When a partnership owns a controlled foreign corporation, which partner's state return carries the Subpart F and GILTI inclusion, and whose factor?

The federal answer moved the inclusion to the partner, in two steps

Section 951(a) and section 951A(a) tax a "United States shareholder" on its pro rata share of a CFC's income, measured by stock "owned (within the meaning of section 958(a))" (IRC section 951(a)(1)(A), (a)(2); section 951A(a)). The regulations decide whether a domestic partnership is that owner, and they did so at different times for the two inclusions.

For GILTI, the 2019 final regulations treated a domestic partnership as not owning the CFC's stock "for purposes of section 951A," for CFC years beginning after December 31, 2017, so the partners have computed that inclusion from the start (former Treas. Reg. section 1.951A-1(e); T.D. 9866). For Subpart F income and section 956 amounts, the general rule until 2022 was the opposite: a domestic partnership that was a United States shareholder included the amount itself, and former section 1.951-1(h) was only an anti-avoidance rule for "partnership blocker structures." Treas. Reg. section 1.958-1(d)(1) then extended the aggregate rule to "sections 951, 951A, and 956(a)" for CFC years beginning on or after January 25, 2022 (T.D. 9960), with an elective early application back to years beginning after December 31, 2017 that the partnership, its corporate United States shareholder partners and related partnerships must apply consistently ((d)(4)).

Two results follow. First, a partner includes only if it is itself a United States shareholder, tested on its own ownership including the interest held through the partnership, because the aggregate rule does not apply in determining United States shareholder status ((d)(2); IRC section 951(b)). Example 1 gives an unrelated 5 percent individual partner no inclusion ((d)(3)); a 5 percent partner related to another owner may reach 10 percent by attribution, which is reasoning from section 951(b), because sections 958(b) and 318 were not read. Second, the partnership reports information, not income: Part VI of Schedules K-2 and K-3 carries the information a partner needs to determine its inclusions. For CFC years before 2022 a partnership that reported Subpart F income as its own item followed the rule then in force for section 951, while GILTI was already a partner-level computation.

How the figure reaches each state

Because the inclusion is computed and reported on the partner's own federal return, it reaches each state through that partner's own starting point. For a corporation, New York entire net income begins with federal taxable income (Tax Law section 208(9)) and New Jersey entire net income is "deemed prima facie" equal to it (N.J.S.A. 54:10A-4(k)); Illinois and Massachusetts likewise start from the federal figure, a chain stated from the subtraction provisions read, because 35 ILCS 5/203(b)(1) and G.L. c. 63, section 30 were not read. For an individual, New York, Illinois and Massachusetts start from federal adjusted gross income or the federal Code sections, New Jersey gross income tax has its own enumerated categories and never starts from the federal figure, and California computes its own base and incorporates neither section 951 nor section 951A. A state subtraction, dividends received deduction or exempt income rule is therefore claimed by the partner on its own return under its own state's rule for its own entity type. Nothing in a state's partnership return is the vehicle for it, and a partnership that allocates a "Subpart F adjustment" among its partners on state K-1s is adjusting an item that is no longer a partnership item.

One caveat is reasoning, because no source read speaks to it. A state that fixes its conformity to the Code as of a date before January 25, 2022 and reads the Code without later Treasury regulations could argue that section 951 amounts are still computed under the pre-2022 entity rule, so that the partnership is the includer and the state subtraction is tested at the partnership level. No state covered here takes that position in any source read, and Massachusetts, the closest case (a fixed conformity date, with sections 951 and 951A listed as current Code sections), follows the federal computation.

The relief also differs by partner type. Section 250 is allowed only "[i]n the case of a domestic corporation" (IRC section 250(a)(1)); section 245A is a deduction for dividends received by a domestic corporation and does not reach an inclusion (IRC section 245A(a)); and an individual reaches corporate treatment only by a section 962 election, which allows the section 250 percentage against the GILTI and related section 78 amounts "but no other deductions or amounts" (IRC section 962(a); Treas. Reg. section 1.962-1(b)(1)(i)). State corporate relief usually rides on dividend or exempt income rules that individuals cannot use, so a corporate partner's relief says nothing about an individual partner's.

California

California conforms to neither inclusion for anyone (FTB 2025 Form 100 and Form 565 booklets; 2025 Instructions for Schedule CA (540)). An individual subtracts both a section 951(a) inclusion and a GILTI inclusion on Schedule CA (540), lines 8n and 8o, column B. The subtraction defers rather than eliminates California tax, because the same instructions direct an addition on line 3, column C, of CFC dividends in the year distributed. A corporation excludes section 951A amounts and follows California's own treatment of Subpart F, which for a water's edge group is the ratio of the CFC's Subpart F income to its earnings and profits, applied to the CFC's own income and factors (Rev. and Tax. Code section 25110(a)(2)(A)(ii)); a worldwide combined report includes a unitary CFC in full (reasoning; Rev. and Tax. Code section 25101 was not read).

On the FTB's likely position, that ratio reaches a CFC only if the CFC is a member of the corporate partner's unitary group under the tests of sections 25101 and 25105 as applied through the partnership (Cal. Code Regs., tit. 18, section 25137-1). If the partnership or the CFC is not unitary with the corporate partner, the corporation has no California inclusion until an actual dividend, with the section 24411 deduction available only to a water's edge filer that meets that section's ownership test. The 2025 Form 100W booklet was not read. California's conformity date is January 1, 2025 for taxable years beginning on or after that date, but no conformity date would bring in section 951 or 951A, because California's own base never incorporated either.

New York

For taxable years beginning on or after January 1, 2019 (L. 2019, ch. 39, Part I), a corporation's GILTI is 95 percent "exempt CFC income," measured "without regard to the deduction under section 250," which is added back. Subpart F income from a unitary CFC that is not in the combined report is exempt CFC income as well (Tax Law section 208(6-a)(a), (b)). Attributable interest reduces the exemption unless the taxpayer makes the revocable 40 percent election, which requires the investment income and exempt unitary corporation dividend elections of sections 208(6)(b) and 208(6-a)(c) to be made with it. The GILTI exemption is not investment income and not an exempt unitary corporation dividend, and other exempt income cannot exceed entire net income. For apportionment, a C corporation puts none of its GILTI in the numerator and 5 percent in the denominator; an S corporation puts all of it in the denominator (Tax Law section 210-A(5-a)).

Individuals have no subtraction; the IT-225 instructions list only an addition where a section 962 election kept the inclusion out of federal adjusted gross income. Whether a nonresident's inclusion is New York source turns on section 631(b)(2) if it is income from intangible property, and no New York source read characterizes it. The Article 9-A regulations were searched for an other exempt income provision and none was found, so this article cites the statute only.

New Jersey

For privilege periods ending on and after July 31, 2023, a corporation's net CFC tested income is treated as a dividend and the section 250 deduction is disallowed (N.J.S.A. 54:10A-4(k)(5); Division of Taxation bulletin TB-110(R)). The dividend exclusion applies by ownership band: 100 percent at 80 percent or more of voting power and of other classes under section 54:10A-4(d), 50 percent above 50 and below 80 percent, reduced by a 5 percent deemed-expense claw-back that does not apply to intercompany dividends (TB-111(R)). The exclusion depends on the taxpayer's own ownership of the CFC. The amount not excluded enters only the denominator for most taxpayers, with no look-through to the CFC's sales unless the CFC is in the combined group, and the federal renaming changed nothing for the corporation business tax. Neither the statute nor the bulletins say how ownership held through a partnership counts toward the bands, and none names section 951, so whether a corporate partner's Subpart F inclusion is a deemed dividend within the exclusion was not found.

For an individual partner, the gross income tax does not start from federal adjusted gross income. The Division's position is that GILTI is reported "when the income is actually distributed from earnings and profits as Dividend Income," including by partners in partnerships, while section 965 deemed repatriation dividends are included in the federal year and amount (Division of Taxation TCJA FAQs). The Division's position on an individual's Subpart F inclusion was not found.

Illinois

A corporate partner's inclusion starts in Illinois base income through federal taxable income. The foreign dividend subtraction of 35 ILCS 5/203(b)(2)(O) is computed on dividends including amounts under "Sections 951 through 965," so a corporation's Subpart F inclusion is within the subtraction at the statute's tiers (text current as of January 1, 2025). For tax years ending on or after December 31, 2025, the Department states that the GILTI deduction is limited to 50 percent of the amount recognized "regardless of the foreign ownership percentage" (Informational Bulletin FY 2025-29, citing Public Act 104-0006). Illinois individuals have no subtraction: section 203(a) carries none for foreign dividends, Subpart F or section 951A, so an individual partner's inclusions stay in base income.

For the factor, 86 Ill. Adm. Code 100.3370(a)(2)(A) excludes "dividends; amounts included under IRC section 78; and Subpart F income" from the sales factor under 35 ILCS 5/304(a)(3)(D). GILTI, which the Department characterizes as a foreign dividend, follows the same exclusion; that is reasoning from the bulletin and the regulation, and no pronouncement read says it in words. The Department's likely position, illustrated by a 2026 general information letter that is not binding, is that a corporation cannot cure the resulting base-without-factor result by alternative apportionment on assertion alone: the petitioner bears the "clear and convincing evidence" burden of 86 Ill. Adm. Code 100.3390(c) (IT 26-0008-GIL). The amended text of section 203(b)(2)(O) and the 2025 Schedule J instructions were not read.

Massachusetts

Under St. 2018, c. 273, as the Department explains it in TIR 19-11, section 951 and 951A amounts are a "dividend" for chapter 63, Massachusetts decouples from sections 245A, 250 and 965(c), and the 95 percent dividends received deduction applies "subject to the voting stock ownership requirements." GILTI "is not included in the apportionment factors" of a business corporation, because the section 38(f) sales factor excludes "interest, dividends and gross receipts from" securities, and the financial institution receipts factor excludes section 951 and 951A amounts by name. For individuals, both amounts "will be treated as Part A dividend income under chapter 62," and because chapter 62 lists sections 951 and 951A as current Code sections, the inclusion follows the post-2025 federal text despite chapter 62's fixed conformity date; the rule applies to "an individual that is a member of a pass-through entity." Every Massachusetts taxpayer that is a United States shareholder files Schedule FCI with its own return. The statutes themselves were not read, and the quotations are the Department's statement of them.

Whose factor carries the receipts

The partnership-level answer is reasoning from the federal regulations, and no state source read says otherwise. Under the aggregate rule the partnership has no inclusion, so there is nothing for its receipts factor and nothing for a corporate partner to pick up through a flow-up rule such as Cal. Code Regs., tit. 18, section 25137-1(f), which combines "the taxpayer and its share of the partnership's factors." The law read is each state's own factor rule for the partner's own inclusion: New York's zero numerator and 5 percent denominator for C corporations; New Jersey's denominator-only rule; Illinois's exclusion of dividends, section 78 amounts and Subpart F income from the sales factor; Massachusetts's exclusion of the inclusion from the factors entirely; and California's water's edge ratio, which brings in a unitary CFC's own factors rather than a receipt. No Multistate Tax Commission model on the factor treatment of these inclusions was found. Loading the inclusion into the partnership's receipts factor as a gross receipt would dilute every state's factor for every partner and has no rule behind it.

What the partnership still has to do, and later distributions

The partnership furnishes Part VI information so each partner can compute its inclusion, and it tells its partners, in state K-1 footnotes or a cover letter, that no state adjustment for Subpart F or net CFC tested income has been made at the partnership level and why. Actual distributions from the CFC later are the partner's own item in each state: California adds a CFC dividend back for an individual in the year distributed, New Jersey taxes an individual's GILTI only on distribution, and the other states' treatment of previously taxed earnings was not read. No state withholding instruction read says whether a nonresident withholding base treats the inclusion as a distributive share item, so that question goes to each state's instructions.

Law that moved

From taxable years beginning after December 31, 2025, GILTI is "net CFC tested income," the deemed tangible return and qualified business asset investment are gone, the section 250 percentage for it is 40 percent, and section 951(a) was amended generally (Pub. L. 119-21, sections 70323 and 70354(a); IRC sections 951A, 250). New York's statute still uses the term GILTI and defines it by section 951A(a), so it reaches the renamed inclusion by its terms; New Jersey's notice says the renaming changed nothing.

A worked example

A domestic LLC taxed as a partnership distributes industrial equipment and owns all the stock of one foreign subsidiary, a CFC. Its partners, unrelated to one another, are a domestic C corporation (70 percent), an individual resident in New York (20 percent), and two individuals resident in California (5 percent each). For the CFC's 2026 year, assume its tested income is $10,000,000 and its Subpart F income is $1,000,000, each already computed under the federal rules, with no tested loss, no section 78 amount, no interest attribution and no section 962 election. The facts are invented.

Federal.

• The partnership includes nothing (Treas. Reg. section 1.958-1(d)(1)).
• Corporate partner (70 percent through the partnership, a United States shareholder): Subpart F 70% x $1,000,000 = $700,000; net CFC tested income 70% x $10,000,000 = $7,000,000; section 250 deduction 40% x $7,000,000 = $2,800,000, before the taxable income limitation; net federal amount from net CFC tested income $4,200,000. Federal taxable income from the two inclusions is $4,200,000 + $700,000 = $4,900,000.
• New York individual (20 percent, a United States shareholder): Subpart F $200,000; net CFC tested income $2,000,000; total $2,200,000; no section 250 deduction.
• Each California individual (5 percent, unrelated): not a United States shareholder, so no inclusion. Had the two been spouses, attribution could make each a 10 percent United States shareholder; the example assumes they are not.

State, corporate partner filing in New York (assume the CFC is unitary with the partner but not in its combined report; the Subpart F exemption at section 208(6-a)(b)(i) depends on that assumption, the GILTI exemption at (b)(iii) does not).

• Federal taxable income carries $4,200,000 from net CFC tested income; the section 250(a)(1)(B)(i) deduction is added back: $4,200,000 + $2,800,000 = $7,000,000.
• Exempt CFC income from GILTI: 95% x $7,000,000 = $6,650,000; remaining in business income $350,000.
• Subpart F from a unitary CFC not in the combined report: $700,000 exempt CFC income; $0 remaining.
• Apportionment: $0 of GILTI in the numerator; 5% x $7,000,000 = $350,000 in the denominator.

State, individuals. The New York resident's $2,200,000 is in federal adjusted gross income with no New York subtraction. If that partner lived in California instead, Schedule CA would subtract $200,000 on line 8n and $2,000,000 on line 8o, leaving $0 at the inclusion stage, and a later distribution of those earnings would be added back on line 3 in the year distributed. The two 5 percent partners have nothing to report in any state at the inclusion stage.

Partnership. No state return of the partnership carries the $1,000,000 or the $10,000,000, and its receipts factor includes neither.

The inclusion sits with each qualifying partner, the 5 percent partners have none, and the same dollars are 95 percent exempt for a New York corporation, fully taxed for a New York individual and deferred for a California individual. The example leaves out the section 250 taxable income limitation, interest attribution and the 40 percent election, the section 78 amount, foreign tax credits, the New Jersey, Illinois and Massachusetts arithmetic, and later distributions beyond the California sentence.

Practice notes

Test each partner's United States shareholder status through the partnership, with section 958(b) attribution among related partners, before any state work, because only those partners have an inclusion. Remove partnership-level Subpart F and GILTI adjustments from state K-1s, say so in the partner footnotes, and furnish Part VI information instead; for 2018 to 2021 CFC years, check which rule the partnership applied to Subpart F income and whether the early-application election was made consistently. Run each partner's state relief by partner type: California individuals subtract on Schedule CA lines 8n and 8o and add CFC dividends back on line 3 when distributed, New York and Illinois individuals have no subtraction, and New Jersey individuals report GILTI on distribution.

For a New York C corporation partner, compute exempt CFC income at 95 percent of the section 951A amount before the section 250 deduction, put 5 percent of it in the denominator only, and, if the 40 percent election is chosen in place of interest attribution, make the section 208(6)(b) and 208(6-a)(c) elections with it. For a New Jersey corporate partner, document the partner's own ownership of the CFC against the 80 percent and 50 percent bands before claiming the exclusion, and watch for Division guidance on partnership-held stock. For a California corporate partner, decide whether the partnership-held CFC is a member of the water's edge group before applying the section 25110 ratio. Keep the inclusion out of the partnership's receipts factor, apply each corporate partner's own state factor rule to its own inclusion, and update terminology and percentages for 2026 years. G&G State Tax Group provides review of partner-level state treatment of foreign income inclusions alongside its state and local tax practice.