So I see that it is the top of the hour, and for those of you just joining us welcome to today's webinar. Mortgage & Other Interest Expense Allocation & Apportionment for Individuals with Partnership Interests Form 1116 and Schedule K-3. We're glad you're joining us today. My name is Anika Pompey, and I am a Senior Stakeholder Liaison with the Internal Revenue Service. I'll be your moderator for today's webinar which is slated for approximately 60 minutes. Before we begin, if there's anyone in the audience that is with the media, please send an email to the address on the slide and be sure to include your contact information and the news publication you're with.

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Let's see how the majority of you responded. Okay, so I see that 70% of you selected no. 29% of you responded yes. So, we hope that you received the polling question and was able to submit your answer. If not, now's the time to check your pop-up blocker to make sure you have it turned off.

Again, we've included several technical documents that describe how you can allow pop-up blockers based on the browser you are using. Just click on the materials drop down arrow on the left side of your screen to download the browser document. Again, I want to welcome you all and we're glad you joined us today for today's webinar. Before you move along with our session, let's just make sure you're in the right place. Today's webinar is Mortgage & Other Interest Expense Allocation & Apportionment for Individuals with Partnership Interests Form 1116 and Schedule K-3. This webinar is scheduled for approximately 60 minutes. Let's go ahead and introduce today's speakers. First, we have Jim Wu. Jim is a Senior Revenue Agent in Large Business and International, specifically in its Withholding, Exchange, and International Individual Compliance Division in the Foreign Tax Credit Practice Network. Jim joined the IRS in 2010. Next, we have Patricia Marando, who is also a Senior Revenue Agent with Withholding, Exchange, and International Individual Compliance Division in the Foreign Tax Credit Practice Network. And from the Office of Associate Chief Counsel, International, we have John Lee and Karen Cate. And I'm going to go ahead and turn it over to Patti to begin the presentation. Patti, the mic is yours. Thank you. Good day, everyone. This is our agenda for today. What we're going to be doing today is explain the relevance of interest, expense, allocation, and apportionment to the foreign tax credit limitation. We're going to explain the special interest expense allocation and apportionment rules for individuals. And, finally, we're going to explain the interaction of the partnership and individual interest expense allocation and apportionment rules. Here, we have the acronyms that will be referenced today, and that's FTC for Foreign Tax Credit; IRC for the Internal Revenue Code; USP as Domestic Partnership.

Before we delve into the rules on interest expense apportionment, let's review some FTC limitations. U.S. citizens and U.S. residents are allowed a credit against their U.S. income tax liability for income taxes paid or accrued to foreign countries and U.S. possessions. In other words, that's the foreign tax credit, and that's in lieu of deducting such taxes. That's IRC Section 27 and IRC Section 901. The FTC limitation under IRC 904 is the fraction, the numerator of which is the foreign source taxable income, and the denominator is the worldwide taxable income.

The resulting percentage is then multiplied against U.S. tax liability. Now, note that the foreign source taxable income in this fraction cannot exceed the taxpayer's entire taxable income. This fraction for the FTC limitation is expressed on Form 1116, Part III. The FTC limitation formula is computed by separate category of foreign income under IRC Section 904(d). The IRS has published a practice unit, Foreign Tax Credits, Categorization of Income and Taxes into Proper Basket, that discusses this concept in more detail. The foreign source taxable income is the gross income. It's the gross foreign source income for a particular income category or basket, minus any deductions including deductible expenses and losses. Deducible interest expense is one of these deductions.

The interest expense that is used in the FTC limitation determination is what's reported on the Form 1040 as deductible interest expense. Individuals have special rules for apportioning interest expense that differ from the rules that apply to corporations. Individual taxpayers apportion deductible interest expense amongst the various categories of what we call baskets of income. And some of these are general and passive among this based on the type of interest expense. The types of interest expense identified in the rules are qualified residence interest, which is your home mortgage interest, business interest, investment interest, and passive activity interest. If the individual is a partner in a partnership, the individual must consider the partnership's interest expense and apportionment factors. An individual is not required to follow the apportionment rules for interest expense discussed in the prior slide, if the individual's foreign source income is less than $5,000. In this case, the interest expense is allocated entirely to domestic source. For this purpose, any income excluded under IRC Section 911 is included in the $5,000 threshold. And now, I'm going to turn it over to Jim to discuss mortgage interest. Jim? Thanks, Patti. Home mortgage interest expense is apportioned by multiplying the ratio of gross foreign source income for a particular category of income or basket of income divided by gross income from all sources.

For this purpose, we do not include any income excluded under the foreign earned income exclusion under Section 911 on the Form 2555. The Form 1116 instructions provide a worksheet to do the apportionment for the mortgage interest expense, and we will be looking at an example in just a few minutes. Note that this general rule does not apply if the home is a rental property, rather, the business interest or passive activity interest rules, which we will discuss momentarily, will apply to mortgage interest related to rental property. As mentioned previously, if the individual taxpayer owns interest in a partnership, information from the Schedule K-3 should be taken into consideration when apportioning interest expense. Different rules apply depending on how the partnership is owned and the percentage of ownership. How mortgage interest expense is apportioned is different for an individual who is a general partner or a LP, limited partner with at least 10% ownership interest versus a limited partner with less than 10% ownership interest. To apportion home mortgage interest expense, an individual, who is a general partner or a limited partner with at least 10% ownership must take into account his distributive share of partnership income by source and category. This information comes from Schedule K-3, Part II, Section 1, columns (a) through (e), and in certain cases the partner will need to determine the source of income. For example, when the source depends on the partner's residence, and that will be reported in column (f). A classic example of this is a sale of capital assets. This slide is just a snapshot of the Schedule K-3, Part II, Section 1, so you can visualize the part of the Schedule K-3 we just referred to. Note that in Section 1, Section 1 continues onto another page, but we're not depicting that here. The information in Part II, Section 1, columns (a) through (f), is used by the partner to allocate and apportion home mortgage interest expense. When it comes to a limited partner with less than 10% interest, the individual partner must similarly take into account her distributive share of partnership income to allocate and apportion partner's home mortgage interest expense. The difference here is that all foreign source income from the partnership will be classified as passive income. So we'll now look at an example. And in this example, the taxpayer has deductible mortgage interest from the Form 1040, Schedule A, and that amount is $25,000.

Taxpayer is a 10% limited partner in a domestic partnership. Taxpayer's distributive share of foreign source general category income from the partnership is $20,000, and that is shown on the Schedule K-3, Part II, Section 1, column (d). The taxpayer also has a distributive share of foreign source passive income of $6,000, which is shown on Schedule K-3, Part II, Section 1, column (c).

And for this example, taxpayer has no other foreign source income, and the taxpayer's gross income from all sources is $75,000. Again, because the taxpayer is at least a 10% partner, even though the taxpayer is a limited partner, the mortgage interest expense is apportioned in part based on the distributive share of foreign source income by source and category as reported on the Schedule K-3. The individual taxpayer must also include any income not from the partnership to allocate and apportion the interest expense. In this case, as we noted, the taxpayer did not have any foreign source income outside of the partnership. So, now, we'll use the worksheet that's contained in the Form 1116 instruction to do the actual apportionment. First, we'll do the general category. The only foreign source income that is distributed is a distributive share of partnership income and that part is a general category, which is $20,000 that is entered on line 1. And the gross income from all sources is $75,000 per the facts of the case and this goes on line 2. Line 3 is the apportionment percentage determined by dividing line 1 by line 2. Line 4 is a $25,000 mortgage interest expense and that is multiplied by the apportionment percentage to determine the amount apportioned to the general category and that's on line 5 and the number is $6,668. This apportioned amount goes on line 4(a) of the Form 1116 general category. Next slide, again, we use the worksheet to apportion the mortgage interest to the passive category. We just went over the general category, now we're doing the passive. Again, the passive income from the partnership is $6,000. Total gross income from all sources, $75,000. Dividing line 1 by line 2, we get the apportionment percentage, 0.08%.

Total mortgage interest expense is $25,000. Multiplying that by the percentage, we get $2,000. And that goes on line 4(a) of the Form 1116 passive category. Now, we want to talk about interest expense other than the mortgage interest expense. This will go on line 4(b) of the Form 1116. The other interest expense, as Patti mentioned previously, is comprised of business interest expense, investment interest expense, and passive activity interest expense. The general rule is that these types of interest expense should be apportioned using the taxpayers' asset value. For example, business interest expense is apportioned proportionately to each category of income based on the amount of business assets assigned to the category of income divided by the total amount of business assets. And the Treasury Reg. for this is cited on this slide. Okay, now we're ready for our first polling question. And for that, I'm going to turn it over back to Anika. Anika? All right, Jim. Thanks so much. So, audience, here is our first polling question. Interest expense requiring apportionment includes which of the following? A, mortgage interest expense; B, business interest expense; C, investment interest expense; or D: A, B, and C. So, let's take a moment and click the radio button that best answers the question. I'll read that one more time. Interest expense requiring apportionment includes which of the following? A, mortgage interest expense; B, business interest expense; C, investment interest expense; Or D: A, B, and C. I'll give you guys a few more seconds to make your selection. All right, so we're going to stop the polling now, and let's share the correct answer on the next slide. And the correct response is D: A, B, and C. All right, so it looks like 85% of you responded correctly. That is a great response rate. John, it looks like I'll turn it back over to you to continue the presentation. Thanks, Anika. As with mortgage interest, there are different rules for apportioning other interest expense, depending on how the partnership interest is held, whether the individual partner is a general partner or a limited partner with at least 10% ownership interest, or if the individual partner is a limited partner with less than 10% ownership interest. For general partners or limited partners with at least 10% ownership interest, the individual partner has to add this distributive share of partnership interest expense to his other interest expense, classified as business interest expense, investment interest expense, or passive activity interest expense. This information comes from Schedule K-3, Part II, Section 2, lines 41 through 43. These lines report out any distributive share of other interest expense, business, investment, or passive activity. Next, the individual partner has to add to its assets the pro rata share of the inside basis of partnership assets, also by classification as business assets, investment assets, or passive activity assets.

This information comes from the Section K-3, Part III, Section 2, lines 6(b) through 6(d). The part of the Schedule K-3 that shows the interest expense apportionment factors. The next two slides are snapshots of the part of the Schedule K-3, just referred, so you can visualize what we are talking about. Schedule K-3, Part II, Section 2, lines 41 through 43, report the partner's share of the partnership interest expense by classification as business, investment, or passive activity.

Then on Schedule K-3, Part III, Section 2, lines 6(b) through 6(d), report the partner's share of the assets by classification as business, investment, or passive activity. For example, the partner's business interest expense, including the distributive share of the business interest expense of the partnership is allocated in proportion to the partner's business assets, including the ratable share of the business assets of the partnership. We will show an example later on. The partnership asset values, as reported on Schedule K-3, Part III, Section 2 for apportionment purposes, are generally computed based on the average of the inside basis of the partnership assets at the beginning and end of the year. Certain assets are excluded from this average inside basis, for example, tax exempt assets. Again, we're showing a snapshot of the Schedule K-3, Part III, Section 2, which shows the average values of the distributive share of assets on line 1.

Lines 3 through 5 are excluded from assets used in apportionment, including, for example, tax exempt assets. Under the tax book value method, the value of an asset is determined based on the adjusted basis of the asset. This is not necessarily what you will see on the Form 1065, Schedule L, Balance Sheet per books. So, for example, in the initial tax year, a building is purchased for $1 million, and the building is depreciated for book purposes on a less accelerated method than for tax purposes. Then, after depreciation is applied for a few years, in the year at issue, the building's value for book purposes on Schedule L is $500,000. But for tax purposes, including for allocating and apportioning interest expense, it could be $200,000. Some interest expense is directly allocable under the Treasury Regulations stated on the slide, 1.861-10 or 1.861-10T. Schedule K-3, Part II, Section 2, lines 39 through 40 are used for this purpose. The sourcing and category of this type of interest expense is indicated under columns (b) through (e). Assets used to apportion non-directly allocable interest expense do not include assets attracting directly allocable interest expenses, this is subtracted on lines 3 and 4. Individual partners should report this directly allocable interest expense on Form 1116, line 4(b). We are now going to go to the next poll question. All right, so it is time for the next poll question. So audience, here is our second polling question. To apportion other interest expense on Form 1116, line 4(b), the partner should look to which part of the Schedule K-3 for apportionment factors? A, Part III, Section 2, lines 6(b) through 6(d); B, Part II, Section 2, lines 41 through 43; C, Part III, Section 2, lines 1 through 6(a); or D, none of the above. I'm going to read that one more time. To apportion other interest expense on Form 1116, line 4(b), the partners should look to which part of the Schedule K-3 for apportionment factors? A, Part III, Section 2, lines 6(b) through 6(d); B, Part II, Section 2, lines 41 through 43; C, Part III, Section 2, lines 1 through 6(a); or D, none of the above. So just take a moment and click the radio button that best answers the question.

I'll give you a few more seconds to make your selection. All right, so we're going to go ahead and stop polling now, and let's share the correct answer on the next slide. Okay, so the correct response is A, Part III, Section 2, lines 6(b) through 6(d). Now, let's see how well you guys did with this question. Ooh, all right. So it looks like only 23% of you responded correctly. So, John, can you clarify this question for listeners? Sure. Form 1116, 4(b) includes interest expense other than home mortgage interest expense that reduces foreign source income. Interest expense other than home mortgage interest is generally apportioned based on assets in the same grouping, whether business, investment, or passive activity. So, Part III, Section 2, lines 6(b)

through 6(d) contains the partner's distributive share of these assets in the groupings identified, business, investment, or passive activity. All right, John, thank you for the explanation and a great job to everyone. Karen, it looks like I'm going to be turning it over to you to continue the presentation. So the mic is yours. That is correct. Thanks, Anika. Hello, everyone. Welcome to our webcast today. So, moving on to the next slide, now we're going to look at a different set of rules that apply to limited partners with a less-than-10% ownership interest. A partner who has this level of ownership may allocate her share of the partnership's interest expense to her distributive share of partnership gross income. So because the foreign source portion of the distributive share of the partnership gross income is classified as passive category income in this particular ownership fact pattern, the portion of the partner's interest expense allocated to that foreign source is treated as passive category income as well. There are certain exceptions to this rule such as high-taxed income. So, moving on, in this scenario, the partnership will not complete Schedule K-3, Part III, Section 2, for interest expense apportionment for an individual limited partner who has this less-than-10% interest, because of the special rule for in the passive treatment. When apportioning the partner's interest expense on an asset basis, the partner's interest in the partnership is the relevant asset instead of the partner's distributive share of the partnership's assets. So the partner's interest in the partnership is assigned to the categories of income in the same manner as the partner's share of the partnership interest expense is generally allocated, that is, only to either passive category foreign source income or domestic source income. And the authority for this rule for individuals with a less-than-10% limited partner is under Treasury Regulation Section 1.861-9T(e)(4)(ii). We'll now go to our next polling question. Thanks for your help, Anika. Yes, thank you, Karen. So, audience, it is time for our third polling question. So, in general, for a limited individual partner with less-than-10% ownership interest, the portion of his share of interest expense that is allocated to foreign source income, as opposed to domestic source income, is treated as allocated to which category of income? Is it A, general; B, passive; C, foreign branch; or D, none of the above? I'll read that one more time. In general, for a limited individual partner with less-than-10% ownership interest, the portion of his share of interest expense that is allocated to foreign source income, as opposed to domestic source income, is treated as allocated to which category of income? Is it A, general; B, passive; C, foreign branch, or D, none of the above? Let's take a moment and click the radio button that best answers the question, and I will give you guys a few more seconds to make your selection. All right, so the correct response is B, passive, and it looks like 76% of you responded to that correctly. So, Karen, would you mind clarifying that for us? Sure, Anika. So, as I explained a few slides ago, there is a special rule that allows a partner, that is a limited partner, that owns a less than 10% ownership interest in the partnership to treat the foreign source income, it's distributive share of the partnership income as foreign source passive income, would always be in the passive basket in that particular scenario. So please look out for that rule that kind of uses the burden of tracking the separate category of income. So, Karen, thank you for the explanation. I'm going to turn it back over to you. Sure, great. So, now, we are going to move on to an example, where hopefully we can pull this all together. So we have A, who is a U.S. citizen, who owns 10% interest in USP. And remember, USP is a domestic partnership, and this domestic partnership is engaged in the active contact of the U.S. trade or business. USP's business generates only domestic source income, and USP separately has an investment portfolio consisting of several less-than-10% stock investments that generates both domestic source and foreign source passive income. USP has a bank loan, the proceeds of which are divided 60% and 40% between the business and the investment portfolio. And A's only business assets and investment assets are its distributive share of those owned by the U.S. partnership. Continuing on with the facts, A's only interest expense is that from its distributive share of USP's interest expense: $3,000 for business activity and $2,000 for investment activity; the $3,000 business interest expense must be apportioned on the basis of the business assets. And, recall, that this business interest expense is reported on Schedule K-3, Part II, Section 2, column (f), line 41. A's distributive share of USP's business assets is $72,000, and those assets generate solely domestic source income, because it only is in a U.S. business. That amount of $72,000 is reported on Schedule K-3, Part III, Section 2, column (a), line 6(b). So the distinction being that the interest expense is reported on Part II, and then these assets that are used to do the apportionment are reported on Part III. Note that the $3,000 of business interest expense needs to be determined at the partner level in terms of the sourcing, because it's reported under column (f). And since the business assets attracting business interest expense are all U.S. sourced, the entire $3,000 of business interest expense is apportioned to U.S. source and need not be reported on the Form 1116. And that is because on the Form 1116, it is only required to be reported foreign source income, not U.S. source income, and we'll see this in a moment illustrated. So $3,000, again, is apportioned to U.S. source income by the partner and does not need to be reported on the Form 1116. But we still have the $2,000 of investment interest expense that does need to be apportioned on the basis of investment assets. And, again, the business interest expense, the investment interest expense will also be reported on Schedule K-3, Part II, Section 2, and column(f), but it will be reported on line 42, which is designated for the investment interest expense, whereas line 41 is designated for the business interest expense. Continuing on with the facts, A's distributive share of the adjusted basis in USP's stock is $20,000, with respect to which $8,000 is the stock generating domestic source income, and $12,000 is with respect to the stock generating foreign source passive income. So these amounts, the $20,000, the $8,000, and the $12,000 are reported on Schedule K-3, Part III, Section 2, line 6c, columns (a) and (c), respectively. So this is where we explained to you before that the assets are reported by the source of income which they generate in the separate category, and Part III has those there for apportionment purposes. $800 is apportioned to domestic source income and does not need to be reported on the Form 1116, because just like the gross income, the expense allocated to U.S.

source income does not need to be apportioned to - if it's U.S. source does not need to be reported on the Form 1116. And the way that this $800 was derived by taking the total adjusted basis in USP stock of $20,000 as the denominator, and the portion that is generating domestic source income of $8,000 of that $20,000 is multiplied by the $2,000 of interest expense. The same rule applies for purposes of determining the foreign source portion of that $2,000 interest expense, because there's only two types of income generated by the stock, the domestic source income and then the foreign source passive income. The remaining amount of $2,000 would be apportioned to foreign source passive income of $1,200. And so, now, we see that we look here on the slide so that you can see what it looks like when you receive a Schedule K-3, when the partner receives a Schedule K-3, the partner will look to Part II, Section 2, Line 41 and 42, and the partner will see on line 41 here that other interest expense, that's business expense, is $3,000 reported in column (f) and column (g), and then the portion of the interest expense that's aligned with investment, interest expense of $2,000 is here on line 42. And then in terms of the apportionment factors that are utilized to allocate an apportion of the interest expense, the partner would look to Part III of its Schedule K-3, and in particular Section 2 is where the interest expense apportionment factors are. And so here, in total, you'll see that $72,000 assets are attracting domestic source of the total $80,000. So the $3,000 of the related interest expense is all domestic source and need not be reported on the Form 1116. However, as we discussed before, the $2,000 does need to be apportioned to domestic source and passive category foreign source. And you can see here how that's broken up. So here we have on line 6(a), we have the $80,000 for domestic source in column (a), but we also have $12,000 in passive category of assets.

And then, we also have a total of $92,000. There's $72,000 that generates domestic source. There's $8,000 that generate domestic source in the investment categories. That's $72,000 within the general category, business category, and then we have $12,000 and, again, on line 6(c) to differentiate the types of income that is being generated by the assets so that the partner can do the allocation and apportionment. So, now, we'll move on to our final polling question, Anika.

Yeah, Karen, we are at our final polling question. So, audience, here is your fourth and final polling question. Which assets are taken into account by an individual that owns a 10% interest in a partnership when allocating their other interest expense? Is it: A, asset owned by the individual? B, assets owned by the partnership? C, A and B? Or D, none of the above? I'm going to read that one more time. Which assets are taken into account by an individual that owns a 10% interest in a partnership when allocating their other interest expense? Is it A, assets owned by the individual? B, assets owned by the partnership? C, A and B? Or D, none of the above? Take a moment to click the radio button that best answers the question, and I'll give you guys a few more seconds to make your selection. All right, so we're going to go ahead and stop the polling now, and let's share the correct answer on the next slide. And the correct response is C, A and B. Now, let's take a look and see how many of you responded correctly. Okay, so it looks like only 64% of you responded correctly to this particular question. So if you don't mind providing an additional explanation in regard to this question, I think that will help the audience a lot, Karen. Sure, Anika. So the main point that we wanted to emphasize with this webinar is the fact that when an individual who's a partner in a partnership has a flow through amount of interest expense from a partnership in terms of determining the amount, how to allocate and apportion that interest expense to foreign source income and U.S. source income, the partner cannot simply look to its own assets aside from its partnership interest. It needs to look through in most cases to the partnership's assets, and so that's why the partnership reports on Schedule K-3, the partner's distributive share of the value of the assets, so that the partner can add both those assets, its distributive share of the partnership assets to its own assets, and doing the interest expense allocation and apportionment for that interest expense that requires an asset allocation and apportionment.

Thanks, Anika. No, thank you for that explanation. So great job to everyone. Now, I believe we have some resources to share. So, Patti, can you show us the resources? Absolutely. Thank you, Anika. On this slide, you're going to see some of our recommended resources, and these are the instructions to the schedules. There are very good examples in these instructions that will further clarify the allocation and apportionment of interest expense. And so look at the slide, read the instructions, and it'll guide you. And, Anika, that about wraps it up for us. All right. So thank you so much for that, Patti. So, hello, audience, it's me again, Anika Pompey, and I am going to be moderating the Q&A session. Before we start the Q&A session, I do want to thank everyone for attending today's presentation, Mortgage & Other Interest Expense Allocation & Apportionment for Individuals with Partnership Interests Form 1116 and Schedule K-3. Now, earlier we did mention that we want to know what questions you have for our presenters. So here is your opportunity. If you haven't input your questions, there's still time. So go ahead and click on the drop down arrow next to ask questions field and type your question and click the Send. Jim, Patti, Karen and John are all staying on with us to answer your questions. But one thing before we get started, we may not have time to answer all the questions submitted. However, let me assure you that we will answer as many as time allows. If you're participating to earn a certificate and relating continuing education credits, you will qualify for one credit for participating for at least 50 minutes from the official start time of the webinar, which means the first few minutes of chatting before the top of the hour does not count towards the 50 minutes. Let's go ahead and get started so that we can get to as many questions as possible. All right. So I have my first question here. And, Jim, I am going to direct this question to you. What happens if you do not itemized deductions?

Yeah, Anika, that's a very good question. I think we got actually three questions on the same topic. So if a taxpayer does not itemized, meaning a taxpayer most likely took a standard deduction.

In that case, there is no apportionment necessary on line 4(a) of the Form 1116, meaning there is no apportionment of mortgage interest expense, because if a taxpayer did not use the standard deduction there would be an apportion up above on line 3. But you might still have other business interest expense or other types of interest expense, which you need an apportion on 4(b), but line 4(a) would not be necessary. Back to you. Hopefully that answers the question. Thank you, Jim.

We appreciate that detailed response. I'm going to go ahead and move on to our next question. And, Karen, I am going to direct this question to you. So what does it mean by sourced by partners in column (f)? Sure, Anika. I think our instructions are really helpful on this. The instructions to the schedule K-2, K-3 for the 1065. We also have similar instructions for the 1120-S. And basically what this means is that some of the rules for how an item of gross income is sourced or how an expense is allocated and apportioned, require that it cannot be determined at the partnership level, because the rule requires that the source of the gross income or the allocation and apportionment of the expense be done at the partner level. So, for example, today, we've talked about interest expense and as I was further explaining the fourth polling question, I explained that the allocation and apportionment of interest expense is not solely dependent on the partnerships assets. It also looks to the partner's assets. So, that's an example of an expense that cannot be determined solely at the partnership level in terms of how that expense reduces foreign source income and U.S. source income, because at the partnership level there is not the information about the partner's assets. So, we would say that interest expense is a type of expense that needs to be determined at the partner level and that is why we put that expense usually in column (f). There's also similarly gross income items and that would be typically under Section 865. The source of a sale is generally determined based on the partner's residence as opposed to the partnerships residence, and so that would be a type of gross income that would need to be determined at the partner level and so that type of sales income, for example, would be included in column (f).

Karen, thank you so much for that very detailed information. I hope that was beneficial to our audience members and that you had some takeaways from that. Okay. So, Jim, I'm going to direct this next question to you. If a taxpayer owns less-than-10% of a domestic LLP, let's say a big four accounting firm, that is actively working in the LLP, what rules will we apply to apportionment of home mortgage interest? And will it still be under the less-than-10% ownership passive category? Yeah, that's a very good question too. I'll try to answer that, but if Karen wants to chime in, please. So to me, based on the description in the facts of this question, this partner working for a big five or big four actually accounting firm actively, to me, would be a general partner rather than the limited partner. So, I think, we have to try to define the capacity of this partner, whether, in fact, the partner really is working as a general partner.

Now, if the partner is limited partner and owns less-than-10%, of course, then the rules applicable to that type of ownership would apply to apportion of mortgage interest. Karen, do you have something to add to that? No. That's the way I would have answered it as well, Jim. Thanks.

All right, Jim. Thank you so much for that response. I think we have time for another question.

So, Patti, I'll direct this one to you. Is the allocation of the partner's individual mortgage expense only required if the partner has met the foreign income threshold? Thank you, Anika.

Basically, in regards to this question, we're looking at taxpayer on the individual side. So, if the individual's total income, his foreign source income is less than $5,000, then you would only be apportioning it all to domestic, or it would be considered all U.S. source for their purposes.

If they had more than $5,000 of foreign source income on the individual side, then it would have to be apportioned. And you would take in, you'd factor in any interest expense that they have on the return, to allocate interest expense allocation based on sourcing rules. Okay. Thank you so much for that response, Patti. I think we have time for at least one more question. So, I am going to direct this last question to Karen. Why would an individual have interest expense other than home mortgage interest? Right, so for this reason it is why we thought it would be helpful to do this webcast. We have received a lot of questions on this particular subject matter, because it is rare for individuals to have interest expense other than home mortgage expense. And the reason why in this particular fact pattern they would have interest expense other than home mortgage expense is because of their ownership in the partnership. And so it wouldn't necessarily be as rare for the partnership to have interest expense that is in these different categories that we've discussed today. For example, the business interest expense, the passive activity, and the investment interest expense as well as the assets associated with those that would generate those types of activities. And so that's why we wanted to focus on that today to explain these special rules in the case where an individual has an interest in a partnership, so that they would be aware that for these types of interest expense. Generally, the rule is that that interest expense would be apportioned based on assets as opposed to home mortgage interest expense, which I think most individuals are more likely to see, which would be apportioned based on gross income. Thanks. All right. Thank you so much for that response. So, audience, it looks like that's all the time that we have for questions. I want to thank Jim, Patti, Karen, and John for sharing their knowledge and expertise and for answering your questions. But before we close the Q&A session, Jim, did you have any key points that you want our attendees to remember from today's webinar? Yes, Anika. I think the key takeaway from today's webinar is, number one, the rules of apportioning interest expense depend on the, first of all, the type of interest expense. And so, for mortgage interest, it's based on relative foreign source gross income in income category over total gross income from all sources. And then, secondly, if the taxpayer has an interest in a partnership, that taxpayer must take into account his or her share of the partnership interest expense, and also the distributive apportionment factors to apportion the different types of interest expense. And back to you, Anika. Thank you so much, Jim. So, audience, we are planning additional webinars throughout the year, so to register for all upcoming webinars, please visit IRS.gov, do a keyword search for webinars and select the Webinars for Tax Practitioners or Webinars for Small Businesses. When appropriate, we will offer certificates and continuing education credits for upcoming webinars. We invite you to visit our video portal at www.irsvideos.gov. There you can view archived versions of our webinars. But please note continuing education credits and certificates of completion are not offered if you view any version of our webinars after the live broadcast. And a very big thank you to our speakers, Patti Marando, Jim Wu, John Lee, and Karen Cate for such a great webinar. Thank you for sharing your expertise for answering our questions. And I also want to thank you, our attendees for attending today's webinar, Mortgage & Other Interest Expense Allocation & Apportionment for Individuals with Partnership Interests Form 1116 and Schedule K-3. Now, if you attended today's webinar for at least 50 minutes from the official start time of the webinar, you qualify for one possible CE credit. Again, the time we spent chatting before the webinar started does not count towards the 50 minutes. If you're eligible for continuing education from the IRS and registered with your valid PTIN, your credit will be posted in your PTIN account. If you qualify and you have not received your certificate and/or credit by October 23, please email us at cl.sl.web.conference.team@irs. gov. The email address is on the slide as well. And if you're interested in finding out, who your local stakeholder liaison is, you may send us an email using the address shown on this slide and we'll send you that information. 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