CFC Partner's E&P is Increased by Domestic Partnership's Section 951 (a) Income Inclusions

The Tax Court has concluded that for the years at issue (2007 - 2010), the earnings and profits (E&P) of the upper tier controlled foreign corporation (CFC) partner of a domestic partnership had to be increased as a result of the partnership's Code Sec. 951(a) income inclusions. (Eaton Corporation and Subsidiaries, (2019) 152 TC No. 2).

KERRIGAN, Judge: The Internal Revenue Service (respondent) determined deficiencies in Federal income tax and penalties for the 2007-10 calendar taxable years (years in issue) of Eaton Corp. (Eaton or petitioner). This case is before the Court on the parties' cross-motions for partial summary judgment. Unless otherwise indicated, all section references are to the Internal Revenue Code (Code) in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.

Generally speaking, a controlled foreign corporation (CFC) that is a partner in a domestic partnership must include in gross income its distributive share of that partnership's gross income, including income that the partnership included under section 951(a) with respect to any lower tier CFCs. According to respondent the upper tier CFC partners must also increase their earnings and profits (E&P) by such an amount. Adopting that approach, respondent contends that the correct amounts to be included in petitioner's gross income under sections 951 and 956 are $73,030,810 and $114,065,635 for tax years 2007 and 2008, respectively. 

Petitioner, by contrast, contends that a domestic partnership's section 951(a) inclusions do not affect the E&P of its upper tier CFC partners. The primary issue we must decide is whether the E&P of the upper tier CFC partners of Eaton Worldwide LLC (EW LLC), a domestic partnership, must be increased as a result of the partnership's section 951(a) income inclusions.

Court's conclusion. The majority Tax Court opinion held that the E&P of upper tier CFC partners of a domestic partnership, such as EW LLC, must be increased as a result of the partnership's Code Sec. 951(a) income inclusions. Each upper tier CFC partner is required to include in gross income, and make a correlative increase to its E&P to reflect, its distributive share of EW LLC's partnership income, including EW LLC's Code Sec. 951(a) inclusions with respect to the lower tier CFCs.