Attorneys Seek Clarity in Proposed Regs on Partnership Expense Allocations

Pursuant to your request in Internal Revenue Bulletin 2004-20, we respectfully submit comments that, when finalized, the temporary and proposed regulations relating to the allocation of partnership expenditures for foreign taxes published in TD 9121 should contain additional guidance with respect to the following issues:

• The rationale for the conclusion embodied in the temporary and proposed regulations that allocations of creditable foreign taxes (as opposed to allocations of tax credits) do not have substantial economic effect.

• The temporary and proposed regulations do not directly answer the question as to how a partnership allocates indirect taxes when it receives a dividend from a foreign corporation.

• Example 28 in the temporary regulations shows allocations of foreign tax expenditures that are deemed not to be in accordance with the partners' interests in the partnership. This example contains no indication as to what sort of allocation should then occur in order to ensure that the foreign taxes are allocated in accordance with the partners' interests in the partnership. While making allocations in accordance with the partners' interests in the partnership are always factually intensive, the usefulness of the example is somewhat limited by its lack of guidance on this point. Presumably in this example, the IRS is looking for $32.5 of foreign taxes to be allocated to A, and $7.5 of foreign taxes to be allocated to B, so that the allocation of foreign taxes corresponds proportionately to the $130 of after-tax returns to A and $30 of after-tax returns to B. If so, then the required foreign tax allocations do not correspond to the parties' business deal of 50-50 allocations ($20 of foreign taxes each to A and B). Thus, other reallocations (of other items of tax income and expense) are required in order to achieve the contemplated business deal.