Under the controlled foreign corporation (CFC) rules of the tax code, taxpayers may be subject to adverse tax consequences, including "phantom income" inclusions, if they are 10% United States shareholders in a CFC. Very generally, a CFC is any foreign corporation more than 50% of whose voting power or value is directly, indirectly, or constructively owned by 10% United States shareholders.

The Tax Cuts and Jobs Act expanded constructive ownership to include downward attribution, so that a subsidiary now is deemed to own all of the stock owned by any 50% shareholder. As a result of this expansion, if (for example) a foreign parent owns a U.S. subsidiary and a foreign subsidiary, the U.S. subsidiary is deemed to own all of the stock of the foreign subsidiary, so that the foreign subsidiary is treated as a CFC, which could have adverse tax consequences for any 10% United States shareholders of the parent.

On October 1, 2019, Treasury and the IRS issued a revenue procedure and proposed regulations that address the expansion of constructive ownership. Despite legislative history suggesting that this expansion was intended to have a more limited effect than what the tax code now literally provides, the new guidance does not narrow the application of downward attribution. 

However, the the guidance does provide a safe harbor that respects a 10% United States shareholder's determination that a foreign corporation is not a CFC by reason of the downward attribution rules so long as the shareholder satisfies a duty of inquiry. More specifically, under the safe harbor, the IRS will not challenge a 10% U.S. shareholder's determination that a foreign corporation is not a CFC so long as (1) the foreign corporation would be a CFC solely as a result of downward attribution and (2) the shareholder (a) does not have actual knowledge, has not received statements, and cannot obtain reliable public information sufficient to determine that the foreign corporation is a CFC, and (b) asks the foreign entities in which the shareholder directly owns an interest whether they are CFCs, and asks them for certain information about their own subsidiaries.

The safe harbor effectively permits a 10% United States shareholder to avoid asking unrelated foreign co-investors about their own stock ownership to determine whether the downward attribution rules apply.