported on such Schedule K-1. 
 
The notice also provides for coordination with Rev. Proc. 2019-32. Rev. Proc. 2019-32 grants eligible partnerships an extension of time to file a superseding Form 1065 and furnish a corresponding Schedule K-1 (Form 1065) to each of its partners. A partnership that is eligible for and elects the relief provided in Rev. Proc. 2019-32 is eligible to apply the rules described in this notice. However, under Rev. Proc. 2019-32, a partnership eligible for and electing the relief provided in Rev. Proc. 2019-32 must furnish Schedules K-1 that are consistent with the superseding Form 1065 in a timely manner; thus, in the case of a partnership electing the relief provided in Rev. Proc. 2019-32, Schedules K-1 consistent with the Final Regulations must be furnished if the partnership files Form 1065 consistent with the Final Regulations.
 
The regulations described in the notice will be effective for taxable years ending before June 22, 2019.  Prior to the issuance of such regulations, domestic partnerships and S corporations may rely on the notice, provided they satisfy the requirements detailed above.
 
For additional details and examples illustrating these rules, see Notice 2019-46.
 

BDO Insight

The rules in the notice are intended to provide relief from compliance burdens for certain domestic partnerships and S corporations. Please contact a BDO international tax specialist if you would like more information regarding the notice.
 
 
CONTACT
 

Joe Calianno
Partner and International Tax Technical
Practice Leader, National Tax Office

  Monika Loving
Partner and International Tax Practice Leader
 

 
Brandon Boyle
Principal
  Reese Fredrickson
Partner

 
Annie Lee
Partner
  Chip Morgan
Partner

 
Robert Pedersen
Partner
  Jerry Seade
Principal

 
Natallia Shapel
Partner
  Sean Dokko
Managing Director, National Tax Office
 
[1] See proposed §1.951A-5(b).
[2] See proposed §1.951A-5(c).
[3] See §1.951A-1(e)(1). 
[4] See id. 
[5] See §1.951A-7.