On July 24, the IRS released final regulations that address the allocation of a partnership’s creditable foreign tax expenditures (CFTEs) among its partners. The rules generally adopt temporary regulations that were issued in February 2016, with minor changes.  CFTEs are foreign taxes paid or accrued by a partnership that are eligible for a credit under section 901(a) of the tax code or an applicable U.S. income tax treaty.

A partnership agreement's allocation of the partnership's items of income, gain, loss, deduction, and credit among the partners generally will be respected if the allocations (i) have "substantial economic effect" or (ii) are in accordance with the partners' interest in the partnership.  Allocations of CFTEs do not have substantial economic effect, because they are not reflected by an adjustment to the partners’ capital accounts (i.e., the allocations do not correspond to any change in the partners' respective rights to the partnership's assets upon a liquidation).   Under a safe harbor, allocations of CFTEs generally will be deemed to be in accordance with the partners' interests in the partnership if the allocations correspond to the allocations of income to which the CFTEs relate.  The final regulations provide a number of operative rules for applying the safe harbor.