Share with your friends

Upper-tier CFC partners’ E&P increased by partnership’s section 951(a) income inclusions

U.S. Tax Court opinion

The U.S. Tax Court today issued a “reviewed opinion” in which the majority concluded that the earnings and profits of upper-tier controlled foreign corporation partners of a U.S. domestic partnership must be increased as a result of the partnership’s section 951(a) income inclusions.


Related content

The Tax Court granted the government’s motion for summary judgment. The case is: Eaton Corp. v. Commissioner, 152 T.C. No. 2 (February 25, 2019)

Read the Tax Court’s opinion [PDF 113 KB] that includes concurring and dissenting opinions.


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 amounts that the partnership included in income under section 951(a) with respect to any lower-tier CFCs. According to the IRS, the upper-tier CFC partners also must increase their earnings and profits (E&P) by that amount.

The amount of the upper-tier CFCs’ E&P was relevant for purposes of applying section 956. The IRS and the taxpayer agreed that section 956 applied to the extent of the upper-tier CFC’s applicable earnings, but disagreed on whether the CFC’s distributive share of the domestic partnership’s section 951(a) inclusion increased the CFC’s E&P. The IRS argued that the CFC’s E&P was increased, and thus, asserted that the correct amounts to be included in the taxpayer’s gross income under sections 951 and 956 were approximately $73 million and $114 million for tax years 2007 and 2008, respectively.

The taxpayer countered that a domestic partnership’s section 951(a) inclusions do not affect the E&P of its upper-tier CFC partners.

The Tax Court majority agreed with the IRS, holding that the E&P of the upper-tier CFC partners of the domestic partnership must be increased by their distributive share of the partnership’s section 951(a) income inclusions. 

© 2021 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.

For more detail about the structure of the KPMG global organization please visit

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us


Want to do business with KPMG?


loading image Request for proposal