Treasury fulfills promise to issue Brown Group partnership regulations.

• Author: Sams, Jim

Treasury has issued Prop. Regs. Sec. 1.952-1(b) and (g) to support its litigation position in Brown Group Inc. The issue in that case was whether, or the extent to which, the subpart F character of income derived by a controlled foreign corporation (CFC) through a partnership is determined as if the income were earned by the CFC directly (i.e., an "aggregate" approach). The saga of th Brown Group case is legendary: Th: IRS initially lost in the Tax Court (102 TC 616 (1994)), but later prevailed in that court (104 TC 105 (1995)), only to lose again in the Eighth Circuit (77 F3d 217 (1996)).

The Service's theory was that the character of income derived by a CFC through a partnership is determined as if the income were earned by the CFC directly. In other words, the IRS applied the "aggregate" approach to partnerships to determine, the subpart F character of a CFC's distributive share of partnership income. The Court of Appeals disagreed on two grounds. First, it would not treat the partnership as a pure aggregate for this purpose. Second, it suggested that no income earned by a partnership could ever be subpart F income. The partnership, it said, "is not a controlled foreign corporation, and therefore its income ... cannot be characterized as subpart F income. "

In response, the Service...