List of Foreign Partner Interests in Partnerships

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Instructions for Schedule P (Form 1120-F)

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2007

Department of the Treasury
Internal Revenue Service

Instructions for Schedule P
(Form 1120-F)
List of Foreign Partner Interests in Partnerships
Section references are to the Internal
Revenue Code unless otherwise noted.

General Instructions
Purpose of Schedule
Schedule P (Form 1120-F) is used to
identify and reconcile the foreign
corporation’s directly held partnership
interests with the distributive shares of
partnership effectively connected income
and the foreign corporation’s effectively
connected outside tax basis in each
interest. Part I is used to identify all
partnership interests the foreign
corporation directly owns that give rise to
a distributive share of income or loss
effectively connected with a trade or
business within the United States (“ECI”)
of the foreign corporation. Part II is used
to reconcile the foreign corporation’s
distributive share of ECI and allocable
expenses with the total income and
expenses reported to it on Schedule K-1
(Form 1065). Part III is used as follows:
The corporation’s outside basis in its
directly-held partnership interests that
include ECI in the corporation’s
distributive share is apportioned between
ECI and non-ECI under Regulations
section 1.884-1(d)(3) to determine the
average value treated as a U.S. asset for
interest expense allocation purposes
under Regulations section 1.882-5. The
apportionment of the outside basis to ECI
as of the current and prior tax year end is
also taken into account in determining the
average apportioned value included in the
corporation’s U.S. assets for purposes of
computing the branch profits tax. The
U.S. assets, and partner share of booked
liabilities and interest expense of the
partnership are also coordinated with the
interest expense allocation computations
filed with Form 1120-F on Schedule I
(Form 1120-F).

Who Must Complete
Schedule P
A foreign corporation that is directly or
indirectly engaged in trade or business
within the United States is required to file
Schedule P (Form 1120-F) for all
directly-owned partnership interests that
have ECI included in its distributive share
of income reported to the corporation on
Schedule K-1 (Form 1065). If the foreign
corporation treats any of its distributive

share of partnership net income or loss
from a partnership that is not engaged in
trade or business within the United States
as ECI with another trade or business of
the corporation, the corporation’s entire
distributive share of items of income and
expense must also be reconciled between
ECI and non-ECI and reported on
Schedule P.
A foreign corporation may be engaged
in a trade or business within the United
States either directly through its own
non-partnership related activities or
indirectly through the activities of one or
more partnerships in which the
corporation owns a partnership interest.
In addition, if a corporation owns an
interest in a partnership that is itself
deemed engaged in trade or business
within the United States as a result of the
partnership’s own directly or indirectly
owned interest in another partnership
(“lower tier partnership”), the corporation
is also treated as engaged in trade or
business as a result of its direct and
indirect ownership of such interests. See
section 875(1). The foreign corporation’s
distributive share of income from a
domestic partnership and certain foreign
partnership interests is reported to the
partner on Schedule K-1 (Form 1065),
together with the corporation’s allocable
share of partnership liabilities. If the
partnership is engaged in trade or
business directly or indirectly through a
lower-tier partnership and has ECI to
report in the distributive share of a foreign
partner, it is responsible for withholding
quarterly estimated taxes on the foreign
partner’s distributive share of estimated
ECI under section 1446 and to report the
amounts to the foreign partner for the tax
year on Form 8805, Foreign Partner’s
Information Statement of Section 1446
Withholding Tax. If a partnership is
required to report ECI on Form 8805 to a
foreign corporate partner, the corporation
must reconcile its entire distributive share
of income and expenses reported on
Schedule K-1 (Form 1065) from such
partnership on Schedule P (Form
1120-F).

Exceptions from Filing
Schedule P
Do not file Schedule P if the corporation
does not have any ECI with respect to its
combined distributive shares of income
from all directly owned partnership
Cat. No. 50608W

interests. A foreign corporation that has
ECI reported to it from a partnership is not
required to file Schedule P (Form 1120-F)
if all of the corporation’s business profits
including its ECI from the partnership are
not attributable to a U.S. permanent
establishment pursuant to an applicable
income tax treaty and the corporation files
a protective tax return under Regulations
section 1.882-4(a)(3)(vi).
Protective election on Schedule P.
See Protective election on page 4 for
instructions for making a protective
partnership outside basis apportionment
election with a protective return.

When and Where To File
Attach Schedule P (Form 1120-F) to the
foreign corporation’s Form 1120-F income
tax return. See the instructions for Form
1120-F for the time, place and manner for
filing the foreign corporation’s income tax
return.

Other Forms and
Schedules Related to
Schedule P
Form 1120-F, Section II. Gross ECI
includible in the corporation’s distributive
share is reportable on Form 1120-F,
Section II, lines 3 through 10, in the
applicable category of income. Expenses
(other than interest expense) that are
deductions allocated and apportioned on
Schedule P (Form 1120-F) to the
partner’s ECI are also reported on Form
1120-F, Section II.
Schedule I (Form 1120-F). Interest
expense reportable on Schedule P is
includible in the corporation’s interest
expense allocation computation under
Regulations section 1.882-5. The
corporation’s distributive share of interest
expense that is directly allocable to
effectively connected income under
Regulations section 1.882-5(a)(1)(ii)(B) is
reported on Schedule P, line 14b, and on
Schedule I (Form 1120-F), line 22. The
corporation’s distributive share of interest
expense that is included in the taxpayer’s
three-step allocation formula is reported
on Schedule P, line 14c, and the total
from line 14c is reported on Schedule I
(Form 1120-F), line 9, column (b). The
average value of partnership liabilities the
corporation includes in the determination
of its outside basis for which the
corporation also receives a distributive

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Instructions for Schedule P (Form 1120-F)

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share of interest expense is reported on
Schedule P (Form 1120-F), line 17 (Total
column), and on Schedule I (Form
1120-F), line 8, column (b). The average
value of partnership liabilities reported on
Schedule P (Form 1120-F) and Schedule
I (Form 1120-F) does not include the
partnership liabilities that give rise to
directly allocable interest expense under
Temporary Regulations section
1.882-5T(a)(1)(ii)(B), reportable on
Schedule P (Form 1120-F), line 14b. The
average value of the partner’s outside
basis apportioned to ECI is reported on
Schedule P (Form 1120-F), line 19, and
as a U.S. asset on Schedule I (Form
1120-F), line 5, column (b).
Schedule H (Form 1120-F), Part I, Part
II and Part IV. The corporation’s
distributive share of non-interest
expenses included on Schedule P, lines 4
and 5 is also included in the corporation’s
overall allocation and apportionment of
expenses on Schedule H (Form 1120-F),
Part IV, lines 39 through 42, if the
partnership books constitute set(s) of
books that are also reportable on Form
1120-F, Schedule L or the partnership
interest is recorded on Schedule L books
of the corporation’s own separate trade or
business within the United States. If the
partnership interest is not reported on
Schedule L, the distributive share of
partnership expenses allocable to the
corporation’s distributive share of ECI is
included on Schedule H (Form 1120-F) in
Parts I and Part II. See the instructions for
Schedule H (Form 1120-F).
Schedule M-3 (Form 1120-F), Part II.
The corporation’s distributive share of
partnership income may be reported on
Schedule M-3 (Form 1120-F), Part II, line
9 (domestic partnerships) and line 10
(foreign partnerships) in accordance with
the corporation’s reporting on its
applicable financial statements for
Schedule M-3 (Form 1120-F) purposes.
See the instructions for Schedule M-3
(Form 1120-F), Part II, lines 9 and 10 for
determining the applicable financial
statement.

Part I – List of Foreign
Partner Interests in
Partnerships
In Part I, list the name, address and
Employer Identification Number of each
directly owned partnership interest that
has effectively connected income
included in the partner’s distributive share
on Schedule K-1 (Form 1065). Also
include in the list of partnership interests
any interest in a partnership that is not
engaged in trade or business within the
United States if the corporation treats
some or all of its distributive share as ECI
with a separate trade or business of its
own within the United States. Do not
report on Schedule P any indirectly
owned partnership interests (lower-tier
partnership interests) that have income
effectively connected with the lower-tier
partnership’s own trade or business within

the United States unless the corporation
also owns a direct interest in the
lower-tier partnership. The corporation’s
distributive share of ECI earned through
lower-tier partnership interests is
includable on the Schedule K-1 (Form
1065) reportable to the corporation by the
partnership in which the corporation owns
a direct interest, whether or not the
directly owned partnership is itself directly
engaged in trade or business within the
United States.
Schedule P (Form 1120-F)
accommodates reporting for four
directly-owned partnership interests.
Complete a separate line in Part I, and
the corresponding columns in Parts II and
III, for each directly owned partnership
interest. If the corporation directly owns
more than four partnership interests
which are required to be reported on
Schedule P (Form 1120-F), report the
required information for those additional
partnership interests on attached
separate sheets using the same size and
format as shown on the schedule. Also, in
the “Totals” column of Parts II and III,
enter the sum of all directly owned
partnership interests, including those
interests reported on attached sheets.
Entities treated as partnerships for tax
purposes include Limited Liability
Partnerships (LLPs) and Limited Liability
Companies (LLCs) that are not classified
as corporations for federal income tax
purposes. Do not include any interest in
any entity treated as a disregarded entity
as described under Regulations section
301.7701-2(c)(2).

Part II – Foreign Partner
Income and Expenses:
Reconciliation to Schedule
K-1 (Form 1065)
Part II reconciles the partner’s ECI and
non-ECI to its Schedule K-1 (Form 1065)
distributive share from each partnership
listed in Part I. The Schedule K-1 lines
are grouped for reconciliation of their
income and expense in the following
manner:
• Schedule P, lines 1 through 5: ECI and
non-ECI reconciliation of income and
non-interest expenses from Schedule K-1
(Form 1065), lines 1 through 3.
• Schedule P, lines 6 through 9:
Reconciliation of other income and other
non-interest expenses from Schedule K-1
(Form 1065).
• Schedule P, lines 10 and 11: Total
gross income and total gross ECI from
Schedule K-1 (Form 1065).
• Schedule P, lines 12 through 14:
Reconciliation of total interest expense
from Schedule K-1 (Form 1065).

Lines 1 Through 5. ECI and
Non-ECI Reconciliation of
Income and Non-Interest
Expenses
Line 1. Enter on line 1 the combined
total income (loss) from Schedule K-1

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(Form 1065), Part III, line 1, Ordinary
business income (loss); line 2, Net rental
real estate income (loss); and line 3,
Other net rental income (loss). Enter the
combined amount in the column in Part II
which corresponds to the line in Part I on
which the partnership is listed. The
amount entered on line 1 is grouped into
its gross income and gross expense
components for allocation and
apportionment to ECI and non-ECI under
sections 864(c) and 882(c). The gross
income apportionments are shown on line
3, and the allocation and apportionments
of non-interest expenses are determined
under Regulations sections 1.861-8 and
1.861-17 and Temporary Regulations
section 1.861-8T(c). See Regulations
section 1.861-17 for the allocation and
ECI apportionment treatment of research
and experimentation expenditures that
are included in trade or business income
on line 1 or 3, Schedule K-1, and which
are also reportable on Schedule P (Form
1120-F), lines 4 and 5.
Lines 2 through 5. Gross income
(loss). Enter on line 2 the total gross
income included in Schedule P (Form
1120-F), line 1. On line 3, enter the
amount of ECI included in the gross
income reported on line 2. If all of the
gross income reported on line 2 is ECI,
then report the same number on line 3.
Note. Line 3 may exceed line 2 if losses
included in line 2 are non-ECI and the
income and gains are ECI.
Non-interest expense. Enter on line
4 the total amount of non-interest
expense included on line 1. On line 5,
enter the amount of non-interest expense
included on line 1 that is allocated and
apportioned to ECI. Include on line 4 (and
line 5 if applicable), guaranteed payments
made by the partnership that are included
in the combined net income (loss)
reported on line 1. Interest expense
included in line 1 is subject to allocation
under Regulations section 1.882-5 and is
reported in a separate grouping of the
corporation’s distributive share of all
interest expense on Schedule P (Form
1120-F), line 12.

Lines 6 Through 9. Other Gross
Income and Other Non-Interest
Expenses
Other gross income. Enter on line 6 all
other gross income from Schedule K-1
(Form 1065) that is not included on lines
1 through 3 of the Schedule K-1 (and is
not reportable on line 2 of Schedule P).
On line 7, enter the amount of gross
income from line 6 that is allocated and
apportioned to ECI.
Note. The amount on line 7 may exceed
the amount on line 6 if losses included on
line 6 are allocated to non-ECI and other
gross income and gains are allocated to
ECI.
Other non-interest expense. Enter on
line 8 all other non-interest expense from
Schedule K-1 (Form 1065) that is not
included on lines 1 through 3 of the

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Instructions for Schedule P (Form 1120-F)

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Schedule K-1 (and is not reportable on
lines 4 and 5 of Schedule P). On line 9,
enter the amount of non-interest expense
from line 8 that is allocated and
apportioned to ECI. Include on line 8 (and
line 9 if applicable) guaranteed payments
made by the partnership that are not
included on lines 4 and 5.

Lines 10 and 11. Summary of
Gross Income
Line 10. Total Gross Income. Enter on
line 10 the sum of the gross income
amounts entered on line 2 and line 6. The
amount on line 10 is the total gross
income from Schedule K-1 (Form 1065).
Line 11. Total Gross Effectively
Connected Income. Enter on line 11 the
sum of the ECI amounts entered on lines
3 and 7. The amount on line 11 is the
total gross ECI from Schedule K-1 (Form
1065).

Lines 12 Through 14. Interest
Expense Reconciliation
Enter on line 12 the amount of interest
expense included in the net income (loss)
on lines 1 through 3 of Schedule K-1
(Form 1065) and in the net income (loss)
reported on line 1 of Schedule P (Form
1120-F). On line 13, enter the sum of the
other interest expense reported on
Schedule K-1 (Form 1065), lines 13 and
18.
Note. If interest expense is included on
any line of Schedule K-1 (Form 1065)
other than lines 1, 2, 3, 13 or 18, attach a
schedule indicating the line the interest is
included on and reclassify the interest
expense reported on such other line to
Schedule K-1 (Form 1065), line 13 or line
18, as appropriate, for purposes of
reporting the reclassified amount on line
13 of Schedule P. The reclassification will
require an adjustment to such other line
to prevent double counting of total
expenses.
Line 14a. Total interest expense. Add
lines 12 and 13 and enter the result on
line 14a. This amount is the corporation’s
total distributive share of interest expense
from Schedule K-1 (Form 1065) that is
subject to allocation under Regulations
section 1.882-5.
Line 14b. Direct interest expense
allocation. On line 14b, enter the
amount of interest expense included in
line 14a that is directly allocable to ECI
under Temporary Regulations section
1.882-5T(a)(1)(ii)(B) and the applicable
requirements of Temporary Regulations
section 1.861-10T(b) or (c). The amount
entered on line 14b is also included on
Schedule I (Form 1120-F), line 22.
Line 14c. U.S. booked interest expense
of the partnership. Subtract line 14b
from line 14a and enter the amount on
line 14c. This amount constitutes the
book interest expense of the partnership
that is includible in the three-step formula
under Regulations section 1.882-5(d) or
1.882-5(e). The amount on line 14c
(“Totals” column) is also required to be

reported on Schedule I (Form 1120-F),
line 9, column (b). The line 14c amount is
also taken into account on Form 1120-F,
Section III, Part II, line 8 in determining
the corporation’s branch interest under
Regulations section 1.884-4(b).

Part III – Foreign Partner’s
Average Outside Basis
Under Regulations
Sections 1.882-5(b) and
1.884-1(d)(3)
Report in Part III the corporation’s outside
basis for each partnership interest
identified in Part I of this Schedule P
(1120-F) for purposes of determining the
amount the corporation includes as a U.S.
asset in Step 1 of the interest expense
allocation under Regulations section
1.882-5. The corporation’s outside basis
in its partnership interests reported on
Schedule P is determined and adjusted
under the rules applicable to the
determination of the corporation’s outside
basis in the partnership for branch profits
tax purposes under Regulations section
1.884-1(d)(3), except that the amounts
entered on lines 15 through 19 are the
average values rather than the
determination dates used under the
section 884 regulations for branch profits
tax purposes. If the corporation is not
exempt from the branch profits tax under
an applicable income tax treaty, attach a
schedule showing the determination of
the corporation’s outside basis in
accordance with the requirements of lines
15 through 19 for an averaging period
that shows the apportioned outside basis
for the beginning and ending
determination dates of the corporation’s
tax year.
Line 15. Section 705 Outside Basis.
Enter on line 15 the corporation’s average
value of the outside basis (otherwise
determined under section 705) of the
partnership in the column which
corresponds to the line in Part I on which
the partnership interest is listed. The
average value is determined using the
most frequent averaging period for which
data is reasonably available. See
Temporary Regulations sections
1.882-5T(b)(3) and 1.882-5T(c)(2)(iv).
Line 16. Partner Liabilities Included in
the Corporation’s Outside Basis. The
corporation’s outside basis reported on
line 15 is adjusted on line 16 to conform
the amount of liabilities the corporation
includes in the determination of its outside
basis to the proportionate amount of the
corporation’s distributive share of interest
expense with respect to the partnership’s
liabilities. This adjustment is made only
for purposes of determining the
corporation’s outside basis included in the
interest expense allocation and branch
profits tax computations. The adjustment
is not made for other federal income tax
purposes such as for determining the
corporation’s gain or loss from disposition
of the partnership interest.

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Line 16a. Adjustment for directly
allocable interest. The outside basis is
reduced by the average amount of
liabilities that give rise to directly allocable
interest expense in accordance with
Temporary Regulations section
1.882-5T(a)(1)(ii)(B). Enter the portion of
the partnership liability that is subject to
the direct interest expense allocation
rules under Temporary Regulations
section 1.861-10T(b) or (c) and is subject
to exclusion from the determination of the
corporation’s average U.S. asset values
under Regulations section 1.882-5. See
Temporary Regulations section
1.861-10T(d).
Line 16b. Enter the average amount
of the corporation’s share of all other
partnership liabilities it otherwise takes
into account under section 752 in
determining its outside basis in its
partnership interest.
Line 16c. Add lines 16a and 16b and
enter the result on line 16c. This is the
corporation’s combined average total
share of partnership liabilities for the year.
Line 17. Enter the corporation’s average
partnership liabilities, or portion thereof,
for the year for which the corporation
receives a distributive share of interest
expense for the year. See Regulations
section 1.884-1(d)(3)(vi). Also, enter this
line 17 amount on Schedule I (Form
1120-F), line 8, column (b).
Line 18. Partner’s Adjusted Average
Outside Basis in Partnership. Add
lines 16d and 17 and enter the amount on
line 18. The amount reported on line 18 is
the corporation’s adjusted outside basis
that is eligible for apportionment between
ECI and non-ECI.
Line 19. Partner’s Outside Basis
Allocable to ECI. Enter on line 19 the
corporation’s average outside basis
reported on line 18 that is apportioned to
ECI. Also enter this line 19 amount on
Schedule I (Form 1120-F), line 5, column
(b). See Regulations section
1.884-1(d)(3)(i) for the elective
requirements for apportioning outside
basis on the mandatory proportionate
income or asset method. For purposes of
determining the proportion of the
partnership interest that is a U.S. asset, a
foreign corporation may elect separately
for each partnership interest to use either
the asset method or the income method
described in Regulations sections
1.884-1(d)(3) (ii) and (iii). If the
corporation does not timely elect either
method in the first year the corporation
has a distributive share of ECI from the
partnership, the Director of Field
Operations may make the election on
behalf of the corporation. See
Regulations section 1.884-1(d)(3)(iv) and
the instructions for line 20 on page 4.
Note. The required timely-filed election
under Regulations section 1.884-1(d)(3)
for apportioning outside basis between
ECI and non-ECI also applies to lower-tier
partnership interests that are not required
to be identified and reconciled to

Page 4 of 4

Instructions for Schedule P (Form 1120-F)

16:00 - 26-FEB-2008

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Schedule K-1 (Form 1065) on this
Schedule P (Form 1120-F).
Line 20. Outside Basis Election
Method. Enter “income” or “asset” on
line 20 to indicate the elective outside
basis apportionment method used to
determine the amount of the corporation’s
outside basis in its partnership interests
apportioned to ECI and reported on line
19. The allocation method is subject to a
five-year minimum period election that
must be made in the first year the partner
has a distributive share of ECI included in
the income reported on Schedule K-1
(Form 1065). The elective method chosen
must be used for both branch profits tax
and interest expense allocation purposes
during the same five-year minimum
period.
Asset method. In general, a
partner’s interest in a partnership shall be
treated as a U.S. asset in the same
proportion that the sum of the partner’s
proportionate share of the adjusted bases
of all partnership assets as of the
determination date, bears to the sum of
the partner’s proportionate share of the
adjusted bases of all partnership assets
as of the determination date. The

proportion of U.S. assets to total assets of
the partnership is determined as if the
partnership were a foreign corporation
engaged in trade or business within the
United States. Generally, a partner’s
proportionate share of a partnership asset
is the same as its proportionate share of
all items of income, gain, loss, and
deduction that may be generated by the
asset. See Regulations section
1.884-1(d)(3)(ii)(B) for non-uniform
treatment of certain partnership items.
Income method. Under the income
method, a partner’s interest in a
partnership shall be treated as a U.S.
asset in the same proportion that its
distributive share of partnership ECI for
the partnership’s tax year that ends with
or within the partner’s tax year bears to its
distributive share of all partnership
income for that tax year.
Protective election. If the
corporation files a protective tax return
under Regulations section
1.882-4(a)(3)(vi), and the partnership is
not engaged in trade or business within
the United States or does not have
business profits attributable to a U.S.
permanent establishment, the corporation

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need not file Schedule P and report its
distributive share of income and
expenses with its Form 1120-F. However,
if it is later determined that the
corporation’s distributive share of
partnership income is ECI with a trade or
business of the corporation, the
corporation will have failed to make a
timely income method or asset method
election with respect to such partnership
for outside basis apportionment purposes
if no other election disclosure is made. To
preserve the right to allocate and
apportion its outside basis under a
chosen method, the corporation may
make a protective election by filing
Schedule P (Form 1120-F) and
completing Part I and line 20 with the
protective return filing on Form 1120-F.
The protective election is effective only for
a year in which a Schedule P (Form
1120-F) protective election attachment is
also the first year in which the
corporation’s distributive share is in fact
ECI with a trade or business of the
corporation within the United States. The
corporation need not complete Part II or
Part III lines 15 through 19 with the
protective election.