Daily Tax Update: Treasury and IRS Address Partnership Foreign Tax Credit "Splitter" Deals.

WASHINGTON PHOENIX LOS ANGELES LONDON BRUSSELS

Today, Treasury and the IRS issued proposed and temporary regulations that purport to clarify the manner in which the substantial economic effect regulations under section 704 apply to allocations of foreign tax expenditures. In these deals, U.S. partners attempt, through special allocations, to split the allocation of foreign tax credits (which they claim) from the income that would be subject to such tax (which may be allocated to foreign partners).

The temporary regulations provide that creditable foreign tax expenditures must be allocated in accordance with the partners' interests in a partnership. A safe harbor provides that such expenditures will be deemed to be in accordance with the partners' interests in the partnership if (1) the partnership agreement satisfies historic regulatory …