• Proposed Section 892 Regulations Provide Relief From the “All or Nothing” Rule and Permit SWF Limited Partners to Avoid Commercial Activity Attribution
  • November 11, 2011 | Authors: Dwaune L. Dupree; Daniel R. McKeithen; Carol P. Tello
  • Law Firms: Sutherland Asbill & Brennan LLP - Atlanta Office ; Sutherland Asbill & Brennan LLP - Washington Office ; Sutherland Asbill & Brennan LLP - Atlanta Office ; Sutherland Asbill & Brennan LLP - Washington Office
  • Proposed regulations issued under Internal Revenue Code section 892, on November 2, 2011, address some of the most criticized rules under temporary regulations issued more than 20 years ago. Under the controlled commercial entity (CCE) regulations, engaging in even a de minimis amount of commercial activity can result in characterization of non-integral controlled entities as CCEs (the so-called “all or nothing” rule). As described in more detail below, the proposed regulations would liberalize this rule by not classifying an entity as a CCE if its commercial activity is determined to be “inadvertent.” If certain other conditions are met, a new safe harbor rule excludes commercial activities as long as 5% or less of the controlled entity’s assets and income are from commercial activities, but corrective action is required to eliminate the commercial activity once discovered. Another significant change eliminates the partnership attribution rules in the context of limited partnerships, thereby allowing foreign governments and sovereign wealth funds (SWFs) to invest in limited partnerships as a limited partner without being classified as CCEs regardless of whether or not the partnership engages in commercial activities.