(a) Purpose and scope. This section provides rules for the application of section 1503(d), concerning the determination and use of dual consolidated losses. Paragraph (b) of this section provides a general rule prohibiting a dual consolidated loss from offsetting the taxable income of a domestic affiliate. Paragraph (c) of this section provides definitions of the terms used in this section. Paragraph (d) of this section provides rules for calculating the amount of a dual consolidated loss and for adjusting the basis of stock of a dual resident corporation. Paragraph (e) of this section contains an anti-avoidance provision. Paragraph (f) of this section applies the rules of paragraph (d) of this section to the computation of foreign tax credit limitations. Paragraph (g) of this section provides certain exceptions to the limitation rule of paragraph (b) of this section. Finally, paragraph (h) of this section provides the effective date of the regulations and a provision for the retroactive application of the regulations to qualifying taxpayers.
(b) In general--(1) Limitation on the use of a dual consolidated loss to offset income of a domestic affiliate. Except as otherwise provided in this section, a dual consolidated loss of a dual resident corporation cannot offset the taxable income of any domestic affiliate in the taxable year in which the loss is recognized or in any other taxable year, regardless of whether the loss offsets income of another person under the income tax laws of a foreign country and regardless of whether the income that the loss may offset in the foreign country is, has been, or will be subject to tax in the United States. Pursuant to paragraph (c) (1) and (2) of this section, the same limitation shall apply to a dual consolidated loss of a separate unit of a domestic corporation as if the separate unit were a wholly owned subsidiary of such corporation.
(1) Limitation on the use of a dual consolidated loss to offset income of a domestic affiliate. Except as otherwise provided in this section, a dual consolidated loss of a dual resident corporation cannot offset the taxable income of any domestic affiliate in the taxable year in which the loss is recognized or in any other taxable year, regardless of whether the loss offsets income of another person under the income tax laws of a foreign country and regardless of whether the income that the loss may offset in the foreign country is, has been, or will be subject to tax in the United States. Pursuant to paragraph (c) (1) and (2) of this section, the same limitation shall apply to a dual consolidated loss of a separate unit of a domestic corporation as if the separate unit were a wholly owned subsidiary of such corporation.
(2) Limitation on the use of a dual consolidated loss to offset income of a successor-in-interest. A dual consolidated loss of a dual resident corporation also cannot be used to offset the taxable income of another corporation by means of a transaction in which the other corporation succeeds to the tax attributes of the dual resident corporation under section 381 of the Code. Similarly, a dual consolidated loss of a separate unit of a domestic corporation cannot be used to offset income of the domestic corporation following the termination, liquidation, sale, or other disposition of the separate unit. However, if a dual resident corporation transfers its assets to another corporation in a transaction subject to section 381, and the acquiring corporation is a dual resident corporation of the same foreign country of which the transferor dual resident corporation is a resident, or a domestic corporation that carries on the business activities of the transferor dual resident corporation as a separate unit, then income generated by the transferee dual resident corporation, or separate unit, may be offset by the carryover losses of the transferor dual resident corporation. In addition, if a domestic corporation transfers a separate unit to another domestic corporation in a transaction subject to section 381, the income generated by the separate unit following the transfer may be offset by the carryover losses of the separate unit.
(3) Application of rules to multiple tiers of separate units. If a separate unit of a domestic corporation is owned indirectly through another separate unit, the principles of paragraph (b) (1) and (2) of this section shall apply as if the upper-tier separate unit were a subsidiary of the domestic corporation and the lower-tier separate unit were a lower-tier subsidiary.
(4) Examples. The following examples illustrate the application of this paragraph (b).
Example 1. P, a domestic corporation, owns all of the outstanding stock of DRC, a domestic corporation. P and DRC file a consolidated U.S. income tax return. DRC is managed and controlled in Country W, a country that determines the tax residence of corporations according to their place of management and control. Therefore, DRC is a dual resident corporation and any net operating loss it incurs is a dual consolidated loss. In Years 1 through 3, DRC incurs dual consolidated losses. Under this paragraph (b), the dual consolidated losses may not be used to offset P's income on the group's consolidated U.S. income tax return. At the end of Year 3, DRC sells all of its assets and discontinues its business operations. DRC is then liquidated into P, pursuant to the provisions of section 332. Normally, under section 381, P would succeed to, and be permitted to utilize, DRC's net operating loss carryovers. However, this paragraph (b) prohibits the dual consolidated losses of DRC from reducing P's income for U.S. tax purposes. Therefore, DRC's net operating loss carryovers will not be available to offset P's income.
Example 2. The facts are the same as in Example 1, except that DRC does not sell its assets and, following the liquidation of DRC, P continues to operate DRC's business as a separate unit (e.g., a branch). DRC's loss carryovers are available to offset P's income generated by the assets previously owned by DRC and now held by the separate unit.
(c) Definitions. The following definitions shall apply for purposes of this section.
(1) Domestic corporation. The term ``domestic corporation'' has the meaning assigned to it by section 7701(a) (3) and (4). The term also includes any corporation otherwise treated as a domestic corporation by the Code, including, but not limited to, sections 269B, 953(d), and 1504 (d). For purposes of this section, any separate unit of a domestic corporation, as defined in paragraph (c) (3) and (4) of this section, shall be treated as a separate domestic corporation.
(2) Dual resident corporation. A dual resident corporation is a domestic corporation that is subject to the income tax of a foreign country on its worldwide income or on a residence basis. A corporation is taxed on a residence basis if it is taxed as a resident under the laws of the foreign country. An S corporation, as defined in section 1361, is not a dual resident corporation. For purposes of this section, any separate unit of a domestic corporation, as defined in paragraph (c) (3) and (4) of this section, shall be treated as a dual resident corporation. Unless otherwise indicated, any reference in this section to a dual resident corporation refers also to a separate unit.
(3) Separate unit--(i) The term ``separate unit'' shall mean any of the following:
(i) The term ``separate unit'' shall mean any of the following:
(A) A foreign branch, as defined in Sec. 1.367(a)-6T(g) (or a successor regulation), that is owned either directly by a domestic corporation or indirectly by a domestic corporation through ownership of a partnership or trust interest (regardless of whether the partnership or trust is a United States person);
(B) an interest in a partnership; or
(C) an interest in a trust.
(ii) If two or more foreign branches located in the same foreign country are owned by a single domestic corporation and the losses of each branch are made available to offset the income of the other branches under the tax laws of the foreign country, within the meaning of paragraph (c)(15)(ii) of this section, then the branches shall be treated as one separate unit.
(4) Hybrid entity separate unit. The term ``separate unit'' includes an interest in an entity that is not taxable as an association for U.S. income tax purposes but is subject to income tax in a foreign country as a corporation (or otherwise at the entity level) either on its worldwide income or on a residence basis.
(5) Dual consolidated loss--(i) In general. The term ``dual consolidated loss'' means the net operating loss (as defined in section 172(c) and the regulations thereunder) of a domestic corporation incurred in a year in which the corporation is dual resident corporation. The dual consolidated loss shall be computed under paragraph (d)(1) of this section. The fact that a particular item taken into account in computing a dual resident corporation's net operating loss is not taken into account in computing income subject to a foreign country's income tax shall not cause such item to be excluded from the calculation of the dual consolidated loss.
(i) In general. The term ``dual consolidated loss'' means the net operating loss (as defined in section 172(c) and the regulations thereunder) of a domestic corporation incurred in a year in which the corporation is dual resident corporation. The dual consolidated loss shall be computed under paragraph (d)(1) of this section. The fact that a particular item taken into account in computing a dual resident corporation's net operating loss is not taken into account in computing income subject to a foreign country's income tax shall not cause such item to be excluded from the calculation of the dual consolidated loss.
(ii) Exceptions. A dual consolidated loss shall not include the following--
(A) A net operating loss incurred by a dual resident corporation in a foreign country whose income tax laws--
(1) Do not permit the dual resident corporation to use its losses, expenses or deductions to offset the income of any other person that is recognized in the same taxable year in which the losses, expenses or deductions are incurred; and
(2) Do not permit the losses, expenses or deductions of the dual resident corporation to be carried over or back to be used, by any means, to offset the income of any other person in other taxable years; or
(B) A net operating loss incurred during that portion of the taxable year prior to the date on which the domestic corporation becomes a dual resident corporation or subsequent to the date on which the domestic corporation ceases to be a dual resident corporation. For purposes of determining the amount of the net operating loss incurred in that portion of the taxable year prior to the date on which the domestic corporation becomes a dual resident corporation or subsequent to the date on which the domestic corporation ceases to be a dual resident corporation, in no event shall more than the aggregate of the equal daily portion of the net operating loss commensurate with the portion of the taxable year during which the domestic corporation was not a dual resident corporation be allocated to that portion of the taxable year in which the domestic corporation was not a dual resident corporation.
(iii) Dual consolidated losses of separate units that are partnership interests, including interests in hybrid entities. [Reserved]
(6) Subject to tax. For purposes of determining whether a domestic corporation is subject to the income tax of a foreign country on its income, the fact that the corporation has no actual income tax liability to the foreign country for a particular taxable year shall not be taken into account.
(7) Foreign country. For purposes of this section, possessions of the United States shall be considered foreign countries.
(8) Consolidated group. The term ``consolidated group'' means an affiliated group, as defined in section 1504(a), with which a dual resident corporation or domestic owner files a consolidated U.S. income tax return.
(9) Domestic owner. The term ``domestic owner'' means a domestic corporation that owns one or more separate units.
(10) Affiliated dual resident corporation or affiliated domestic owner. The term ``affiliated dual resident corporation'' or ``affiliated domestic owner'' means a dual resident corporation or domestic owner that is a member of a consolidated group.
(11) Unaffiliated dual resident corporation or unaffiliated domestic owner. The term ``unaffiliated dual resident corporation'' or ``unaffiliated domestic owner'' means a dual resident corporation or domestic owner that is an unaffiliated domestic corporation.
(12) Successor-in-interest. The term ``successor-in-interest'' means an acquiring corporation that succeeds to the tax attributes of an acquired corporation by means of a transaction subject to section 381.
(13) Domestic affiliate. The term ``domestic affiliate'' means any member of an affiliated group, without regard to the exceptions contained in section 1504(b) (other than section 1504(b)(3)) relating to includible corporations.
(14) Unaffiliated domestic corporation. The term ``unaffiliated domestic corporation'' means a domestic corporation that is not a member of an affiliated group.
(15) Use of loss to offset income of a domestic affiliate or another person--(i) A dual consolidated loss shall be deemed to offset income of a domestic affiliate in the year it is included in the computation of the consolidated taxable income of a consolidated group. The fact that no tax benefit results from the inclusion of the dual consolidated loss in the computation of the group's consolidated taxable income in the taxable year shall not be taken into account.
(i) A dual consolidated loss shall be deemed to offset income of a domestic affiliate in the year it is included in the computation of the consolidated taxable income of a consolidated group. The fact that no tax benefit results from the inclusion of the dual consolidated loss in the computation of the group's consolidated taxable income in the taxable year shall not be taken into account.
(ii) Except as provided in paragraph (c)(15)(iii) of this section, a loss, expense, or deduction taken into account in computing a dual consolidated loss shall be deemed to offset income of another person under the income tax laws of a foreign country in the year it is made available for such offset. The fact that the other person does not have sufficient income in that year to benefit from such an offset shall not be taken into account. However, where the laws of a foreign country provide an election that would enable a dual resident corporation or separate unit to use its losses, expenses, or deductions to offset income of another person, the losses, expenses, or deductions shall be considered to offset such income only if the election is made.
(iii) The losses, expenses, or deductions taken into account in computing a dual resident corporation's or separate unit's dual consolidated loss shall not be deemed to offset income of another person under the income tax laws of a foreign country for purposes of this section, if under the laws of the foreign country the losses, expenses, or deductions of the dual resident corporation or separate unit are used to offset the income of another dual resident corporation or separate unit within the same consolidated group (or income of another separate unit that is owned by the unaffiliated domestic owner of the first separate unit). If the losses, expenses, or deductions of a dual resident corporation or separate unit are made available under the laws of a foreign country to offset the income of other dual resident corporations or separate units within the same consolidated group (or other separate units owned by the unaffiliated domestic owner of the first separate unit), as well as the income of another person, and the laws of the foreign country do not provide applicable rules for determining which person's income is offset by the losses, expenses, or deductions, then for purposes of this section, the losses, expenses or deductions shall be deemed to offset the income of the other dual resident corporations or separate units, to the extent of such income, before being considered to offset the income of the other person.
(iv) Except to the extent paragraph (g)(1) of this section applies, where the income tax laws of a foreign country deny the use of losses, expenses, or deductions of a dual resident corporation to offset the income of another person because the dual resident corporation is also subject to income taxation by another country on its worldwide income or on a residence basis, the dual resident corporation shall be treated as if it actually had offset its dual consolidated loss against the income of another person in such foreign country.
(16) Examples. The following examples illustrate this paragraph (c).
Example 1. X, a member of a consolidated group, conducts business through a branch in Country Y. Under Country Y's income tax laws, the branch is taxed as a permanent establishment and its losses may be used under the Country Y form of consolidation to offset the income of Z, a Country Y affiliate of X. In Year 1, the branch of X incurs an overall loss that would be treated as a net operating loss if the branch were a separate domestic corporation. Under paragraph (c)(3) of this section, the branch of X is treated as a separate domestic corporation and a dual resident corporation. Thus, under paragraph (c)(5), its loss constitutes a dual consolidated loss. Unless X qualifies for an exception under paragraph (g) of this section, paragraph (b) of this section precludes the use of the branch's loss to offset any income of X not derived from the branch operations or any income of a domestic affiliate of X.
Example 2. A and B are members of a consolidated group. FC is a Country X corporation that is wholly owned by B. A and B organize a partnership, P, under the laws of Country X. P conducts business in Country X and its business activity constitutes a foreign branch within the meaning of paragraph (c)(3)(i)(A) of this section. P also earns U.S. source income that is unconnected with the branch operations and, therefore, is not subject to tax by Country X. Under the laws of Country X, the branch can consolidate with FC. The interests in P held by A and B are each treated as a dual resident corporation. The branch is also treated as a separate dual resident corporation. Unless an exception under paragraph (g) of this section applies, any dual consolidated loss incurred by P's branch cannot offset the U.S. source income earned by P or any other income of A or B.
Example 3. X is classified as a partnership for U.S. income tax purposes. A, B, and C are the sole partners of X. A and B are domestic corporations and C is a Country Y corporation. For U.S. income tax purposes, each partner has an equal interest in each item of partnership profit or loss. Under Country Y's law, X is classified as a corporation and its income and losses may be used under the Country Y form of consolidation to offset the income of companies that are affiliates of X. Under paragraph (c)(3) and (4) of this section, the partnership interests held by A and B are treated as separate domestic corporations and as dual resident corporations. Unless an exception under paragraph (g) of this section applies, losses allocated to A and B can only be used to offset profits of X allocated to A and B, respectively.
Example 4. P, a domestic corporation, files a consolidated U.S. income tax return with its two wholly-owned domestic subsidiaries, DRC1 and DRC2. Each subsidiary is also treated as a Country Y resident for Country Y tax purposes. Thus, DRC1 and DRC2 are dual resident corporations. DRC1 owns FC, a Country Y corporation. Country Y's tax laws permit affiliated resident corporations to file a form of consolidated return. In Year 1, DRC1 incurs a $200 net operating loss for both U.S. and Country Y tax purposes, while DRC2 recognizes $200 of income under the tax laws of each country. FC also earns $200 of income for Country Y tax purposes. DRC1, DRC2, and FC file a Country Y consolidated return. However, Country Y has no applicable rules for determining which income is offset by DRC1's $200 loss. Under paragraph (c)(15)(iii) of this section, the loss shall be treated as offsetting DRC2's $200 of income. Because DRC1 and DRC2 are members of the same consolidated group, for purposes of this section, the offset of DRC1's loss against the income of DRC2 is not considered a use of the loss against the income of another person under the laws of a foreign country.
Example 5. DRC, a domestic corporation, files a consolidated U.S. income tax return with its parent, P. DRC is also subject to tax in Country Y on its worldwide income. Therefore, DRC is a dual resident corporation and any net operating loss incurred by DRC is a dual consolidated loss. Country Y's tax laws permit corporations that are subject to tax on their worldwide income to use the Country Y form of consolidation, thus enabling eligible corporations to use their losses to offset income of affiliates. However, to prevent corporations like DRC from offsetting losses against income of affiliates in Country Y and then again offsetting the losses against income of foreign affiliates under the tax laws of another country, Country Y prevents a corporation that is also subject to the income tax of another country on its worldwide income or on a residence basis from using the Country Y form of consolidation. There is no agreement, as described in paragraph (g)(1) of this section, between the United States and Country Y. Because of Country Y's statute, DRC will be treated as having actually offset its losses against the income of affiliates in Country Y under paragraph (c)(15)(iv) of this section. Therefore, DRC will not be able to file an agreement described in paragraph (g)(2) of this section and offset its losses against the income of P or any other domestic affiliate.
(d) Special rules for accounting for dual consolidated losses--(1) Determination of amount of dual consolidated loss--(i) Dual resident corporation that is a member of a consolidated group. For purposes of determining whether a dual resident corporation that is a member of a consolidated group has a dual consolidated loss for the taxable year, the dual resident corporation shall compute its taxable income (or loss) in accordance with the rules set forth in the regulations under section 1502 governing the computation of consolidated taxable income, taking into account only the dual resident corporation's items of income, gain, deduction, and loss for the year. However, for purposes of this computation, the following items shall not be taken into account:
(1) Determination of amount of dual consolidated loss--(i) Dual resident corporation that is a member of a consolidated group. For purposes of determining whether a dual resident corporation that is a member of a consolidated group has a dual consolidated loss for the taxable year, the dual resident corporation shall compute its taxable income (or loss) in accordance with the rules set forth in the regulations under section 1502 governing the computation of consolidated taxable income, taking into account only the dual resident corporation's items of income, gain, deduction, and loss for the year. However, for purposes of this computation, the following items shall not be taken into account:
(i) Dual resident corporation that is a member of a consolidated group. For purposes of determining whether a dual resident corporation that is a member of a consolidated group has a dual consolidated loss for the taxable year, the dual resident corporation shall compute its taxable income (or loss) in accordance with the rules set forth in the regulations under section 1502 governing the computation of consolidated taxable income, taking into account only the dual resident corporation's items of income, gain, deduction, and loss for the year. However, for purposes of this computation, the following items shall not be taken into account:
(A) Any net capital loss of the dual resident corporation; and
(B) Any carryover or carryback losses.
(ii) Dual resident corporation that is a separate unit of a domestic corporation. For purposes of determining whether a separate unit has a dual consolidated loss for the taxable year, the separate unit shall compute its taxable income (or loss) as if it were a separate domestic corporation and a dual resident corporation in accordance with the provisions of paragraph (d)(1)(i) of this section, using only those items of income, expense, deduction, and loss that are otherwise attributable to such separate unit.
(2) Effect of a dual consolidated loss. For any taxable year in which a dual resident corporation or separate unit has a dual consolidated loss to which paragraph (b) of this section applies, the following rules shall apply.
(i) If the dual resident corporation is a member of a consolidated group, the group shall compute its consolidated taxable income without taking into account the items of income, loss, or deduction taken into account in computing the dual consolidated loss. The dual consolidated loss may be carried over or back for use in other taxable years as a separate net operating loss carryover or carryback of the dual resident corporation arising in the year incurred. It shall be treated as a loss incurred by the dual resident corporation in a separate return limitation year and (without regard to whether the dual resident corporation is a common parent) shall be subject to all of the limitations of Secs. 1.1502-21A(c) or 1.1502-21(c), as appropriate (relating to limitations on net operating loss carryovers and carrybacks from separate return limitation years).
(ii) The unaffiliated domestic owner of a separate unit, or the consolidated group of an affiliated domestic owner, shall compute its taxable income without taking into account the items of income, loss or deduction taken into account in computing the separate unit's dual consolidated loss. The dual consolidated loss shall be treated as a loss incurred by a separate corporation and its use shall be subject to all of the limitations of Secs. 1.1502-21A(c) or 1.1502-21(c), as appropriate, as if the separate unit were filing a consolidated return with the unaffiliated domestic owner or with the consolidated group of the affiliated domestic owner.
(3) Basis adjustments for dual consolidated losses--(i) Dual resident corporation that is a member of an affiliated group. When a dual resident corporation is a member of a consolidated group, each other member owning stock in the dual resident corporation shall adjust the basis of the stock in the following manner.
(i) Dual resident corporation that is a member of an affiliated group. When a dual resident corporation is a member of a consolidated group, each other member owning stock in the dual resident corporation shall adjust the basis of the stock in the following manner.
(A) Positive adjustments. Positive adjustments shall be made in accordance with the principles of Sec. 1.1502-32(b)(1), except that there shall be no positive adjustment under Sec. 1.1502-32(b)(1)(ii) for any amount of the dual consolidated loss that is not absorbed as a result of the application of paragraph (b) of this section. In addition, there shall be no positive adjustment for any amount included in income pursuant to paragraph (g)(2)(vii) of this section.
(B) Negative adjustments. Negative adjustments shall be made in accordance with the principles of Sec. 1.1502-32(b)(2), except that there shall be no negative adjustment under Sec. 1.1502-32(b)(2)(ii) for the amount of the dual consolidated loss subject to paragraph (b) of this section that is absorbed in a carryover year.
(ii) Dual resident corporation that is a separate unit arising from an interest in a partnership. Where a separate unit is an interest in a partnership, the domestic owner shall adjust its basis in the separate unit in accordance with section 705, except that no increase in basis shall be permitted for any amount included as income pursuant to paragraph (g)(2)(vii) of this section.
(4) Examples. The following examples illustrate this paragraph (d).
(i) P, S1, S2, and T are domestic corporations. P owns all of the stock of S1 and S2. S2 owns all of the stock of T. T is a resident of Country FC for Country FC income tax purposes. Therefore, T is a dual resident corporation. P, S1, S2, and T file a consolidated U.S. income tax return. X and Y are corporations that are not members of the consolidated group.
(ii) At the beginning of Year 1, P has a basis of $1000 in the stock of S2. S2 has a $500 basis in the stock of T.
(iii) In Year 1, T incurs interest expense in the amount of $100. In addition, T sells a noncapital asset, u, in which it has a basis of $10, to S1 for $50. T also sells a noncapital asset, v, in which it has a basis of $200, to S1 for $100. The sales of u and v are intercompany transactions described in Sec. 1.1502-13. T also sells a capital asset, z, in which it has a basis of $180, to Y for $90. In Year 1, S1 earns $200 of separate taxable income, calculated in accordance with Sec. 1.1502-12, as well as $90 of capital gain from a sale of an asset to X. P and S2 have no items of income, loss, or deduction for Year 1.
(iv) In Year 1, T has a dual consolidated loss of $100 (attributable to its interest expense). T's $90 capital loss is not included in the computation of the dual consolidated loss. Instead, T's capital loss is included in the computation of the consolidated group's capital gain net income under Sec. 1.1502-22(c) and is used to offset S1's $90 capital gain.
(v) No elective agreement, as described in paragraph (g)(1) of this section, exists between the United States and Country FC. For Country FC tax purposes, T's $100 loss is offset against the income of a Country FC affiliate. Therefore, T is not eligible for the exception provided in paragraph (g)(2) of this section.
(vi) Because T has a dual consolidated loss for the year, the consolidated taxable income of the consolidated group is calculated without regard to T's items of income, loss or deduction taken into account in computing the dual consolidated loss. Therefore, the consolidated taxable income of the consolidated group is $200 (the sum of $200 of separate taxable income earned by S1 plus $90 of capital gain earned by S1 minus $90 of capital loss incurred by T). The $40 gain recognized by T upon the sale of item u to S1 and the $100 loss recognized by T upon the sale of item v to S1 are deferred pursuant to Sec. 1.1502-13(c)(1).
(vii) S2 may not make the positive adjustment provided for in Sec. 1.1502-32(b)(1)(ii) to its basis in the stock of T for the $100 dual consolidated loss incurred by T. In addition, no positive adjustment in the basis of the stock is required for T's $90 capital loss because the loss has been absorbed by the consolidated group. S2, however, must make the negative adjustment provided for in Sec. 1.1502-32(b)(2)(i) for its allocable part of T's deficit in earnings and profits for the taxable year attributable to both T's $100 dual consolidated loss and T's $90 capital loss. Thus, as provided in Sec. 1.1502-32(e)(1), S2 must make a $190 net negative adjustment to its basis in the stock of T, reducing its basis to $310. As provided in Sec. 1.1502-33(c)(4)(ii)(a), S2's earnings and profits for Year 1 will reflect S2's decrease in its basis in T stock for the taxable year. Since S2 has no other earnings and profits for the taxable year, S2 has a $190 deficit in earnings and profits for the year. As provided in Sec. 1.1502-32(b)(2)(i), P must make a negative adjustment to its basis in the stock of S2 for its allocable part of S2's deficit in earnings and profits for the taxable year. Thus, P must make a $190 net negative adjustment to its basis in S2 stock, reducing its basis to $810.
(i) The facts are the same as in Example 1, except that in Year 2, S1 sells items u and v to X for no gain or loss. The disposition of items u and v outside of the consolidated group restores the deferred loss and gain to T. T also incurs $100 of interest expense in Year 2. In addition, T sells a noncapital asset, r, in which it has a basis of $100, to Y for $300. P and S2 have no items of income, loss, or deduction for Year 2.
(ii) T has $40 of separate taxable income in Year 2, computed as follows:
($100) interest expense
($100) sale of item v to S1
$ 40 sale of item u to S1
$200 sale of item r to Y--------
$ 40
Thus, T has no dual consolidated loss for the year.
(iii) Since T does not have a dual consolidated loss for the taxable year, the group's consolidated taxable income is calculated in accordance with the general rule of Sec. 1.1502-11 and not in accordance with paragraph (d)(2) of this section. T is the only member of the consolidated group that has any income or loss for the taxable year. Thus, the consolidated taxable income of the group, computed without regard to T's dual consolidated loss carryover, is $40.
(iv) As provided by Sec. 1.1502-21A(c), the amount of the dual consolidated loss arising in Year 1 that is included in the group's consolidated net operating loss deduction for Year 2 is $40 (that is, the consolidated taxable income computed without regard to the consolidated net operating loss deduction minus such consolidated taxable income recomputed by excluding the items of income and deduction of T). Thus, the group has no consolidated taxable income for the year.
(v) S2 must make the positive adjustment provided for in Sec. 1.502-32(b)(1)(i) to its basis in T stock for its allocable part of T's undistributed earnings and profits for the taxable year. S2 cannot make the negative adjustment provided for in Sec. 1.1502-32(b)(2)(ii) for the dual consolidated loss of T incurred in Year 1 and absorbed in Year 2. Thus, as provided in Sec. 1.1502-32(e)(2), S2 must make a $40 net positive adjustment to its basis in T stock, increasing its basis to $350. As provided in Sec. 1.1502-33(c)(4)(ii)(a), S2's earnings and profits for Year 2 will reflect S2's increase in its basis in T stock for the taxable year. Since S2 has no other earnings and profits for the taxable year, S2 has $40 of earnings and profits for the year. As provided in Sec. 1.1502-32(b)(1)(i), P must make a positive adjustment to its basis in the stock of S2 for its allocable part of the undistributed earnings and profits of S2 for the taxable year. Thus, P must make a $40 net positive adjustment to its basis in S2 stock, increasing its basis to $850.
(e) Special rule for use of dual consolidated loss to offset tainted income--(1) In general. The dual consolidated loss of any dual resident corporation that ceases to be a dual resident corporation shall not be used to offset income of such corporation to the extent that such income is tainted income, as defined in paragraph (e)(2) of this section.
(1) In general. The dual consolidated loss of any dual resident corporation that ceases to be a dual resident corporation shall not be used to offset income of such corporation to the extent that such income is tainted income, as defined in paragraph (e)(2) of this section.
(2) Tainted income defined. Tainted income is any income derived from tainted assets, as defined in paragraph (e)(3) of this section, beginning on the date such assets are acquired by the dual resident corporation. In the absence of evidence establishing the actual amount of income that is attributable to the tainted assets, the portion of a corporation's income in a particular taxable year that is treated as tainted income shall be an amount equal to the corporation's taxable income for the year multiplied by a fraction, the numerator of which is the fair market value of the tainted asset at the end of the taxable year and the denominator of which is the fair market value of the total assets owned by the corporation at the end of the taxable year. Documentation submitted to establish the actual amount of income that is attributable to the tainted assets must be attached to the consolidated group's or unaffiliated dual resident corporation's timely filed tax return for the taxable year in which the income is recognized.
(3) Tainted assets defined. Tainted assets are any asset acquired by a dual resident corporation in a non-recognition transaction, as defined in section 7701(a)(45), or any assets otherwise transferred to the corporation as a contribution to capital, at any time during the three taxable years immediately preceding the taxable year in which the corporation ceases to be a dual resident corporation or at any time thereafter. Tainted assets shall not include assets that were acquired by such dual resident corporation on or before December 31, 1986.
(4) Exceptions. Income derived from assets acquired by a dual resident corporation shall not be subject to the limitation described in paragraph (e)(1) of this section, if--
(i) For the taxable year in which the assets were acquired, the corporation did not have a dual consolidated loss (or a carry forward of a dual consolidated loss to such year); or
(ii) The assets were acquired as replacement property in the ordinary course of business.
(f) Computation of foreign tax credit limitations. If a dual resident corporation or separate unit is subject to paragraph (d)(2) of this section, the consolidated group or unaffiliated domestic owner shall compute its foreign tax credit limitation by applying the limitations of paragraph (d)(2). Thus, the dual consolidated loss is not taken into account until the year in which it is absorbed.
(g) Exception--(1) Elective agreement in place between the United States and a foreign country. Paragraph (b) of this section shall not apply to a dual consolidated loss to the extent the dual resident corporation, or domestic owner of a separate unit, elects to deduct the loss in the United States pursuant to an agreement entered into between the United States and a foreign country that puts into place an elective procedure through which losses offset income in only one country.
(1) Elective agreement in place between the United States and a foreign country. Paragraph (b) of this section shall not apply to a dual consolidated loss to the extent the dual resident corporation, or domestic owner of a separate unit, elects to deduct the loss in the United States pursuant to an agreement entered into between the United States and a foreign country that puts into place an elective procedure through which losses offset income in only one country.
(2) Elective relief provision--(i) In general. Paragraph (b) of this section shall not apply to a dual consolidated loss if the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner elects to be bound by the provisions of this paragraph (g)(2). In order to elect relief under this paragraph (g)(2), the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner must attach to its timely filed (including extensions) U.S. income tax return for the taxable year in which the dual consolidated loss is incurred an agreement described in paragraph (g)(2)(i)(A) of this section. The agreement must be signed under penalties of perjury by the person who signs the return. For taxable years beginning after December 31, 2002, the agreement attached to the income tax return of the consolidated group, unaffiliated dual resident corporation or unaffiliated domestic owner pursuant to the preceding sentence may be an unsigned copy. If an unsigned copy is attached to the return, the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner must retain the original in its records in the manner specified by Sec. 1.6001-1(e). The agreement must include the following items, in paragraphs labeled to correspond with the items set forth in paragraph (g)(2)(i)(A) through (F) of this section.
(i) In general. Paragraph (b) of this section shall not apply to a dual consolidated loss if the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner elects to be bound by the provisions of this paragraph (g)(2). In order to elect relief under this paragraph (g)(2), the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner must attach to its timely filed (including extensions) U.S. income tax return for the taxable year in which the dual consolidated loss is incurred an agreement described in paragraph (g)(2)(i)(A) of this section. The agreement must be signed under penalties of perjury by the person who signs the return. For taxable years beginning after December 31, 2002, the agreement attached to the income tax return of the consolidated group, unaffiliated dual resident corporation or unaffiliated domestic owner pursuant to the preceding sentence may be an unsigned copy. If an unsigned copy is attached to the return, the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner must retain the original in its records in the manner specified by Sec. 1.6001-1(e). The agreement must include the following items, in paragraphs labeled to correspond with the items set forth in paragraph (g)(2)(i)(A) through (F) of this section.
(A) A statement that the document submitted is an election and an agreement under the provisions of paragraph (g)(2) of this section.
(B) The name, address, identifying number, and place and date of incorporation of the dual resident corporation, and the country or countries that tax the dual resident corporation on its worldwide income or on a residence basis, or, in the case of a separate unit, identification of the separate unit, including the name under which it conducts business, its principal activity, and the country in which its principal place of business is located.
(C) An agreement by the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner to comply with all of the provisions of Sec. 1.1503-2(g)(2)(iii)-(vii).
(D) A statement of the amount of the dual consolidated loss covered by the agreement.
(E) A certification that no portion of the dual resident corporation's or separate unit's losses, expenses, or deductions taken into account in computing the dual consolidated loss has been, or will be, used to offset the income of any other person under the income tax laws of a foreign country.
(F) A certification that arrangements have been made to ensure that no portion of the dual consolidated loss will be used to offset the income of another person under the laws of a foreign country and that the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner will be informed of any such foreign use of any portion of the dual consolidated loss.
(ii) Consistency rule--(A) If any loss, expense, or deduction taken into account in computing the dual consolidated loss of a dual resident corporation or separate unit is used under the laws of a foreign country to offset the income of another person, then the following other dual consolidated losses (if any) shall be treated as also having been used to offset income of another person under the laws of such foreign country, but only if the income tax laws of the foreign country permit any loss, expense, or deduction taken into account in computing the other dual consolidated loss to be used to offset the income of another person in the same taxable year;
(1) Any dual consolidated loss of a dual resident corporation that is a member of the same consolidated group of which the first dual resident corporation or domestic owner is a member, if any loss, expense, or deduction taken into account in computing such dual consolidated loss is recognized under the income tax laws of such country in the same taxable year; and
(2) Any dual consolidated loss of a separate unit that is owned by the same domestic owner that owns the first separate unit, or that is owned by any member of the same consolidated group of which the first dual resident corporation or domestic owner is a member, if any loss, expense, or deduction taken into account in computing such dual consolidated loss is recognized under the income tax laws of such country in the same taxable year.
(B) The following examples illustrate the application of this paragraph (g)(2)(ii).
Example 1. P, a domestic corporation, owns A and B, which are domestic corporations, and C, a Country X corporation. A is subject to the income tax laws of Country X on a residence basis and, thus, is a dual resident corporation. B conducts business in Country X through a branch, which is a separate unit under paragraph (c)(3) of this section. The income tax laws of Country X permit branches of foreign corporations to elect to file consolidated returns with Country X affiliates. In Year 1, A incurs a dual consolidated loss, which is used to offset the income of C under the Country X form of consolidation. The branch of B also incurs a net operating loss. However, B elects not to use the loss on a Country X consolidated return to offset the income of foreign affiliates. The use of A's loss to offset the income of C in Country X will cause the separate unit of B to be treated as if it too had used its dual consolidated loss to offset the income of an affiliate in Country X. Therefore, an election and agreement under this paragraph (g)(2) cannot be made with respect to the separate unit's dual consolidated loss.
Example 2. The facts are the same as in Example 1, except that the income tax laws of Country X do not permit branches of foreign corporations to file consolidated income tax returns with Country X affiliates. Therefore, an election and agreement described in this paragraph (g)(2) may be made for the dual consolidated loss incurred by the separate unit of B.
(iii) Triggering events requiring the recapture of dual consolidated losses--(A) The consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner must agree that, if there is a triggering event described in this paragraph (g)(2)(iii), and no exception applies under paragraph (g)(2)(iv) of this section, the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner will recapture and report as income the amount of the dual consolidated loss provided in paragraph (g)(2)(vii) of this section on its tax return for the taxable year in which the triggering event occurs (or, when the triggering event is a use of the loss for foreign purposes, the taxable year that includes the last day of the foreign tax year during which such use occurs). In addition, the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner must pay any applicable interest charge required by paragraph (g)(2)(vii) of this section. For purposes of this section, any of the following events shall constitute a triggering event:
(1) In any taxable year up to and including the 15th taxable year following the year in which the dual consolidated loss that is the subject of the agreement filed under this paragraph (g)(2) was incurred, any portion of the losses, expenses, or deductions taken into account in computing the dual consolidated loss is used by any means to offset the income of any other person under the income tax laws of a foreign country;
(2) An affiliated dual resident corporation or affiliated domestic owner ceases to be a member of the consolidated group that filed the election. For purposes of this paragraph (g)(2)(iii)(A)(2), a dual resident corporation or domestic owner shall be considered to cease to be a member of the consolidated group if it is no longer a member of the group within the meaning of Sec. 1.1502-1(b), or if the group ceases to exist because the common parent is no longer in existence or is no longer a common parent or the group no longer files on the basis of a consolidated return. Such disaffiliation, however, shall not constitute a triggering event if the taxpayer demonstrates, to the satisfaction of the Commissioner, that the dual resident corporation's or separate unit's losses, expenses, or deductions cannot be used to offset income of another person under the laws of a foreign country at any time after the affiliated dual resident corporation or affiliated domestic owner ceases to be a member of the consolidated group;
(3) An unaffiliated dual resident corporation or unaffiliated domestic owner becomes a member of a consolidated group. Such affiliation of the dual resident corporation or domestic owner, however, shall not constitute a triggering event if the taxpayer demonstrates, to the satisfaction of the Commissioner, that the losses, expenses, or deductions of the dual resident corporation or separate unit cannot be used to offset the income of another person under the laws of a foreign country at any time after the dual resident corporation or domestic owner becomes a member of the consolidated group.
(4) A dual resident corporation transfers assets in a transaction that results, under the laws of a foreign country, in a carryover of its losses, expenses, or deductions. For purposes of this paragraph (g)(2)(iii)(A)(4), a transfer, either in a single transaction or a series of transactions within a twelve-month period, of 50% or more of the dual resident corporation's assets (measured by the fair market value of the assets at the time of such transfer (or for multiple transactions, at the time of the first transfer)) shall be deemed a triggering event, unless the taxpayer demonstrates, to the satisfaction of the Commissioner, that the transfer of assets did not result in a carryover under foreign law of the dual resident corporation's losses, expenses, or deductions to the transferee of the assets;
(5) A domestic owner of a separate unit transfers assets of the separate unit in a transaction that results, under the laws of a foreign country, in a carryover of the separate unit's losses, expenses, or deductions. For purposes of this paragraph (g)(2)(iii)(A)(5), a transfer, either in a single transaction or a series of transactions over a twelve-month period, of 50% or more of the separate unit's assets (measured by the fair market value of the assets at the time of the transfer (or for multiple transfers, at the time of the first transfer)), shall be deemed a triggering event, unless the taxpayer demonstrates, to the satisfaction of the Commissioner, that the transfer of assets did not result in a carryover under foreign law of the separate unit's losses, expenses, or deductions to the transferee of the assets;
(6) An unaffiliated dual resident corporation or unaffiliated domestic owner becomes a foreign corporation by means of a transaction (e.g., a reorganization) that, for foreign tax purposes, is not treated as involving a transfer of assets (and carryover of losses) to a new entity. Such a transaction, however, shall not constitute a triggering event if the taxpayer demonstrates, to the satisfaction of the Commissioner, that the dual resident corporation's or separate unit's losses, expenses, or deductions cannot be used to offset income of another person under the laws of the foreign country at any time after the unaffiliated dual resident corporation or unaffiliated domestic owner becomes a foreign corporation.
(7) A domestic owner of a separate unit, either in a single transaction or a series of transactions within a twelve-month period, sells, or otherwise disposes of, 50% or more of the interest in the separate unit (measured by voting power or value) owned by the domestic owner on the last day of the taxable year in which the dual consolidated loss was incurred. For purposes of this paragraph (g)(2)(iii)(A)(7), the domestic owner shall be deemed to have disposed of its entire interest in a hybrid entity separate unit if such hybrid entity becomes classified as a foreign corporation for U.S. tax purposes. The disposition of 50% or more of the interest in a separate unit, however, shall not constitute a triggering event if the taxpayer demonstrates, to the satisfaction of the Commissioner, that the losses, expenses, or deductions of the separate unit cannot be used to offset income of another person under the laws of the foreign country at any time after the disposition of the interest in the separate unit; or
(8) The consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner fails to file a certification required under paragraph (g)(2)(vi)(B) of this section.
(B) A taxpayer wishing to rebut the presumption of a triggering event described in paragraphs (g)(2)(iii)(A)(2) through (7) of this section, by demonstrating that the losses, expenses, or deductions of the dual resident corporation or separate unit cannot be carried over or otherwise used under the laws of the foreign country, must attach documents demonstrating such facts to its timely filed U.S. income tax return for the year in which the presumed triggering event occurs.
(C) The following example illustrates this paragraph (g)(2)(iii).
Example. DRC, a domestic corporation, is a member of CG, a consolidated group. DRC is a resident Country Y for Country Y income tax purposes. Therefore, DRC is a dual resident corporation. In Year 1, DRC incurs a dual consolidated loss of $100. CG files an agreement described in paragraph (g)(2) of this section and, thus, the $100 dual consolidated loss is included in the computation of CG's consolidated taxable income. In Year 6, all of the stock of DRC is sold to P, a domestic corporation that is a member of NG, another consolidated group. The sale of DRC to P is a triggering event under paragraph (g)(2)(iii)(A) of this section, requiring the recapture of the dual consolidated loss. However, the laws of Country Y provide for a five-year carryover period for losses. At the time of DRC's disaffiliation from CG, the losses, expenses and deductions that were included in the computation of the dual consolidated loss had expired for Country Y purposes. Therefore, upon adequate documentation that the losses, expenses, or deductions have expired for Country Y purposes, CG can rebut the presumption that a triggering event has occurred.
(iv) Exceptions--(A) Acquisition by a member of the consolidated group. The following events shall not constitute triggering events, requiring the recapture of the dual consolidated loss under paragraph (g)(2)(vii) of this section:
(1) An affiliated dual resident corporation or affiliated domestic owner ceases to be a member of a consolidated group solely by reason of a transaction in which a member of the same consolidated group succeeds to the tax attributes of the dual resident corporation or domestic owner under the provisions of section 381;
(2) Assets of an affiliated dual resident corporation or assets of a separate unit of an affiliated domestic owner are acquired by a member of its consolidated group in any other transaction; or
(3) An affiliated domestic owner of a separate unit transfers its interest in the separate unit to another member of its consolidated group.
(B) Acquisition by an unaffiliated domestic corporation or a new consolidated group--(1) If all the requirements of paragraph (g)(2)(iv)(B)(3) of this section are met, the following events shall not constitute triggering events requiring the recapture of the dual consolidated loss under paragraph (g)(2)(vii) of this section:
(i) An affiliated dual resident corporation or affiliated domestic owner becomes an unaffiliated domestic corporation or a member of a new consolidated group (other than in a transaction described in paragraph (g)(2)(iv)(B)(2)(ii) of this section);
(ii) Assets of a dual resident corporation or a separate unit are acquired by an unaffiliated domestic corporation or a member of a new consolidated group; or
(iii) A domestic owner of a separate unit transfers its interest in the separate unit to an unaffiliated domestic corporation or to a member of a new consolidated group.
(2) If the requirements of paragraph (g)(2)(iv)(B)(3)(iii) of this section are met, the following events shall not constitute triggering events requiring the recapture of the dual consolidated loss under paragraph (g)(2)(vii) of this section--
(i) An unaffiliated dual resident corporation or unaffiliated domestic owner becomes a member of a consolidated group;
(ii) A consolidated group that filed an agreement under this paragraph (g)(2) ceases to exist as a result of a transaction described in Sec. 1.1502-13(j)(5)(i) (other than a transaction in which any member of the terminating group, or the successor-in-interest of such member, is not a member of the surviving group immediately after the terminating group ceases to exist).
(3) If the following requirements (as applicable) are satisfied, the events listed in paragraphs (g)(2)(iv)(B)(1) and (2) of this section shall not constitute triggering events requiring recapture under paragraph (g)(2)(vii) of this section.
(i) The consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner that filed the agreement under this paragraph (g)(2) and the unaffiliated domestic corporation or new consolidated group must enter into a closing agreement with the Internal Revenue Service providing that the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner and the unaffiliated domestic corporation or new consolidated group will be jointly and severally liable for the total amount of the recapture of dual consolidated loss and interest charge required in paragraph (g)(2)(vii) of this section, if there is a triggering event described in paragraph (g)(2)(iii) of this section;
(ii) The unaffiliated domestic corporation or new consolidated group must agree to treat any potential recapture amount under paragraph (g)(2)(vii) of this section as unrealized built-in gain for purposes of section 384(a), subject to any applicable exceptions thereunder;
(iii) The unaffiliated domestic corporation or new consolidated group must file, with its timely filed (including extensions) income tax return for the taxable year in which the event described in paragraph (g)(2)(iv)(B)(1) or (2) of this section occurs, an agreement described in paragraph (g)(2)(i) of this section (new (g)(2)(i) agreement), whereby it assumes the same obligations with respect to the dual consolidated loss as the corporation or consolidated group that filed the original (g)(2)(i) agreement with respect to that loss. The new (g)(2)(i) agreement must be signed under penalties of perjury by the person who signs the return and must include a reference to this paragraph (g)(2)(iv)(B)(3)(iii). For taxable years beginning after December 31, 2002, the agreement attached to the return pursuant to the preceding sentence may be an unsigned copy. If an unsigned copy is attached to the return, the corporation or consolidated group must retain the original in its records in the manner specified by Sec. 1.6001-1(e).
(C) Subsequent triggering events. Any triggering event described in paragraph (g)(2)(iii) of this section that occurs subsequent to one of the transactions described in paragraph (g)(2)(iv) (A) or (B) of this section and does not fall within the exceptions provided in paragraph (g)(2)(iv) (A) or (B) of this section shall require recapture under paragraph (g)(2)(vii) of this section.
(D) Example. The following example illustrates the application of paragraph (g)(2)(iv)(B)(2)(ii) of this section:
(i) Facts. C is the common parent of a consolidated group (the C Group) that includes DRC, a domestic corporation. DRC is a dual resident corporation and incurs a dual consolidated loss in its taxable year ending December 31, Year 1. The C Group elects to be bound by the provisions of this paragraph (g)(2) with respect to the Year 1 dual consolidated loss. No member of the C Group incurs a dual consolidated loss in Year 2. On December 31, Year 2, stock of C is acquired by D in a transaction described in Sec. 1.1502-13(j)(5)(i). As a result of the acquisition, all the C Group members, including DRC, become members of a consolidated group of which D is the common parent (the D Group).
(ii) Acquisition not a triggering event. Under paragraph (g)(2)(iv)(B)(2)(ii) of this section, the acquisition by D of the C Group is not an event requiring the recapture of the Year 1 dual consolidated loss of DRC, or the payment of an interest charge, as described in paragraph (g)(2)(vii) of this section, provided that the D Group files the new (g)(2)(i) agreement described in paragraph (g)(2)(iv)(B)(3)(iii) of this section.
(iii) Subsequent event. A triggering event occurs on December 31, Year 3, that requires recapture by the D Group of the dual consolidated loss that DRC incurred in Year 1, as well as the payment of an interest charge, as provided in paragraph (g)(2)(vii) of this section. Each member of the D Group, including DRC and the other former members of the C Group, is severally liable for the additional tax (and the interest charge) due upon the recapture of the dual consolidated loss of DRC.
(v) Ordering rules for determining the foreign use of losses. If the laws of a foreign country provide for the use of losses of a dual resident corporation to offset the income of another person but do not provide applicable rules for determining the order in which such losses are used to offset the income of another person in a taxable year, then for purposes of this section, the following rules shall govern:
(A) If under the laws of the foreign country the dual resident corporation has losses from different taxable years, the dual resident corporation shall be deemed to use first the losses from the earliest taxable year from which a loss may be carried forward or back for foreign law purposes.
(B) Any net loss, or income, that the dual resident corporation has in a taxable year shall first be used to offset net income, or loss, recognized by affiliates of the dual resident corporation in the same taxable year before any carryover of the dual resident corporation's losses is considered to be used to offset any income from the taxable year.
(C) Where different losses, expenses, or deductions (e.g., capital losses and ordinary losses) of a dual resident corporation incurred in the same taxable year are available to offset the income of another person, the different losses shall be deemed to offset such income on a pro rata basis.
Example. DRC, a domestic corporation, is taxed as a resident under the tax laws of Country Y. Therefore, DRC is a dual resident corporation. FA is a Country Y affiliate of DRC. Country Y's tax laws permit affiliated corporations to file a form of consolidated return. In Year 1, DRC incurs a capital loss of $80 which, for Country Y purposes, offsets completely $30 of capital gain recognized by FA. Neither corporation has any other taxable income or loss for the year. In Year 1 (and in other years), DRC recognizes the same amount of income for U.S. purposes as it does for Country Y purposes. Under paragraph (d)(1)(i) of this section, however, DRC's $80 capital loss is not a dual consolidated loss. In Year 2, DRC incurs a net operating loss of $100, while FA incurs a net operating loss of $50. DRC's $100 loss is a dual consolidated loss. Since the dual consolidated loss is not used to offset the income of another person under Country Y law, DRC is permitted to file an agreement described in this paragraph (g)(2). In Year 3, DRC has a net operating loss of $10 and FA has capital gains of $60. For Country Y purposes, DRC's $10 net operating loss is used to offset $10 of FA's $60 capital gain. DRC's $10 loss is a dual consolidated loss. Because the loss is used to offset FA's income, DRC will not be able to file an agreement under this paragraph (g)(2) with respect to the loss. Country Y permits FA's remaining $50 of Year 3 income to be offset by carryover losses. However, Country Y has no applicable rules for determining which carryover losses from Years 1 and 2 are used to offset such income. Under the ordering rules of paragraph (g)(2)(v)(A) of this section, none of DRC's $100 Year 2 loss will be deemed to offset FA's remaining $50 of Year 3 income. Instead, the $50 of capital loss carryover from Year 1 will be considered to offset the income.
(vi) Reporting requirements--(A) In general. The consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner must answer the applicable questions regarding dual consolidated losses on its U.S. income tax return filed for the year in which the dual consolidated loss is incurred and for each of the following fifteen taxable years.
(A) In general. The consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner must answer the applicable questions regarding dual consolidated losses on its U.S. income tax return filed for the year in which the dual consolidated loss is incurred and for each of the following fifteen taxable years.
(B) Annual certification. Except as provided in Sec. 1.1503-2(g)(2)(vi)(C), until and unless Form 1120 or the Schedules thereto contain questions pertaining to dual consolidated losses, the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner must file with its income tax return for each of the 15 taxable years following the taxable year in which the dual consolidated loss is incurred a certification that the losses, expenses, or deductions that make up the dual consolidated loss have not been used to offset the income of another person under the tax laws of a foreign country. For taxable years beginning before January 1, 2003, the annual certification must be signed under penalties of perjury by a person authorized to sign the agreement described in Sec. 1.1503-2(g)(2)(i). For taxable years beginning after December 31, 2002, the certification is verified by signing the return with which the certification is filed. The certification for a taxable year must identify the dual consolidated loss to which it pertains by setting forth the taxpayer's year in which the loss was incurred and the amount of such loss. In addition, the certification must warrant that arrangements have been made to ensure that the loss will not be used to offset the income of another person under the laws of a foreign country and that the taxpayer will be informed of any such foreign use of any portion of the loss. If dual consolidated losses of more than one taxable year are subject to the rules of this paragraph (g)(2)(vi)(B), the certifications for those years may be combined in a single document but each dual consolidated loss must be separately identified.
(C) Exception. A consolidated group or unaffiliated domestic owner is not required to file annual certifications under paragraph (g)(2)(vi)(B) of this section with respect to a dual consolidated loss of any separate unit other than a hybrid entity separate unit.
(vii) Recapture of loss and interest charge--(A) Presumptive rule--(1) Amount of recapture. Except as otherwise provided in this paragraph (g)(2)(vii), upon the occurrence of a triggering event described in paragraph (g)(2)(iii) of this section, the taxpayer shall recapture and report as gross income the total amount of the dual consolidated loss to which the triggering event applies on its income tax return for the taxable year in which the triggering event occurs (or, when the triggering event is a use of the loss for foreign tax purposes, the taxable year that includes the last day of the foreign tax year during which such use occurs).
(2) Interest charge. In connection with the recapture, the taxpayer shall pay an interest charge. Except as otherwise provided in this paragraph (g)(2)(vii), such interest shall be determined under the rules of section 6601(a) as if the additional tax owed as a result of the recapture had accrued and been due and owing for the taxable year in which the losses, expenses, or deductions taken into account in computing the dual consolidated loss gave rise to a tax benefit for U.S. income tax purposes. For purposes of this paragraph (g)(2)(vii)(A)(2), a tax benefit shall be considered to have arisen in a taxable year in which such losses, expenses or deductions reduced U.S. taxable income.
(B) Rebuttal of presumptive rule--(1) Amount of recapture. The amount of dual consolidated loss that must be recaptured under this paragraph (g)(2)(vii) may be reduced if the taxpayer demonstrates, to the satisfaction of the Commissioner, the offset permitted by this paragraph (g)(2)(vii)(B). The reduction in the amount of recapture is the amount by which the dual consolidated loss would have offset other taxable income reported on a timely filed U.S. income tax return for any taxable year up to and including the year of the triggering event if such loss had been subject to the restrictions of paragraph (b) of this section (and therefore had been subject to the separate return limitation year restrictions of Secs. 1.1502-21A(c) or 1.1502-21(c) (as appropriate) commencing in the taxable year in which the loss was incurred. A taxpayer utilizing this rebuttal rule must attach to its timely filed U.S. income tax return a separate accounting showing that the income for each year that offsets the dual resident corporation's or separate unit's recapture amount is attributable only to the dual resident corporation or separate unit.
(2) Interest charge. The interest charge imposed under this paragraph (g)(2)(vii) may be appropriately reduced if the taxpayer demonstrates, to the satisfaction of the Commissioner, that the net interest owed would have been less than that provided in paragraph (g)(2)(vii)(A)(2) of this section if the taxpayer had filed an amended return for the year in which the loss was incurred, and for any other affected years up to and including the year of recapture, treating the dual consolidated loss as a loss subject to the restrictions of paragraph (b) of this section (and therefore subject to the separate return limitation year restrictions of Secs. 1.1502-21A(c) or 1.1502-21(c) (as appropriate). A taxpayer utilizing this rebuttal rule must attach to its timely filed U.S. income tax return a computation demonstrating the reduction in the net interest owed as a result of treating the dual consolidated loss as a loss subject to the restrictions of paragraph (b) of this section.
(C) Computation of taxable income in year of recapture--(1) Presumptive rule. Except as otherwise provided in paragraph (g)(2)(vii)(C)(2) of this section, for purposes of computing the taxable income for the year of recapture, no current, carryover or carryback losses of the dual resident corporation or separate unit, of other members of the consolidated group, or of the domestic owner that are not attributable to the separate unit, may offset and absorb the recapture amount.
(2) Rebuttal of presumptive rule. The recapture amount included in gross income may be offset and absorbed by that portion of the taxpayer's (consolidated or separate) net operating loss carryover that is attributable to the dual consolidated loss being recaptured, if the taxpayer demonstrates, to the satisfaction of the Commissioner, the amount of such portion of the carryover. A taxpayer utilizing this rebuttal rule must attach to its timely filed U.S. income tax return a computation demonstrating the amount of net operating loss carryover that, under this paragraph (g)(2)(vii)(C)(2), may absorb the recapture amount included in gross income.
(D) Character and source of recapture income. The amount recaptured under this paragraph (g)(2)(vii) shall be treated as ordinary income in the year of recapture. The amount recaptured shall be treated as income having the same source and falling within the same separate category for purposes of section 904 as the dual consolidated loss being recaptured.
(E) Reconstituted net operating loss. Commencing in the taxable year immediately following the year in which the dual consolidated loss is recaptured, the dual resident corporation or separate unit shall be treated as having a net operating loss in an amount equal to the amount actually recaptured under paragraph (g)(2)(vii) (A) or (B) of this section. This reconstituted net operating loss shall be subject to the restrictions of paragraph (b) of this section (and therefore, the separate return limitation year restrictions of Secs. 1.1502- 21A(c) or 1.1502-21T(c) (as appropriate). The net operating loss shall be available only for carryover, under section 172(b), to taxable years following the taxable year of recapture. For purposes of determining the remaining carryover period, the loss shall be treated as if it had been recognized in the taxable year in which the dual consolidated loss that is the basis of the recapture amount was incurred.
(F) Consequences of failing to comply with recapture provisions--(1) In general. If the taxpayer fails to comply with the recapture provisions of this paragraph (g)(2)(vii) upon the occurrence of a triggering event, then the dual resident corporation or separate unit that incurred the dual consolidated loss (or a successor-in-interest) shall not be eligible for the relief provided in paragraph (g)(2) of this section with respect to any dual consolidated losses incurred in the five taxable years beginning with the taxable year in which recapture is required.
(2) Exceptions. In the case of a triggering event other than a use of the losses, expenses, or deductions taken into account in computing the dual consolidated loss to offset income of another person under the income tax laws of a foreign country, this rule shall not apply in the following circumstances:
(i) The failure to recapture is due to reasonable cause; or
(ii) A taxpayer seeking to rebut the presumption of a triggering event satisfies the filing requirements of paragraph (g)(2)(iii)(B) of this section.
(G) Examples. The following examples illustrate this paragraph (g)(2)(vii).
Example 1. P, a domestic corporation, files a consolidated return with DRC, a dual resident corporation. In Year 1, DRC incurs a dual consolidated loss of $100 and P earns $100. P files an agreement under this paragraph (g)(2). Therefore, the consolidated group is permitted to offset P's $100 of income with DRC's $100 loss. In Year 2, DRC earns $30, which is completely offset by a $30 net operating loss incurred by P. In Year 3, DRC earns income of $25 while P recognizes no income or loss. In addition, there is a triggering event in Year 3. Therefore, under the presumptive rule of paragraph (g)(2)(vii)(A) of this section, DRC must recapture $100. However, the $100 recapture amount may be reduced by $25 (the amount by which the dual consolidated loss would have offset other taxable income if it had been subject to the separate return limitation year restrictions from Year 1) upon adequate documentation of such offset under paragraph (g)(2)(vii)(B)(1) of this section. Commencing in Year 4, the $100 (or $75) recapture amount is treated as a loss incurred by DRC in a separate return limitation year, subject to the restrictions of Secs. 1.1502-21A(c) or 1.1502-21(c), as appropriate. The carryover period of the loss, for purposes of section 172(b), will start from Year 1, when the dual consolidated loss was incurred.
Example 2. The facts are the same as in Example 1, except that in Year 2, DRC earns $75 and P earns $50. In Year 3, DRC earns $25 while P earns $30. A triggering event occurs in Year 3. The $100 presumptive amount of recapture can be reduced to zero by the $75 and $25 earned by DRC in Years 2 and 3, respectively, upon adequate documentation of such offset under paragraph (g)(2)(vii)(B)(1) of this section. Nevertheless, an interest charge will be owed. Under the presumptive rule of paragraph (g)(2)(vii)(A)(2) of this section, interest will be charged on the additional tax owed on the $100 of recapture income as if the tax had accrued in Year 1 (the year in which the dual consolidated loss reduced the income of P). However, the net interest will be reduced to the amount that would have been owed if the consolidated group had filed amended returns, treating the dual consolidated loss as a loss subject to the separate return limitation year restrictions of Sec. 1.1502-21A(c) or 1.1502-21(c), as appropriate, upon adequate documentation of such reduction of interest under paragraph (g)(2)(vii)(B)(2) of this section.
Example 3. P, a domestic corporation, owns DRC, a domestic corporation that is subject to the income tax laws of Country Z on a residence basis. DRC owns FE, a Country Z corporation. In Year 1, DRC incurs a net operating loss for U.S. tax purposes. Under the tax laws of Country Z, the loss is not recognized until Year 3. The Year 1 net operating loss is a dual consolidated loss under paragraph (c)(5) of this section. The consolidated group elects relief under paragraph (g)(2) of this section by filing the appropriate agreement and uses the dual consolidated loss on its U.S. income tax return. In Year 3, the dual consolidated loss is used under the laws of Country Z to offset the income of FE, which is a triggering event under paragraph (g)(2)(iii) of this section. However, the consolidated group does not recapture the dual consolidated loss. The consolidated group's failure to comply with the recapture provisions of this paragraph (g)(2)(vii) prevents DRC from being eligible for the relief provided under paragraph (g)(2) of this section for any dual consolidated losses incurred in Years 3 through 7, inclusive.
(h) Effective date--(1) In general. These regulations are effective for taxable years beginning on or after October 1, 1992. Section 1.1503-2A is effective for taxable years beginning after December 31, 1986, and before October 1, 1992. Paragraph (g)(2)(iv)(B)(2) of this section shall apply with respect to transactions otherwise constituting triggering events occurring on or after January 1, 2002.
(1) In general. These regulations are effective for taxable years beginning on or after October 1, 1992. Section 1.1503-2A is effective for taxable years beginning after December 31, 1986, and before October 1, 1992. Paragraph (g)(2)(iv)(B)(2) of this section shall apply with respect to transactions otherwise constituting triggering events occurring on or after January 1, 2002.
(2) Taxpayers that have filed for relief under Sec. 1.1503-2A--(i) In general. Except as provided in paragraph (h)(ii)(b) of this section, taxpayers that have filed agreements described in Sec. 1.1503-2A(c)(3) or certifications described in Sec. 1.1503-2A(d)(3) shall continue to be subject to the provisions of such agreements or certifications, including the amended return or recapture requirements applicable in the event of a triggering event, for the remaining term of such agreements or certifications.
(i) In general. Except as provided in paragraph (h)(ii)(b) of this section, taxpayers that have filed agreements described in Sec. 1.1503-2A(c)(3) or certifications described in Sec. 1.1503-2A(d)(3) shall continue to be subject to the provisions of such agreements or certifications, including the amended return or recapture requirements applicable in the event of a triggering event, for the remaining term of such agreements or certifications.
(ii) Special transition rule. A taxpayer that has filed an agreement described in Sec. 1.1503-2A(c)(3) or a certification described in Sec. 1.1503-2A(d)(3) and that is in compliance with the provisions of Sec. 1.1503-2A may elect to replace such agreement or certification with an agreement described in paragraph (g)(2)(i) of this section. However, a taxpayer making this election must replace all agreements and certifications filed under Sec. 1.1503-2A. If the taxpayer is a consolidated group, the election must be made with respect to all dual resident corporations or separate units within the group. Likewise, if the taxpayer is an unaffiliated domestic owner, the election must be made with respect to all separate units of the domestic owner. The taxpayer must file the replacement agreement with its timely filed income tax return for its first taxable year commencing on or after October 1, 1992, stating that such agreement is a replacement for the agreement filed under Sec. 1.1503-2A(c)(3) or the certification filed under Sec. 1.1503-2A(d)(3) and identifying the taxable year for which the original agreement or certification was filed. A single agreement described in paragraph (g)(2)(i) of this section may be filed to replace more than one agreement or certification filed under Sec. 1.1503-2A; however, each dual consolidated loss must be separately identified. A taxpayer may also elect to apply Sec. 1.1503-2 for all open years, with respect to agreements filed under Sec. 1.1503-2A(c)(3) or certifications filed under Sec. 1.1503-2A(d)(3), in cases where the agreement or certification is no longer in effect and the taxpayer has complied with the provisions of Sec. 1.1503-2A. For example, a taxpayer may have had a triggering event under Sec. 1.1503-2A that is not a triggering event under Sec. 1.1503-2. If the taxpayer fully complied with the requirements of the agreement entered into under Sec. 1.1503-2A(c)(3) and filed amended U.S. income tax returns within the time required under Sec. 1.1503-2A(c)(3), the taxpayer may file amended U.S. income tax returns consistent with the position that the earlier triggering event is no longer a triggering event.
(3) Taxpayers that are in compliance with Sec. 1.1503-2A but have not filed for relief thereunder. A taxpayer that is in compliance with the provisions of Sec. 1.1503-2A but has not filed an agreement described in Sec. 1.1503-2A(c)(3) or a certification described in Sec. 1.1503-2A(d)(3) may elect to have the provisions of Sec. 1.1503-2 apply for any open year. In particular, a taxpayer may elect to apply the provisions of Sec. 1.1503-2 in a case where the dual consolidated loss has been subjected to the separate return limitation year restrictions of Sec. 1.1502-21A(c) or 1.1502-21(c) (as appropriate) but the losses, expenses, or deductions taken into account in computing the dual consolidated loss have not been used to offset the income of another person for foreign tax purposes. However, if a taxpayer is a consolidated group, the election must be made with respect to all dual resident corporations or separate units within the group. Likewise, if the taxpayer is an unaffiliated domestic owner, the election must be made with respect to all separate units of the domestic owner. [T.D. 8434, 57 FR 41084, Sept. 9, 1992; 57 FR 48722, Oct. 28, 1992; 57 FR 57280, Dec. 3, 1992; 58 FR 13413, Mar. 11, 1993, as amended by T.D. 8597, 60 FR 36680, July 18, 1995; T.D. 8677, 61 FR 33325, June 27, 1996; T.D. 8823, 64 FR 36101, July 2, 1999; T.D. 9084, 68 FR 44617, July 30, 2003; T.D. 9100, 68 FR 70707, Dec. 19, 2003; T.D. 9300, 71 FR 71044, Dec. 8, 2006] Sec. 1.1503(d)-0 Table of contents.
This section lists the captions contained in Secs. 1.1503(d)-1 through 1.1503(d)-8. Sec. 1.1503(d)-1 Definitions and special rules for filings under section
(1) Domestic corporation.(2) Dual resident corporation.(3) Hybrid entity.(4) Separate unit.(i) In general.(ii) Separate unit combination rule.(iii) Business operations that do not constitute a permanent establishment.(iv) Foreign branch separate units held by dual resident corporations or hybrid entities in the same foreign country.(5) Dual consolidated loss.(6) Subject to tax.(7) Foreign country.(8) Consolidated group.(9) Domestic owner.(10) Affiliated dual resident corporation and affiliated domestic owner.(11) Unaffiliated dual resident corporation, unaffiliated domestic corporation, and unaffiliated domestic owner.(12) Domestic affiliate.(13) Domestic use.(14) Foreign use.(15) Grantor trust.(16) Transparent entity.(i) In general.(ii) Example.(17) Disregarded entity.(18) Partnership.(19) Indirectly.(20) Certification period.(c) Special rules for filings under section 1503(d).(1) Reasonable cause exception.(2) Requirements for reasonable cause relief.(i) Time of submission.(ii) Notice requirement.(3) Signature requirement.
(i) In general.(ii) Separate unit combination rule.(iii) Business operations that do not constitute a permanent establishment.(iv) Foreign branch separate units held by dual resident corporations or hybrid entities in the same foreign country.(5) Dual consolidated loss.(6) Subject to tax.(7) Foreign country.(8) Consolidated group.(9) Domestic owner.(10) Affiliated dual resident corporation and affiliated domestic owner.(11) Unaffiliated dual resident corporation, unaffiliated domestic corporation, and unaffiliated domestic owner.(12) Domestic affiliate.(13) Domestic use.(14) Foreign use.(15) Grantor trust.(16) Transparent entity.(i) In general.(ii) Example.(17) Disregarded entity.(18) Partnership.(19) Indirectly.(20) Certification period.(c) Special rules for filings under section 1503(d).(1) Reasonable cause exception.(2) Requirements for reasonable cause relief.(i) Time of submission.(ii) Notice requirement.(3) Signature requirement.
(i) In general.(ii) Separate unit combination rule.(iii) Business operations that do not constitute a permanent establishment.(iv) Foreign branch separate units held by dual resident corporations or hybrid entities in the same foreign country.(5) Dual consolidated loss.(6) Subject to tax.(7) Foreign country.(8) Consolidated group.(9) Domestic owner.(10) Affiliated dual resident corporation and affiliated domestic owner.(11) Unaffiliated dual resident corporation, unaffiliated domestic corporation, and unaffiliated domestic owner.(12) Domestic affiliate.(13) Domestic use.(14) Foreign use.(15) Grantor trust.(16) Transparent entity.(i) In general.(ii) Example.(17) Disregarded entity.(18) Partnership.(19) Indirectly.(20) Certification period.(c) Special rules for filings under section 1503(d).(1) Reasonable cause exception.(2) Requirements for reasonable cause relief.(i) Time of submission.(ii) Notice requirement.(3) Signature requirement.
(i) In general.(ii) Separate unit combination rule.(iii) Business operations that do not constitute a permanent establishment.(iv) Foreign branch separate units held by dual resident corporations or hybrid entities in the same foreign country.(5) Dual consolidated loss.(6) Subject to tax.(7) Foreign country.(8) Consolidated group.(9) Domestic owner.(10) Affiliated dual resident corporation and affiliated domestic owner.(11) Unaffiliated dual resident corporation, unaffiliated domestic corporation, and unaffiliated domestic owner.(12) Domestic affiliate.(13) Domestic use.(14) Foreign use.(15) Grantor trust.(16) Transparent entity.(i) In general.(ii) Example.(17) Disregarded entity.(18) Partnership.(19) Indirectly.(20) Certification period.(c) Special rules for filings under section 1503(d).(1) Reasonable cause exception.(2) Requirements for reasonable cause relief.(i) Time of submission.(ii) Notice requirement.(3) Signature requirement.
Sec. 1.1503(d)-2 Domestic use.
(a) Foreign use.(1) In general.(2) Indirect use.(i) General rule.(ii) Exception.(iii) Examples.(3) Deemed use.(b) Available for use.(c) Exceptions.(1) In general.(2) Election or merger required to enable foreign use.(3) Presumed use where no foreign country rule for determining use.(4) Certain interests in partnerships or grantor trusts.(i) General rule.(ii) Combined separate unit.(iii) Reduction in interest.(5) De minimis reduction of an interest in a separate unit.(i) General rule.(ii) Limitations.(iii) Reduction in interest.(iv) Examples and coordination with exceptions to other triggering events.(6) Certain asset basis carryovers.(7) Assumption of certain liabilities.(i) In general.(ii) Ordinary course limitation.(8) Multiple-party events.(9) Additional guidance.(d) Ordering rules for determining the foreign use of losses.(e) Mirror legislation rule.(1) In general.(2) Stand-alone exception.(i) In general.(ii) Stand-alone domestic use agreement.(iii) Termination of stand-alone domestic use agreement.
(1) In general.(2) Indirect use.(i) General rule.(ii) Exception.(iii) Examples.(3) Deemed use.(b) Available for use.(c) Exceptions.(1) In general.(2) Election or merger required to enable foreign use.(3) Presumed use where no foreign country rule for determining use.(4) Certain interests in partnerships or grantor trusts.(i) General rule.(ii) Combined separate unit.(iii) Reduction in interest.(5) De minimis reduction of an interest in a separate unit.(i) General rule.(ii) Limitations.(iii) Reduction in interest.(iv) Examples and coordination with exceptions to other triggering events.(6) Certain asset basis carryovers.(7) Assumption of certain liabilities.(i) In general.(ii) Ordinary course limitation.(8) Multiple-party events.(9) Additional guidance.(d) Ordering rules for determining the foreign use of losses.(e) Mirror legislation rule.(1) In general.(2) Stand-alone exception.(i) In general.(ii) Stand-alone domestic use agreement.(iii) Termination of stand-alone domestic use agreement.
(i) General rule.(ii) Exception.(iii) Examples.(3) Deemed use.(b) Available for use.(c) Exceptions.(1) In general.(2) Election or merger required to enable foreign use.(3) Presumed use where no foreign country rule for determining use.(4) Certain interests in partnerships or grantor trusts.(i) General rule.(ii) Combined separate unit.(iii) Reduction in interest.(5) De minimis reduction of an interest in a separate unit.(i) General rule.(ii) Limitations.(iii) Reduction in interest.(iv) Examples and coordination with exceptions to other triggering events.(6) Certain asset basis carryovers.(7) Assumption of certain liabilities.(i) In general.(ii) Ordinary course limitation.(8) Multiple-party events.(9) Additional guidance.(d) Ordering rules for determining the foreign use of losses.(e) Mirror legislation rule.(1) In general.(2) Stand-alone exception.(i) In general.(ii) Stand-alone domestic use agreement.(iii) Termination of stand-alone domestic use agreement.
(1) In general.(2) Election or merger required to enable foreign use.(3) Presumed use where no foreign country rule for determining use.(4) Certain interests in partnerships or grantor trusts.(i) General rule.(ii) Combined separate unit.(iii) Reduction in interest.(5) De minimis reduction of an interest in a separate unit.(i) General rule.(ii) Limitations.(iii) Reduction in interest.(iv) Examples and coordination with exceptions to other triggering events.(6) Certain asset basis carryovers.(7) Assumption of certain liabilities.(i) In general.(ii) Ordinary course limitation.(8) Multiple-party events.(9) Additional guidance.(d) Ordering rules for determining the foreign use of losses.(e) Mirror legislation rule.(1) In general.(2) Stand-alone exception.(i) In general.(ii) Stand-alone domestic use agreement.(iii) Termination of stand-alone domestic use agreement.
(i) General rule.(ii) Combined separate unit.(iii) Reduction in interest.(5) De minimis reduction of an interest in a separate unit.(i) General rule.(ii) Limitations.(iii) Reduction in interest.(iv) Examples and coordination with exceptions to other triggering events.(6) Certain asset basis carryovers.(7) Assumption of certain liabilities.(i) In general.(ii) Ordinary course limitation.(8) Multiple-party events.(9) Additional guidance.(d) Ordering rules for determining the foreign use of losses.(e) Mirror legislation rule.(1) In general.(2) Stand-alone exception.(i) In general.(ii) Stand-alone domestic use agreement.(iii) Termination of stand-alone domestic use agreement.
(i) General rule.(ii) Combined separate unit.(iii) Reduction in interest.(5) De minimis reduction of an interest in a separate unit.(i) General rule.(ii) Limitations.(iii) Reduction in interest.(iv) Examples and coordination with exceptions to other triggering events.(6) Certain asset basis carryovers.(7) Assumption of certain liabilities.(i) In general.(ii) Ordinary course limitation.(8) Multiple-party events.(9) Additional guidance.(d) Ordering rules for determining the foreign use of losses.(e) Mirror legislation rule.(1) In general.(2) Stand-alone exception.(i) In general.(ii) Stand-alone domestic use agreement.(iii) Termination of stand-alone domestic use agreement.
(i) General rule.(ii) Combined separate unit.(iii) Reduction in interest.(5) De minimis reduction of an interest in a separate unit.(i) General rule.(ii) Limitations.(iii) Reduction in interest.(iv) Examples and coordination with exceptions to other triggering events.(6) Certain asset basis carryovers.(7) Assumption of certain liabilities.(i) In general.(ii) Ordinary course limitation.(8) Multiple-party events.(9) Additional guidance.(d) Ordering rules for determining the foreign use of losses.(e) Mirror legislation rule.(1) In general.(2) Stand-alone exception.(i) In general.(ii) Stand-alone domestic use agreement.(iii) Termination of stand-alone domestic use agreement.
(1) In general.(2) Stand-alone exception.(i) In general.(ii) Stand-alone domestic use agreement.(iii) Termination of stand-alone domestic use agreement.
(i) In general.(ii) Stand-alone domestic use agreement.(iii) Termination of stand-alone domestic use agreement.
(a) Scope.(b) Limitation on domestic use of a dual consolidated loss.(c) Effect of a dual consolidated loss on a consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner.(1) Dual resident corporation.(2) Separate unit.(3) SRLY limitation.(4) Items of a dual consolidated loss used in other taxable years.(5) Reconstituted net operating losses.(d) Elimination of a dual consolidated loss after certain transactions.(1) General rule.(i) Transactions described in section 381(a).(ii) Cessation of separate unit status.(2) Exceptions.(i) Certain section 368(a)(1)(F) reorganizations.(ii) Acquisition of a dual resident corporation by another dual resident corporation.(iii) Acquisition of a separate unit by a domestic corporation.(A) Acquisition by a corporation that is not a member of the same consolidated group.(B) Acquisition by a member of the same consolidated group.(iv) Special rules for foreign insurance companies.(e) Special rule denying the use of a dual consolidated loss to offset tainted income.(1) In general.(2) Tainted income.(i) Definition. (ii) Income presumed to be derived from holding tainted assets.(3) Tainted assets defined.(4) Exceptions.(f) Computation of foreign tax credit limitation.
(1) Dual resident corporation.(2) Separate unit.(3) SRLY limitation.(4) Items of a dual consolidated loss used in other taxable years.(5) Reconstituted net operating losses.(d) Elimination of a dual consolidated loss after certain transactions.(1) General rule.(i) Transactions described in section 381(a).(ii) Cessation of separate unit status.(2) Exceptions.(i) Certain section 368(a)(1)(F) reorganizations.(ii) Acquisition of a dual resident corporation by another dual resident corporation.(iii) Acquisition of a separate unit by a domestic corporation.(A) Acquisition by a corporation that is not a member of the same consolidated group.(B) Acquisition by a member of the same consolidated group.(iv) Special rules for foreign insurance companies.(e) Special rule denying the use of a dual consolidated loss to offset tainted income.(1) In general.(2) Tainted income.(i) Definition. (ii) Income presumed to be derived from holding tainted assets.(3) Tainted assets defined.(4) Exceptions.(f) Computation of foreign tax credit limitation.
(1) Dual resident corporation.(2) Separate unit.(3) SRLY limitation.(4) Items of a dual consolidated loss used in other taxable years.(5) Reconstituted net operating losses.(d) Elimination of a dual consolidated loss after certain transactions.(1) General rule.(i) Transactions described in section 381(a).(ii) Cessation of separate unit status.(2) Exceptions.(i) Certain section 368(a)(1)(F) reorganizations.(ii) Acquisition of a dual resident corporation by another dual resident corporation.(iii) Acquisition of a separate unit by a domestic corporation.(A) Acquisition by a corporation that is not a member of the same consolidated group.(B) Acquisition by a member of the same consolidated group.(iv) Special rules for foreign insurance companies.(e) Special rule denying the use of a dual consolidated loss to offset tainted income.(1) In general.(2) Tainted income.(i) Definition. (ii) Income presumed to be derived from holding tainted assets.(3) Tainted assets defined.(4) Exceptions.(f) Computation of foreign tax credit limitation.
(i) Transactions described in section 381(a).(ii) Cessation of separate unit status.(2) Exceptions.(i) Certain section 368(a)(1)(F) reorganizations.(ii) Acquisition of a dual resident corporation by another dual resident corporation.(iii) Acquisition of a separate unit by a domestic corporation.(A) Acquisition by a corporation that is not a member of the same consolidated group.(B) Acquisition by a member of the same consolidated group.(iv) Special rules for foreign insurance companies.(e) Special rule denying the use of a dual consolidated loss to offset tainted income.(1) In general.(2) Tainted income.(i) Definition. (ii) Income presumed to be derived from holding tainted assets.(3) Tainted assets defined.(4) Exceptions.(f) Computation of foreign tax credit limitation.
(i) Transactions described in section 381(a).(ii) Cessation of separate unit status.(2) Exceptions.(i) Certain section 368(a)(1)(F) reorganizations.(ii) Acquisition of a dual resident corporation by another dual resident corporation.(iii) Acquisition of a separate unit by a domestic corporation.(A) Acquisition by a corporation that is not a member of the same consolidated group.(B) Acquisition by a member of the same consolidated group.(iv) Special rules for foreign insurance companies.(e) Special rule denying the use of a dual consolidated loss to offset tainted income.(1) In general.(2) Tainted income.(i) Definition. (ii) Income presumed to be derived from holding tainted assets.(3) Tainted assets defined.(4) Exceptions.(f) Computation of foreign tax credit limitation.
(A) Acquisition by a corporation that is not a member of the same consolidated group.(B) Acquisition by a member of the same consolidated group.(iv) Special rules for foreign insurance companies.(e) Special rule denying the use of a dual consolidated loss to offset tainted income.(1) In general.(2) Tainted income.(i) Definition. (ii) Income presumed to be derived from holding tainted assets.(3) Tainted assets defined.(4) Exceptions.(f) Computation of foreign tax credit limitation.
(1) In general.(2) Tainted income.(i) Definition. (ii) Income presumed to be derived from holding tainted assets.(3) Tainted assets defined.(4) Exceptions.(f) Computation of foreign tax credit limitation.
(i) Definition. (ii) Income presumed to be derived from holding tainted assets.(3) Tainted assets defined.(4) Exceptions.(f) Computation of foreign tax credit limitation.
(a) In general.(b) Determination of amount of income or dual consolidated loss of a dual resident corporation.(1) In general.(2) Exceptions.(c) Determination of amount of income or dual consolidated loss attributable to a separate unit, and income or loss attributable to an interest in a transparent entity.(1) In general.(i) Scope and purpose.(ii) Only items of domestic owner taken into account.(iii) Separate application.(2) Foreign branch separate unit.(i) In general.(ii) Principles of Sec. 1.882-5.(iii) Exception where foreign country attributes interest expense solely by reference to books and records.(3) Hybrid entity separate unit and an interest in a transparent entity.(i) General rule.(ii) Interests in certain disregarded entities, partnerships, and grantor trusts owned by a hybrid entity or transparent entity.(4) Special rules.(i) Allocation of items between certain tiered separate units and interests in transparent entities.(A) Foreign branch separate unit.(B) Hybrid entity separate unit or interest in a transparent entity.(ii) Combined separate unit.(iii) Gain or loss on the direct or indirect disposition of a separate unit or an interest in a transparent entity.(A) In general.(B) Multiple separate units or interests in transparent entities.(iv) Inclusions on stock.(v) Foreign currency gain or loss recognized under section 987.(vi) Recapture of dual consolidated loss.(d) Foreign tax treatment disregarded.(e) Items generated or incurred while a dual resident corporation, a separate unit, or a transparent entity.(f) Assets and liabilities of a separate unit or an interest in a transparent entity.(g) Basis adjustments.(1) Affiliated dual resident corporation or affiliated domestic owner.(2) Interests in hybrid entities that are partnerships or interests in partnerships through which a separate unit is owned indirectly.(i) Scope.(ii) Determination of basis of partner's interest.(3) Combined separate units.
(1) In general.(2) Exceptions.(c) Determination of amount of income or dual consolidated loss attributable to a separate unit, and income or loss attributable to an interest in a transparent entity.(1) In general.(i) Scope and purpose.(ii) Only items of domestic owner taken into account.(iii) Separate application.(2) Foreign branch separate unit.(i) In general.(ii) Principles of Sec. 1.882-5.(iii) Exception where foreign country attributes interest expense solely by reference to books and records.(3) Hybrid entity separate unit and an interest in a transparent entity.(i) General rule.(ii) Interests in certain disregarded entities, partnerships, and grantor trusts owned by a hybrid entity or transparent entity.(4) Special rules.(i) Allocation of items between certain tiered separate units and interests in transparent entities.(A) Foreign branch separate unit.(B) Hybrid entity separate unit or interest in a transparent entity.(ii) Combined separate unit.(iii) Gain or loss on the direct or indirect disposition of a separate unit or an interest in a transparent entity.(A) In general.(B) Multiple separate units or interests in transparent entities.(iv) Inclusions on stock.(v) Foreign currency gain or loss recognized under section 987.(vi) Recapture of dual consolidated loss.(d) Foreign tax treatment disregarded.(e) Items generated or incurred while a dual resident corporation, a separate unit, or a transparent entity.(f) Assets and liabilities of a separate unit or an interest in a transparent entity.(g) Basis adjustments.(1) Affiliated dual resident corporation or affiliated domestic owner.(2) Interests in hybrid entities that are partnerships or interests in partnerships through which a separate unit is owned indirectly.(i) Scope.(ii) Determination of basis of partner's interest.(3) Combined separate units.
(1) In general.(2) Exceptions.(c) Determination of amount of income or dual consolidated loss attributable to a separate unit, and income or loss attributable to an interest in a transparent entity.(1) In general.(i) Scope and purpose.(ii) Only items of domestic owner taken into account.(iii) Separate application.(2) Foreign branch separate unit.(i) In general.(ii) Principles of Sec. 1.882-5.(iii) Exception where foreign country attributes interest expense solely by reference to books and records.(3) Hybrid entity separate unit and an interest in a transparent entity.(i) General rule.(ii) Interests in certain disregarded entities, partnerships, and grantor trusts owned by a hybrid entity or transparent entity.(4) Special rules.(i) Allocation of items between certain tiered separate units and interests in transparent entities.(A) Foreign branch separate unit.(B) Hybrid entity separate unit or interest in a transparent entity.(ii) Combined separate unit.(iii) Gain or loss on the direct or indirect disposition of a separate unit or an interest in a transparent entity.(A) In general.(B) Multiple separate units or interests in transparent entities.(iv) Inclusions on stock.(v) Foreign currency gain or loss recognized under section 987.(vi) Recapture of dual consolidated loss.(d) Foreign tax treatment disregarded.(e) Items generated or incurred while a dual resident corporation, a separate unit, or a transparent entity.(f) Assets and liabilities of a separate unit or an interest in a transparent entity.(g) Basis adjustments.(1) Affiliated dual resident corporation or affiliated domestic owner.(2) Interests in hybrid entities that are partnerships or interests in partnerships through which a separate unit is owned indirectly.(i) Scope.(ii) Determination of basis of partner's interest.(3) Combined separate units.
(i) Scope and purpose.(ii) Only items of domestic owner taken into account.(iii) Separate application.(2) Foreign branch separate unit.(i) In general.(ii) Principles of Sec. 1.882-5.(iii) Exception where foreign country attributes interest expense solely by reference to books and records.(3) Hybrid entity separate unit and an interest in a transparent entity.(i) General rule.(ii) Interests in certain disregarded entities, partnerships, and grantor trusts owned by a hybrid entity or transparent entity.(4) Special rules.(i) Allocation of items between certain tiered separate units and interests in transparent entities.(A) Foreign branch separate unit.(B) Hybrid entity separate unit or interest in a transparent entity.(ii) Combined separate unit.(iii) Gain or loss on the direct or indirect disposition of a separate unit or an interest in a transparent entity.(A) In general.(B) Multiple separate units or interests in transparent entities.(iv) Inclusions on stock.(v) Foreign currency gain or loss recognized under section 987.(vi) Recapture of dual consolidated loss.(d) Foreign tax treatment disregarded.(e) Items generated or incurred while a dual resident corporation, a separate unit, or a transparent entity.(f) Assets and liabilities of a separate unit or an interest in a transparent entity.(g) Basis adjustments.(1) Affiliated dual resident corporation or affiliated domestic owner.(2) Interests in hybrid entities that are partnerships or interests in partnerships through which a separate unit is owned indirectly.(i) Scope.(ii) Determination of basis of partner's interest.(3) Combined separate units.
(i) Scope and purpose.(ii) Only items of domestic owner taken into account.(iii) Separate application.(2) Foreign branch separate unit.(i) In general.(ii) Principles of Sec. 1.882-5.(iii) Exception where foreign country attributes interest expense solely by reference to books and records.(3) Hybrid entity separate unit and an interest in a transparent entity.(i) General rule.(ii) Interests in certain disregarded entities, partnerships, and grantor trusts owned by a hybrid entity or transparent entity.(4) Special rules.(i) Allocation of items between certain tiered separate units and interests in transparent entities.(A) Foreign branch separate unit.(B) Hybrid entity separate unit or interest in a transparent entity.(ii) Combined separate unit.(iii) Gain or loss on the direct or indirect disposition of a separate unit or an interest in a transparent entity.(A) In general.(B) Multiple separate units or interests in transparent entities.(iv) Inclusions on stock.(v) Foreign currency gain or loss recognized under section 987.(vi) Recapture of dual consolidated loss.(d) Foreign tax treatment disregarded.(e) Items generated or incurred while a dual resident corporation, a separate unit, or a transparent entity.(f) Assets and liabilities of a separate unit or an interest in a transparent entity.(g) Basis adjustments.(1) Affiliated dual resident corporation or affiliated domestic owner.(2) Interests in hybrid entities that are partnerships or interests in partnerships through which a separate unit is owned indirectly.(i) Scope.(ii) Determination of basis of partner's interest.(3) Combined separate units.
(i) Scope and purpose.(ii) Only items of domestic owner taken into account.(iii) Separate application.(2) Foreign branch separate unit.(i) In general.(ii) Principles of Sec. 1.882-5.(iii) Exception where foreign country attributes interest expense solely by reference to books and records.(3) Hybrid entity separate unit and an interest in a transparent entity.(i) General rule.(ii) Interests in certain disregarded entities, partnerships, and grantor trusts owned by a hybrid entity or transparent entity.(4) Special rules.(i) Allocation of items between certain tiered separate units and interests in transparent entities.(A) Foreign branch separate unit.(B) Hybrid entity separate unit or interest in a transparent entity.(ii) Combined separate unit.(iii) Gain or loss on the direct or indirect disposition of a separate unit or an interest in a transparent entity.(A) In general.(B) Multiple separate units or interests in transparent entities.(iv) Inclusions on stock.(v) Foreign currency gain or loss recognized under section 987.(vi) Recapture of dual consolidated loss.(d) Foreign tax treatment disregarded.(e) Items generated or incurred while a dual resident corporation, a separate unit, or a transparent entity.(f) Assets and liabilities of a separate unit or an interest in a transparent entity.(g) Basis adjustments.(1) Affiliated dual resident corporation or affiliated domestic owner.(2) Interests in hybrid entities that are partnerships or interests in partnerships through which a separate unit is owned indirectly.(i) Scope.(ii) Determination of basis of partner's interest.(3) Combined separate units.
(i) Scope and purpose.(ii) Only items of domestic owner taken into account.(iii) Separate application.(2) Foreign branch separate unit.(i) In general.(ii) Principles of Sec. 1.882-5.(iii) Exception where foreign country attributes interest expense solely by reference to books and records.(3) Hybrid entity separate unit and an interest in a transparent entity.(i) General rule.(ii) Interests in certain disregarded entities, partnerships, and grantor trusts owned by a hybrid entity or transparent entity.(4) Special rules.(i) Allocation of items between certain tiered separate units and interests in transparent entities.(A) Foreign branch separate unit.(B) Hybrid entity separate unit or interest in a transparent entity.(ii) Combined separate unit.(iii) Gain or loss on the direct or indirect disposition of a separate unit or an interest in a transparent entity.(A) In general.(B) Multiple separate units or interests in transparent entities.(iv) Inclusions on stock.(v) Foreign currency gain or loss recognized under section 987.(vi) Recapture of dual consolidated loss.(d) Foreign tax treatment disregarded.(e) Items generated or incurred while a dual resident corporation, a separate unit, or a transparent entity.(f) Assets and liabilities of a separate unit or an interest in a transparent entity.(g) Basis adjustments.(1) Affiliated dual resident corporation or affiliated domestic owner.(2) Interests in hybrid entities that are partnerships or interests in partnerships through which a separate unit is owned indirectly.(i) Scope.(ii) Determination of basis of partner's interest.(3) Combined separate units.
(A) Foreign branch separate unit.(B) Hybrid entity separate unit or interest in a transparent entity.(ii) Combined separate unit.(iii) Gain or loss on the direct or indirect disposition of a separate unit or an interest in a transparent entity.(A) In general.(B) Multiple separate units or interests in transparent entities.(iv) Inclusions on stock.(v) Foreign currency gain or loss recognized under section 987.(vi) Recapture of dual consolidated loss.(d) Foreign tax treatment disregarded.(e) Items generated or incurred while a dual resident corporation, a separate unit, or a transparent entity.(f) Assets and liabilities of a separate unit or an interest in a transparent entity.(g) Basis adjustments.(1) Affiliated dual resident corporation or affiliated domestic owner.(2) Interests in hybrid entities that are partnerships or interests in partnerships through which a separate unit is owned indirectly.(i) Scope.(ii) Determination of basis of partner's interest.(3) Combined separate units.
(A) Foreign branch separate unit.(B) Hybrid entity separate unit or interest in a transparent entity.(ii) Combined separate unit.(iii) Gain or loss on the direct or indirect disposition of a separate unit or an interest in a transparent entity.(A) In general.(B) Multiple separate units or interests in transparent entities.(iv) Inclusions on stock.(v) Foreign currency gain or loss recognized under section 987.(vi) Recapture of dual consolidated loss.(d) Foreign tax treatment disregarded.(e) Items generated or incurred while a dual resident corporation, a separate unit, or a transparent entity.(f) Assets and liabilities of a separate unit or an interest in a transparent entity.(g) Basis adjustments.(1) Affiliated dual resident corporation or affiliated domestic owner.(2) Interests in hybrid entities that are partnerships or interests in partnerships through which a separate unit is owned indirectly.(i) Scope.(ii) Determination of basis of partner's interest.(3) Combined separate units.
(1) Affiliated dual resident corporation or affiliated domestic owner.(2) Interests in hybrid entities that are partnerships or interests in partnerships through which a separate unit is owned indirectly.(i) Scope.(ii) Determination of basis of partner's interest.(3) Combined separate units.
(i) Scope.(ii) Determination of basis of partner's interest.(3) Combined separate units.
(a) In general.(1) Scope and purpose.(2) Absence of foreign affiliate or foreign consolidation regime.(3) Foreign insurance companies treated as domestic corporations.(b) Elective agreement in place between the United States and a foreign country.(1) In general.(2) Application to combined separate units.(c) No possibility of foreign use.(1) In general.(2) Statement.(d) Domestic use election.(1) In general.(2) No domestic use election available if there is a triggering event in the year the dual consolidated loss is incurred.(e) Triggering events requiring the recapture of a dual consolidated loss.(1) Events.(i) Foreign use.(ii) Disaffiliation.(iii) Affiliation.(iv) Transfer of assets.(v) Transfer of an interest in a separate unit.(vi) Conversion to a foreign corporation.(vii) Conversion to a regulated investment company, a real estate investment trust, or an S corporation.(viii) Failure to certify.(ix) Cessation of stand-alone status.(2) Rebuttal.(i) General rule.(ii) Certain asset transfers.(iii) Reporting.(iv) Examples.(f) Triggering event exceptions.(1) Continuing ownership of assets or interests.(i) Disaffiliation as a result of a transaction described in section 381.(ii) Continuing ownership by consolidated group.(iii) Continuing ownership by unaffiliated dual resident corporation or unaffiliated domestic owner.(2) Transactions requiring a new domestic use agreement.(i) Multiple-party events.(ii) Events resulting in a single consolidated group.(iii) Requirements.(A) New domestic use agreement.(B) Statement filed by original elector.(3) Certain transfers qualifying for the de minimis exception to foreign use. (4) Deemed transactions as a result of certain transfers that do not result in a foreign use.(5) Compulsory transfers.(6) Subsequent triggering events.(g) Annual certification reporting requirement.(h) Recapture of dual consolidated loss and interest charge.(1) Presumptive rules.(i) Amount of recapture.(ii) Interest charge.(2) Reduction of presumptive recapture amount and presumptive interest charge.(i) Amount of recapture.(ii) Interest charge.(3) Rules regarding multiple-party event exceptions to triggering events.(i) Scope.(ii) Original elector and prior subsequent electors not subject to recapture or interest charge.(iii) Recapture tax amount and required statement.(A) In general.(B) Recapture tax amount.(iv) Tax assessment and collection procedures.(A) In general.(B) Collection from original elector and prior subsequent electors; joint and several liability.(C) Allocation of partial payments of tax.(D) Refund.(v) Definition of income tax liability.(vi) Example.(4) Computation of taxable income in year of recapture.(i) Presumptive rule.(ii) Exception to presumptive rule.(5) Character and source of recapture income.(6) Reconstituted net operating loss.(i) General rule.(ii) Exception.(iii) Special rule for recapture following multiple-party event exception to a triggering event.(i) [Reserved](j) Termination of domestic use agreement and annual certifications.(1) Rebuttals, exceptions to triggering events, and recapture.(2) Termination of ability for foreign use.(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(1) Scope and purpose.(2) Absence of foreign affiliate or foreign consolidation regime.(3) Foreign insurance companies treated as domestic corporations.(b) Elective agreement in place between the United States and a foreign country.(1) In general.(2) Application to combined separate units.(c) No possibility of foreign use.(1) In general.(2) Statement.(d) Domestic use election.(1) In general.(2) No domestic use election available if there is a triggering event in the year the dual consolidated loss is incurred.(e) Triggering events requiring the recapture of a dual consolidated loss.(1) Events.(i) Foreign use.(ii) Disaffiliation.(iii) Affiliation.(iv) Transfer of assets.(v) Transfer of an interest in a separate unit.(vi) Conversion to a foreign corporation.(vii) Conversion to a regulated investment company, a real estate investment trust, or an S corporation.(viii) Failure to certify.(ix) Cessation of stand-alone status.(2) Rebuttal.(i) General rule.(ii) Certain asset transfers.(iii) Reporting.(iv) Examples.(f) Triggering event exceptions.(1) Continuing ownership of assets or interests.(i) Disaffiliation as a result of a transaction described in section 381.(ii) Continuing ownership by consolidated group.(iii) Continuing ownership by unaffiliated dual resident corporation or unaffiliated domestic owner.(2) Transactions requiring a new domestic use agreement.(i) Multiple-party events.(ii) Events resulting in a single consolidated group.(iii) Requirements.(A) New domestic use agreement.(B) Statement filed by original elector.(3) Certain transfers qualifying for the de minimis exception to foreign use. (4) Deemed transactions as a result of certain transfers that do not result in a foreign use.(5) Compulsory transfers.(6) Subsequent triggering events.(g) Annual certification reporting requirement.(h) Recapture of dual consolidated loss and interest charge.(1) Presumptive rules.(i) Amount of recapture.(ii) Interest charge.(2) Reduction of presumptive recapture amount and presumptive interest charge.(i) Amount of recapture.(ii) Interest charge.(3) Rules regarding multiple-party event exceptions to triggering events.(i) Scope.(ii) Original elector and prior subsequent electors not subject to recapture or interest charge.(iii) Recapture tax amount and required statement.(A) In general.(B) Recapture tax amount.(iv) Tax assessment and collection procedures.(A) In general.(B) Collection from original elector and prior subsequent electors; joint and several liability.(C) Allocation of partial payments of tax.(D) Refund.(v) Definition of income tax liability.(vi) Example.(4) Computation of taxable income in year of recapture.(i) Presumptive rule.(ii) Exception to presumptive rule.(5) Character and source of recapture income.(6) Reconstituted net operating loss.(i) General rule.(ii) Exception.(iii) Special rule for recapture following multiple-party event exception to a triggering event.(i) [Reserved](j) Termination of domestic use agreement and annual certifications.(1) Rebuttals, exceptions to triggering events, and recapture.(2) Termination of ability for foreign use.(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(1) Scope and purpose.(2) Absence of foreign affiliate or foreign consolidation regime.(3) Foreign insurance companies treated as domestic corporations.(b) Elective agreement in place between the United States and a foreign country.(1) In general.(2) Application to combined separate units.(c) No possibility of foreign use.(1) In general.(2) Statement.(d) Domestic use election.(1) In general.(2) No domestic use election available if there is a triggering event in the year the dual consolidated loss is incurred.(e) Triggering events requiring the recapture of a dual consolidated loss.(1) Events.(i) Foreign use.(ii) Disaffiliation.(iii) Affiliation.(iv) Transfer of assets.(v) Transfer of an interest in a separate unit.(vi) Conversion to a foreign corporation.(vii) Conversion to a regulated investment company, a real estate investment trust, or an S corporation.(viii) Failure to certify.(ix) Cessation of stand-alone status.(2) Rebuttal.(i) General rule.(ii) Certain asset transfers.(iii) Reporting.(iv) Examples.(f) Triggering event exceptions.(1) Continuing ownership of assets or interests.(i) Disaffiliation as a result of a transaction described in section 381.(ii) Continuing ownership by consolidated group.(iii) Continuing ownership by unaffiliated dual resident corporation or unaffiliated domestic owner.(2) Transactions requiring a new domestic use agreement.(i) Multiple-party events.(ii) Events resulting in a single consolidated group.(iii) Requirements.(A) New domestic use agreement.(B) Statement filed by original elector.(3) Certain transfers qualifying for the de minimis exception to foreign use. (4) Deemed transactions as a result of certain transfers that do not result in a foreign use.(5) Compulsory transfers.(6) Subsequent triggering events.(g) Annual certification reporting requirement.(h) Recapture of dual consolidated loss and interest charge.(1) Presumptive rules.(i) Amount of recapture.(ii) Interest charge.(2) Reduction of presumptive recapture amount and presumptive interest charge.(i) Amount of recapture.(ii) Interest charge.(3) Rules regarding multiple-party event exceptions to triggering events.(i) Scope.(ii) Original elector and prior subsequent electors not subject to recapture or interest charge.(iii) Recapture tax amount and required statement.(A) In general.(B) Recapture tax amount.(iv) Tax assessment and collection procedures.(A) In general.(B) Collection from original elector and prior subsequent electors; joint and several liability.(C) Allocation of partial payments of tax.(D) Refund.(v) Definition of income tax liability.(vi) Example.(4) Computation of taxable income in year of recapture.(i) Presumptive rule.(ii) Exception to presumptive rule.(5) Character and source of recapture income.(6) Reconstituted net operating loss.(i) General rule.(ii) Exception.(iii) Special rule for recapture following multiple-party event exception to a triggering event.(i) [Reserved](j) Termination of domestic use agreement and annual certifications.(1) Rebuttals, exceptions to triggering events, and recapture.(2) Termination of ability for foreign use.(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(1) Scope and purpose.(2) Absence of foreign affiliate or foreign consolidation regime.(3) Foreign insurance companies treated as domestic corporations.(b) Elective agreement in place between the United States and a foreign country.(1) In general.(2) Application to combined separate units.(c) No possibility of foreign use.(1) In general.(2) Statement.(d) Domestic use election.(1) In general.(2) No domestic use election available if there is a triggering event in the year the dual consolidated loss is incurred.(e) Triggering events requiring the recapture of a dual consolidated loss.(1) Events.(i) Foreign use.(ii) Disaffiliation.(iii) Affiliation.(iv) Transfer of assets.(v) Transfer of an interest in a separate unit.(vi) Conversion to a foreign corporation.(vii) Conversion to a regulated investment company, a real estate investment trust, or an S corporation.(viii) Failure to certify.(ix) Cessation of stand-alone status.(2) Rebuttal.(i) General rule.(ii) Certain asset transfers.(iii) Reporting.(iv) Examples.(f) Triggering event exceptions.(1) Continuing ownership of assets or interests.(i) Disaffiliation as a result of a transaction described in section 381.(ii) Continuing ownership by consolidated group.(iii) Continuing ownership by unaffiliated dual resident corporation or unaffiliated domestic owner.(2) Transactions requiring a new domestic use agreement.(i) Multiple-party events.(ii) Events resulting in a single consolidated group.(iii) Requirements.(A) New domestic use agreement.(B) Statement filed by original elector.(3) Certain transfers qualifying for the de minimis exception to foreign use. (4) Deemed transactions as a result of certain transfers that do not result in a foreign use.(5) Compulsory transfers.(6) Subsequent triggering events.(g) Annual certification reporting requirement.(h) Recapture of dual consolidated loss and interest charge.(1) Presumptive rules.(i) Amount of recapture.(ii) Interest charge.(2) Reduction of presumptive recapture amount and presumptive interest charge.(i) Amount of recapture.(ii) Interest charge.(3) Rules regarding multiple-party event exceptions to triggering events.(i) Scope.(ii) Original elector and prior subsequent electors not subject to recapture or interest charge.(iii) Recapture tax amount and required statement.(A) In general.(B) Recapture tax amount.(iv) Tax assessment and collection procedures.(A) In general.(B) Collection from original elector and prior subsequent electors; joint and several liability.(C) Allocation of partial payments of tax.(D) Refund.(v) Definition of income tax liability.(vi) Example.(4) Computation of taxable income in year of recapture.(i) Presumptive rule.(ii) Exception to presumptive rule.(5) Character and source of recapture income.(6) Reconstituted net operating loss.(i) General rule.(ii) Exception.(iii) Special rule for recapture following multiple-party event exception to a triggering event.(i) [Reserved](j) Termination of domestic use agreement and annual certifications.(1) Rebuttals, exceptions to triggering events, and recapture.(2) Termination of ability for foreign use.(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(1) Scope and purpose.(2) Absence of foreign affiliate or foreign consolidation regime.(3) Foreign insurance companies treated as domestic corporations.(b) Elective agreement in place between the United States and a foreign country.(1) In general.(2) Application to combined separate units.(c) No possibility of foreign use.(1) In general.(2) Statement.(d) Domestic use election.(1) In general.(2) No domestic use election available if there is a triggering event in the year the dual consolidated loss is incurred.(e) Triggering events requiring the recapture of a dual consolidated loss.(1) Events.(i) Foreign use.(ii) Disaffiliation.(iii) Affiliation.(iv) Transfer of assets.(v) Transfer of an interest in a separate unit.(vi) Conversion to a foreign corporation.(vii) Conversion to a regulated investment company, a real estate investment trust, or an S corporation.(viii) Failure to certify.(ix) Cessation of stand-alone status.(2) Rebuttal.(i) General rule.(ii) Certain asset transfers.(iii) Reporting.(iv) Examples.(f) Triggering event exceptions.(1) Continuing ownership of assets or interests.(i) Disaffiliation as a result of a transaction described in section 381.(ii) Continuing ownership by consolidated group.(iii) Continuing ownership by unaffiliated dual resident corporation or unaffiliated domestic owner.(2) Transactions requiring a new domestic use agreement.(i) Multiple-party events.(ii) Events resulting in a single consolidated group.(iii) Requirements.(A) New domestic use agreement.(B) Statement filed by original elector.(3) Certain transfers qualifying for the de minimis exception to foreign use. (4) Deemed transactions as a result of certain transfers that do not result in a foreign use.(5) Compulsory transfers.(6) Subsequent triggering events.(g) Annual certification reporting requirement.(h) Recapture of dual consolidated loss and interest charge.(1) Presumptive rules.(i) Amount of recapture.(ii) Interest charge.(2) Reduction of presumptive recapture amount and presumptive interest charge.(i) Amount of recapture.(ii) Interest charge.(3) Rules regarding multiple-party event exceptions to triggering events.(i) Scope.(ii) Original elector and prior subsequent electors not subject to recapture or interest charge.(iii) Recapture tax amount and required statement.(A) In general.(B) Recapture tax amount.(iv) Tax assessment and collection procedures.(A) In general.(B) Collection from original elector and prior subsequent electors; joint and several liability.(C) Allocation of partial payments of tax.(D) Refund.(v) Definition of income tax liability.(vi) Example.(4) Computation of taxable income in year of recapture.(i) Presumptive rule.(ii) Exception to presumptive rule.(5) Character and source of recapture income.(6) Reconstituted net operating loss.(i) General rule.(ii) Exception.(iii) Special rule for recapture following multiple-party event exception to a triggering event.(i) [Reserved](j) Termination of domestic use agreement and annual certifications.(1) Rebuttals, exceptions to triggering events, and recapture.(2) Termination of ability for foreign use.(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(1) Scope and purpose.(2) Absence of foreign affiliate or foreign consolidation regime.(3) Foreign insurance companies treated as domestic corporations.(b) Elective agreement in place between the United States and a foreign country.(1) In general.(2) Application to combined separate units.(c) No possibility of foreign use.(1) In general.(2) Statement.(d) Domestic use election.(1) In general.(2) No domestic use election available if there is a triggering event in the year the dual consolidated loss is incurred.(e) Triggering events requiring the recapture of a dual consolidated loss.(1) Events.(i) Foreign use.(ii) Disaffiliation.(iii) Affiliation.(iv) Transfer of assets.(v) Transfer of an interest in a separate unit.(vi) Conversion to a foreign corporation.(vii) Conversion to a regulated investment company, a real estate investment trust, or an S corporation.(viii) Failure to certify.(ix) Cessation of stand-alone status.(2) Rebuttal.(i) General rule.(ii) Certain asset transfers.(iii) Reporting.(iv) Examples.(f) Triggering event exceptions.(1) Continuing ownership of assets or interests.(i) Disaffiliation as a result of a transaction described in section 381.(ii) Continuing ownership by consolidated group.(iii) Continuing ownership by unaffiliated dual resident corporation or unaffiliated domestic owner.(2) Transactions requiring a new domestic use agreement.(i) Multiple-party events.(ii) Events resulting in a single consolidated group.(iii) Requirements.(A) New domestic use agreement.(B) Statement filed by original elector.(3) Certain transfers qualifying for the de minimis exception to foreign use. (4) Deemed transactions as a result of certain transfers that do not result in a foreign use.(5) Compulsory transfers.(6) Subsequent triggering events.(g) Annual certification reporting requirement.(h) Recapture of dual consolidated loss and interest charge.(1) Presumptive rules.(i) Amount of recapture.(ii) Interest charge.(2) Reduction of presumptive recapture amount and presumptive interest charge.(i) Amount of recapture.(ii) Interest charge.(3) Rules regarding multiple-party event exceptions to triggering events.(i) Scope.(ii) Original elector and prior subsequent electors not subject to recapture or interest charge.(iii) Recapture tax amount and required statement.(A) In general.(B) Recapture tax amount.(iv) Tax assessment and collection procedures.(A) In general.(B) Collection from original elector and prior subsequent electors; joint and several liability.(C) Allocation of partial payments of tax.(D) Refund.(v) Definition of income tax liability.(vi) Example.(4) Computation of taxable income in year of recapture.(i) Presumptive rule.(ii) Exception to presumptive rule.(5) Character and source of recapture income.(6) Reconstituted net operating loss.(i) General rule.(ii) Exception.(iii) Special rule for recapture following multiple-party event exception to a triggering event.(i) [Reserved](j) Termination of domestic use agreement and annual certifications.(1) Rebuttals, exceptions to triggering events, and recapture.(2) Termination of ability for foreign use.(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(i) Foreign use.(ii) Disaffiliation.(iii) Affiliation.(iv) Transfer of assets.(v) Transfer of an interest in a separate unit.(vi) Conversion to a foreign corporation.(vii) Conversion to a regulated investment company, a real estate investment trust, or an S corporation.(viii) Failure to certify.(ix) Cessation of stand-alone status.(2) Rebuttal.(i) General rule.(ii) Certain asset transfers.(iii) Reporting.(iv) Examples.(f) Triggering event exceptions.(1) Continuing ownership of assets or interests.(i) Disaffiliation as a result of a transaction described in section 381.(ii) Continuing ownership by consolidated group.(iii) Continuing ownership by unaffiliated dual resident corporation or unaffiliated domestic owner.(2) Transactions requiring a new domestic use agreement.(i) Multiple-party events.(ii) Events resulting in a single consolidated group.(iii) Requirements.(A) New domestic use agreement.(B) Statement filed by original elector.(3) Certain transfers qualifying for the de minimis exception to foreign use. (4) Deemed transactions as a result of certain transfers that do not result in a foreign use.(5) Compulsory transfers.(6) Subsequent triggering events.(g) Annual certification reporting requirement.(h) Recapture of dual consolidated loss and interest charge.(1) Presumptive rules.(i) Amount of recapture.(ii) Interest charge.(2) Reduction of presumptive recapture amount and presumptive interest charge.(i) Amount of recapture.(ii) Interest charge.(3) Rules regarding multiple-party event exceptions to triggering events.(i) Scope.(ii) Original elector and prior subsequent electors not subject to recapture or interest charge.(iii) Recapture tax amount and required statement.(A) In general.(B) Recapture tax amount.(iv) Tax assessment and collection procedures.(A) In general.(B) Collection from original elector and prior subsequent electors; joint and several liability.(C) Allocation of partial payments of tax.(D) Refund.(v) Definition of income tax liability.(vi) Example.(4) Computation of taxable income in year of recapture.(i) Presumptive rule.(ii) Exception to presumptive rule.(5) Character and source of recapture income.(6) Reconstituted net operating loss.(i) General rule.(ii) Exception.(iii) Special rule for recapture following multiple-party event exception to a triggering event.(i) [Reserved](j) Termination of domestic use agreement and annual certifications.(1) Rebuttals, exceptions to triggering events, and recapture.(2) Termination of ability for foreign use.(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(i) Foreign use.(ii) Disaffiliation.(iii) Affiliation.(iv) Transfer of assets.(v) Transfer of an interest in a separate unit.(vi) Conversion to a foreign corporation.(vii) Conversion to a regulated investment company, a real estate investment trust, or an S corporation.(viii) Failure to certify.(ix) Cessation of stand-alone status.(2) Rebuttal.(i) General rule.(ii) Certain asset transfers.(iii) Reporting.(iv) Examples.(f) Triggering event exceptions.(1) Continuing ownership of assets or interests.(i) Disaffiliation as a result of a transaction described in section 381.(ii) Continuing ownership by consolidated group.(iii) Continuing ownership by unaffiliated dual resident corporation or unaffiliated domestic owner.(2) Transactions requiring a new domestic use agreement.(i) Multiple-party events.(ii) Events resulting in a single consolidated group.(iii) Requirements.(A) New domestic use agreement.(B) Statement filed by original elector.(3) Certain transfers qualifying for the de minimis exception to foreign use. (4) Deemed transactions as a result of certain transfers that do not result in a foreign use.(5) Compulsory transfers.(6) Subsequent triggering events.(g) Annual certification reporting requirement.(h) Recapture of dual consolidated loss and interest charge.(1) Presumptive rules.(i) Amount of recapture.(ii) Interest charge.(2) Reduction of presumptive recapture amount and presumptive interest charge.(i) Amount of recapture.(ii) Interest charge.(3) Rules regarding multiple-party event exceptions to triggering events.(i) Scope.(ii) Original elector and prior subsequent electors not subject to recapture or interest charge.(iii) Recapture tax amount and required statement.(A) In general.(B) Recapture tax amount.(iv) Tax assessment and collection procedures.(A) In general.(B) Collection from original elector and prior subsequent electors; joint and several liability.(C) Allocation of partial payments of tax.(D) Refund.(v) Definition of income tax liability.(vi) Example.(4) Computation of taxable income in year of recapture.(i) Presumptive rule.(ii) Exception to presumptive rule.(5) Character and source of recapture income.(6) Reconstituted net operating loss.(i) General rule.(ii) Exception.(iii) Special rule for recapture following multiple-party event exception to a triggering event.(i) [Reserved](j) Termination of domestic use agreement and annual certifications.(1) Rebuttals, exceptions to triggering events, and recapture.(2) Termination of ability for foreign use.(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(1) Continuing ownership of assets or interests.(i) Disaffiliation as a result of a transaction described in section 381.(ii) Continuing ownership by consolidated group.(iii) Continuing ownership by unaffiliated dual resident corporation or unaffiliated domestic owner.(2) Transactions requiring a new domestic use agreement.(i) Multiple-party events.(ii) Events resulting in a single consolidated group.(iii) Requirements.(A) New domestic use agreement.(B) Statement filed by original elector.(3) Certain transfers qualifying for the de minimis exception to foreign use. (4) Deemed transactions as a result of certain transfers that do not result in a foreign use.(5) Compulsory transfers.(6) Subsequent triggering events.(g) Annual certification reporting requirement.(h) Recapture of dual consolidated loss and interest charge.(1) Presumptive rules.(i) Amount of recapture.(ii) Interest charge.(2) Reduction of presumptive recapture amount and presumptive interest charge.(i) Amount of recapture.(ii) Interest charge.(3) Rules regarding multiple-party event exceptions to triggering events.(i) Scope.(ii) Original elector and prior subsequent electors not subject to recapture or interest charge.(iii) Recapture tax amount and required statement.(A) In general.(B) Recapture tax amount.(iv) Tax assessment and collection procedures.(A) In general.(B) Collection from original elector and prior subsequent electors; joint and several liability.(C) Allocation of partial payments of tax.(D) Refund.(v) Definition of income tax liability.(vi) Example.(4) Computation of taxable income in year of recapture.(i) Presumptive rule.(ii) Exception to presumptive rule.(5) Character and source of recapture income.(6) Reconstituted net operating loss.(i) General rule.(ii) Exception.(iii) Special rule for recapture following multiple-party event exception to a triggering event.(i) [Reserved](j) Termination of domestic use agreement and annual certifications.(1) Rebuttals, exceptions to triggering events, and recapture.(2) Termination of ability for foreign use.(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(i) Disaffiliation as a result of a transaction described in section 381.(ii) Continuing ownership by consolidated group.(iii) Continuing ownership by unaffiliated dual resident corporation or unaffiliated domestic owner.(2) Transactions requiring a new domestic use agreement.(i) Multiple-party events.(ii) Events resulting in a single consolidated group.(iii) Requirements.(A) New domestic use agreement.(B) Statement filed by original elector.(3) Certain transfers qualifying for the de minimis exception to foreign use. (4) Deemed transactions as a result of certain transfers that do not result in a foreign use.(5) Compulsory transfers.(6) Subsequent triggering events.(g) Annual certification reporting requirement.(h) Recapture of dual consolidated loss and interest charge.(1) Presumptive rules.(i) Amount of recapture.(ii) Interest charge.(2) Reduction of presumptive recapture amount and presumptive interest charge.(i) Amount of recapture.(ii) Interest charge.(3) Rules regarding multiple-party event exceptions to triggering events.(i) Scope.(ii) Original elector and prior subsequent electors not subject to recapture or interest charge.(iii) Recapture tax amount and required statement.(A) In general.(B) Recapture tax amount.(iv) Tax assessment and collection procedures.(A) In general.(B) Collection from original elector and prior subsequent electors; joint and several liability.(C) Allocation of partial payments of tax.(D) Refund.(v) Definition of income tax liability.(vi) Example.(4) Computation of taxable income in year of recapture.(i) Presumptive rule.(ii) Exception to presumptive rule.(5) Character and source of recapture income.(6) Reconstituted net operating loss.(i) General rule.(ii) Exception.(iii) Special rule for recapture following multiple-party event exception to a triggering event.(i) [Reserved](j) Termination of domestic use agreement and annual certifications.(1) Rebuttals, exceptions to triggering events, and recapture.(2) Termination of ability for foreign use.(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(i) Disaffiliation as a result of a transaction described in section 381.(ii) Continuing ownership by consolidated group.(iii) Continuing ownership by unaffiliated dual resident corporation or unaffiliated domestic owner.(2) Transactions requiring a new domestic use agreement.(i) Multiple-party events.(ii) Events resulting in a single consolidated group.(iii) Requirements.(A) New domestic use agreement.(B) Statement filed by original elector.(3) Certain transfers qualifying for the de minimis exception to foreign use. (4) Deemed transactions as a result of certain transfers that do not result in a foreign use.(5) Compulsory transfers.(6) Subsequent triggering events.(g) Annual certification reporting requirement.(h) Recapture of dual consolidated loss and interest charge.(1) Presumptive rules.(i) Amount of recapture.(ii) Interest charge.(2) Reduction of presumptive recapture amount and presumptive interest charge.(i) Amount of recapture.(ii) Interest charge.(3) Rules regarding multiple-party event exceptions to triggering events.(i) Scope.(ii) Original elector and prior subsequent electors not subject to recapture or interest charge.(iii) Recapture tax amount and required statement.(A) In general.(B) Recapture tax amount.(iv) Tax assessment and collection procedures.(A) In general.(B) Collection from original elector and prior subsequent electors; joint and several liability.(C) Allocation of partial payments of tax.(D) Refund.(v) Definition of income tax liability.(vi) Example.(4) Computation of taxable income in year of recapture.(i) Presumptive rule.(ii) Exception to presumptive rule.(5) Character and source of recapture income.(6) Reconstituted net operating loss.(i) General rule.(ii) Exception.(iii) Special rule for recapture following multiple-party event exception to a triggering event.(i) [Reserved](j) Termination of domestic use agreement and annual certifications.(1) Rebuttals, exceptions to triggering events, and recapture.(2) Termination of ability for foreign use.(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(A) New domestic use agreement.(B) Statement filed by original elector.(3) Certain transfers qualifying for the de minimis exception to foreign use. (4) Deemed transactions as a result of certain transfers that do not result in a foreign use.(5) Compulsory transfers.(6) Subsequent triggering events.(g) Annual certification reporting requirement.(h) Recapture of dual consolidated loss and interest charge.(1) Presumptive rules.(i) Amount of recapture.(ii) Interest charge.(2) Reduction of presumptive recapture amount and presumptive interest charge.(i) Amount of recapture.(ii) Interest charge.(3) Rules regarding multiple-party event exceptions to triggering events.(i) Scope.(ii) Original elector and prior subsequent electors not subject to recapture or interest charge.(iii) Recapture tax amount and required statement.(A) In general.(B) Recapture tax amount.(iv) Tax assessment and collection procedures.(A) In general.(B) Collection from original elector and prior subsequent electors; joint and several liability.(C) Allocation of partial payments of tax.(D) Refund.(v) Definition of income tax liability.(vi) Example.(4) Computation of taxable income in year of recapture.(i) Presumptive rule.(ii) Exception to presumptive rule.(5) Character and source of recapture income.(6) Reconstituted net operating loss.(i) General rule.(ii) Exception.(iii) Special rule for recapture following multiple-party event exception to a triggering event.(i) [Reserved](j) Termination of domestic use agreement and annual certifications.(1) Rebuttals, exceptions to triggering events, and recapture.(2) Termination of ability for foreign use.(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(1) Presumptive rules.(i) Amount of recapture.(ii) Interest charge.(2) Reduction of presumptive recapture amount and presumptive interest charge.(i) Amount of recapture.(ii) Interest charge.(3) Rules regarding multiple-party event exceptions to triggering events.(i) Scope.(ii) Original elector and prior subsequent electors not subject to recapture or interest charge.(iii) Recapture tax amount and required statement.(A) In general.(B) Recapture tax amount.(iv) Tax assessment and collection procedures.(A) In general.(B) Collection from original elector and prior subsequent electors; joint and several liability.(C) Allocation of partial payments of tax.(D) Refund.(v) Definition of income tax liability.(vi) Example.(4) Computation of taxable income in year of recapture.(i) Presumptive rule.(ii) Exception to presumptive rule.(5) Character and source of recapture income.(6) Reconstituted net operating loss.(i) General rule.(ii) Exception.(iii) Special rule for recapture following multiple-party event exception to a triggering event.(i) [Reserved](j) Termination of domestic use agreement and annual certifications.(1) Rebuttals, exceptions to triggering events, and recapture.(2) Termination of ability for foreign use.(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(i) Amount of recapture.(ii) Interest charge.(2) Reduction of presumptive recapture amount and presumptive interest charge.(i) Amount of recapture.(ii) Interest charge.(3) Rules regarding multiple-party event exceptions to triggering events.(i) Scope.(ii) Original elector and prior subsequent electors not subject to recapture or interest charge.(iii) Recapture tax amount and required statement.(A) In general.(B) Recapture tax amount.(iv) Tax assessment and collection procedures.(A) In general.(B) Collection from original elector and prior subsequent electors; joint and several liability.(C) Allocation of partial payments of tax.(D) Refund.(v) Definition of income tax liability.(vi) Example.(4) Computation of taxable income in year of recapture.(i) Presumptive rule.(ii) Exception to presumptive rule.(5) Character and source of recapture income.(6) Reconstituted net operating loss.(i) General rule.(ii) Exception.(iii) Special rule for recapture following multiple-party event exception to a triggering event.(i) [Reserved](j) Termination of domestic use agreement and annual certifications.(1) Rebuttals, exceptions to triggering events, and recapture.(2) Termination of ability for foreign use.(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(i) Amount of recapture.(ii) Interest charge.(2) Reduction of presumptive recapture amount and presumptive interest charge.(i) Amount of recapture.(ii) Interest charge.(3) Rules regarding multiple-party event exceptions to triggering events.(i) Scope.(ii) Original elector and prior subsequent electors not subject to recapture or interest charge.(iii) Recapture tax amount and required statement.(A) In general.(B) Recapture tax amount.(iv) Tax assessment and collection procedures.(A) In general.(B) Collection from original elector and prior subsequent electors; joint and several liability.(C) Allocation of partial payments of tax.(D) Refund.(v) Definition of income tax liability.(vi) Example.(4) Computation of taxable income in year of recapture.(i) Presumptive rule.(ii) Exception to presumptive rule.(5) Character and source of recapture income.(6) Reconstituted net operating loss.(i) General rule.(ii) Exception.(iii) Special rule for recapture following multiple-party event exception to a triggering event.(i) [Reserved](j) Termination of domestic use agreement and annual certifications.(1) Rebuttals, exceptions to triggering events, and recapture.(2) Termination of ability for foreign use.(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(i) Amount of recapture.(ii) Interest charge.(2) Reduction of presumptive recapture amount and presumptive interest charge.(i) Amount of recapture.(ii) Interest charge.(3) Rules regarding multiple-party event exceptions to triggering events.(i) Scope.(ii) Original elector and prior subsequent electors not subject to recapture or interest charge.(iii) Recapture tax amount and required statement.(A) In general.(B) Recapture tax amount.(iv) Tax assessment and collection procedures.(A) In general.(B) Collection from original elector and prior subsequent electors; joint and several liability.(C) Allocation of partial payments of tax.(D) Refund.(v) Definition of income tax liability.(vi) Example.(4) Computation of taxable income in year of recapture.(i) Presumptive rule.(ii) Exception to presumptive rule.(5) Character and source of recapture income.(6) Reconstituted net operating loss.(i) General rule.(ii) Exception.(iii) Special rule for recapture following multiple-party event exception to a triggering event.(i) [Reserved](j) Termination of domestic use agreement and annual certifications.(1) Rebuttals, exceptions to triggering events, and recapture.(2) Termination of ability for foreign use.(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(A) In general.(B) Recapture tax amount.(iv) Tax assessment and collection procedures.(A) In general.(B) Collection from original elector and prior subsequent electors; joint and several liability.(C) Allocation of partial payments of tax.(D) Refund.(v) Definition of income tax liability.(vi) Example.(4) Computation of taxable income in year of recapture.(i) Presumptive rule.(ii) Exception to presumptive rule.(5) Character and source of recapture income.(6) Reconstituted net operating loss.(i) General rule.(ii) Exception.(iii) Special rule for recapture following multiple-party event exception to a triggering event.(i) [Reserved](j) Termination of domestic use agreement and annual certifications.(1) Rebuttals, exceptions to triggering events, and recapture.(2) Termination of ability for foreign use.(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(A) In general.(B) Recapture tax amount.(iv) Tax assessment and collection procedures.(A) In general.(B) Collection from original elector and prior subsequent electors; joint and several liability.(C) Allocation of partial payments of tax.(D) Refund.(v) Definition of income tax liability.(vi) Example.(4) Computation of taxable income in year of recapture.(i) Presumptive rule.(ii) Exception to presumptive rule.(5) Character and source of recapture income.(6) Reconstituted net operating loss.(i) General rule.(ii) Exception.(iii) Special rule for recapture following multiple-party event exception to a triggering event.(i) [Reserved](j) Termination of domestic use agreement and annual certifications.(1) Rebuttals, exceptions to triggering events, and recapture.(2) Termination of ability for foreign use.(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(i) Presumptive rule.(ii) Exception to presumptive rule.(5) Character and source of recapture income.(6) Reconstituted net operating loss.(i) General rule.(ii) Exception.(iii) Special rule for recapture following multiple-party event exception to a triggering event.(i) [Reserved](j) Termination of domestic use agreement and annual certifications.(1) Rebuttals, exceptions to triggering events, and recapture.(2) Termination of ability for foreign use.(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(i) Presumptive rule.(ii) Exception to presumptive rule.(5) Character and source of recapture income.(6) Reconstituted net operating loss.(i) General rule.(ii) Exception.(iii) Special rule for recapture following multiple-party event exception to a triggering event.(i) [Reserved](j) Termination of domestic use agreement and annual certifications.(1) Rebuttals, exceptions to triggering events, and recapture.(2) Termination of ability for foreign use.(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(i) Presumptive rule.(ii) Exception to presumptive rule.(5) Character and source of recapture income.(6) Reconstituted net operating loss.(i) General rule.(ii) Exception.(iii) Special rule for recapture following multiple-party event exception to a triggering event.(i) [Reserved](j) Termination of domestic use agreement and annual certifications.(1) Rebuttals, exceptions to triggering events, and recapture.(2) Termination of ability for foreign use.(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(1) Rebuttals, exceptions to triggering events, and recapture.(2) Termination of ability for foreign use.(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(i) In general.(ii) Statement.(3) Agreements filed in connection with stand-alone exception.
(a) In general.(b) Presumed facts for examples.(c) Examples.
(a) General rule.(b) Special rules.(1) Reduction of term of agreements filed under Secs. 1.1503-2A(c)(3), 1.1503-2A(d)(3), 1.1503-2(g)(2)(i), or 1.1503-2T(g)(2)(i).(2) Reduction of term of agreements filed under Secs. 1.1503-2(g)(2)(iv)(B)(2)(i) (1992), 1.1503-2(g)(2)(iv)(B)(3)(i), or Rev. Proc. 2000-42.(3) Relief for untimely filings.(i) General rule.(ii) Closing agreements.(iii) Pending requests for relief.(4) Multiple-party event exception to triggering events.(5) Basis adjustment rules. [T.D. 9315, 72 FR 12914, Mar. 19, 2007; 72 FR 20424, Apr. 23, 2007] Sec. 1.1503(d)-1 Definitions and special rules for filings undersection 1503(d).
(1) Reduction of term of agreements filed under Secs. 1.1503-2A(c)(3), 1.1503-2A(d)(3), 1.1503-2(g)(2)(i), or 1.1503-2T(g)(2)(i).(2) Reduction of term of agreements filed under Secs. 1.1503-2(g)(2)(iv)(B)(2)(i) (1992), 1.1503-2(g)(2)(iv)(B)(3)(i), or Rev. Proc. 2000-42.(3) Relief for untimely filings.(i) General rule.(ii) Closing agreements.(iii) Pending requests for relief.(4) Multiple-party event exception to triggering events.(5) Basis adjustment rules. [T.D. 9315, 72 FR 12914, Mar. 19, 2007; 72 FR 20424, Apr. 23, 2007] Sec. 1.1503(d)-1 Definitions and special rules for filings undersection 1503(d).
(i), or 1.1503-2T(g)(2)(i).(2) Reduction of term of agreements filed under Secs. 1.1503-2(g)(2)(iv)(B)(2)(i) (1992), 1.1503-2(g)(2)(iv)(B)(3)(i), or Rev. Proc. 2000-42.(3) Relief for untimely filings.(i) General rule.(ii) Closing agreements.(iii) Pending requests for relief.(4) Multiple-party event exception to triggering events.(5) Basis adjustment rules. [T.D. 9315, 72 FR 12914, Mar. 19, 2007; 72 FR 20424, Apr. 23, 2007] Sec. 1.1503(d)-1 Definitions and special rules for filings undersection 1503(d).
(a) In general. This section and Secs. 1.1503(d)-2 through 1.1503(d)-8 provide rules concerning the determination and use of dual consolidated losses pursuant to section 1503(d). Paragraph (b) of this section provides definitions that apply for purposes of this section and Secs. 1.1503(d)-2 through 1.1503(d)-8. Paragraph (c) of this section provides a reasonable cause exception and a signature requirement for filings.
(b) Definitions. The following definitions apply for purposes of this section and Secs. 1.1503(d)-2 through 1.1503(d)-8:
(1) Domestic corporation means an entity classified as a domestic corporation under section 7701(a)(3) and (4) or otherwise treated as a domestic corporation by the Internal Revenue Code, including, but not limited to, sections 269B, 953(d), 1504(d), and 7874. However, solely for purposes of section 1503(d), the term domestic corporation shall not include a regulated investment company as defined in section 851, a real estate investment trust as defined in section 856, or an S corporation as defined in section 1361.
(2) Dual resident corporation means--
(i) A domestic corporation that is subject to an income tax of a foreign country on its worldwide income or on a residence basis. A corporation is taxed on a residence basis if it is taxed as a resident under the laws of the foreign country; and
(ii) A foreign insurance company that makes an election to be treated as a domestic corporation pursuant to section 953(d) and is treated as a member of an affiliated group for purposes of chapter 6, even if such company is not subject to an income tax of a foreign country on its worldwide income or on a residence basis. See section 953(d)(3).
(3) Hybrid entity means an entity that is not taxable as an association for Federal tax purposes, but is subject to an income tax of a foreign country as a corporation (or otherwise at the entity level) either on its worldwide income or on a residence basis.
(4) Separate unit--(i) In general. The term separate unit means either of the following that is carried on or owned, as applicable, directly or indirectly, by a domestic corporation (including a dual resident corporation):
(i) In general. The term separate unit means either of the following that is carried on or owned, as applicable, directly or indirectly, by a domestic corporation (including a dual resident corporation):
(A) Except to the extent provided in paragraph (b)(4)(iii) of this section, a business operation outside the United States that, if carried on by a U.S. person, would constitute a foreign branch as defined in Sec. 1.367(a)-6T(g)(1) (foreign branch separate unit).
(B) An interest in a hybrid entity (hybrid entity separate unit).
(ii) Separate unit combination rule. Except as otherwise provided in this paragraph, if a domestic owner, or two or more domestic owners that are members of the same consolidated group, have two or more separate units (individual separate units), then all such individual separate units that are located (in the case of a foreign branch separate unit) or subject to an income tax either on their worldwide income or on a residence basis (in the case of a hybrid entity an interest in which is a hybrid entity separate unit) in the same foreign country shall be treated as one separate unit (combined separate unit). See Sec. 1.1503(d)-7(c) Example 1. Separate units of a foreign insurance company that is a dual resident corporation under paragraph (b)(2)(ii) of this section, however, shall not be combined with separate units of any other domestic corporation. Except as specifically provided in this section or Secs. 1.1503(d)-2 through 1.1503(d)-8, any individual separate unit composing a combined separate unit loses its character as an individual separate unit.
(iii) Business operations that do not constitute a permanent establishment. A business operation carried on by a domestic corporation that is not a dual resident corporation shall not constitute a foreign branch separate unit, provided the business operation:
(A) Is not carried on indirectly through a hybrid entity or a transparent entity; and
(B) Is conducted in a country with which the United States has entered into an income tax convention and is not treated as a permanent establishment pursuant to that convention, or is not otherwise subject to tax on a net basis under that convention. See Sec. 1.1503(d)-7(c) Example 2.
(iv) Foreign branch separate units held by dual resident corporations or hybrid entities in the same foreign country. A foreign branch separate unit may be owned by a dual resident corporation, or through a hybrid entity (an interest in which is a separate unit), even where the foreign branch is located in the same foreign country that subjects such dual resident corporation or hybrid entity to tax on its worldwide income or on a residence basis. But see the rule under paragraph (b)(4)(ii) of this section that combines certain same-country hybrid entity separate units and foreign branch separate units. See also Sec. 1.1503(d)-7(c) Example 1.
(5) Dual consolidated loss means--
(i) In the case of a dual resident corporation, and except to the extent provided in Sec. 1.1503(d)-5(b), the net operating loss (as defined in section 172(c) and the related regulations) incurred in a year in which the corporation is a dual resident corporation; and
(ii) In the case of a separate unit, the net loss attributable to the separate unit under Sec. 1.1503(d)-5(c) through (e).
(6) Subject to tax. For purposes of determining whether a domestic corporation or another entity is subject to an income tax of a foreign country on its income, the fact that it has no actual income tax liability to the foreign country for a particular taxable year shall not be taken into account.
(7) Foreign country includes any possession of the United States.
(8) Consolidated group has the meaning provided in Sec. 1.1502-1(h).
(9) Domestic owner means--
(i) A domestic corporation (including a dual resident corporation) that has one or more separate units or interests in a transparent entity; and
(ii) In the case of a combined separate unit, a domestic corporation (including a dual resident corporation) that has one or more individual separate units that are treated as part of the combined separate unit under paragraph (b)(4)(ii) of this section.
(10) Affiliated dual resident corporation and affiliated domestic owner mean a dual resident corporation and a domestic owner, respectively, that is a member of a consolidated group.
(11) Unaffiliated dual resident corporation, unaffiliated domestic corporation, and unaffiliated domestic owner mean a dual resident corporation, domestic corporation, and domestic owner, respectively, that is not a member of a consolidated group.
(12) Domestic affiliate means--
(i) A member of an affiliated group, without regard to the exceptions contained in section 1504(b) (other than section 1504(b)(3)) relating to includible corporations;
(ii) A domestic owner;
(iii) A separate unit; or
(iv) An interest in a transparent entity, as defined in paragraph (b)(16) of this section.
(13) Domestic use. See Sec. 1.1503(d)-2.
(14) Foreign use. See Sec. 1.1503(d)-3.
(15) Grantor trust means a trust, any portion of which is treated as being owned by the grantor or another person under subpart E of subchapter J of this chapter.
(16) Transparent entity--(i) In general. The term transparent entity means an entity described in this paragraph (b)(16) where all or a portion of its interests are owned, directly or indirectly, by a domestic corporation. An entity is described in this paragraph (b)(16) if the entity--
(i) In general. The term transparent entity means an entity described in this paragraph (b)(16) where all or a portion of its interests are owned, directly or indirectly, by a domestic corporation. An entity is described in this paragraph (b)(16) if the entity--
(A) Is not taxable as an association for Federal tax purposes;
(B) Is not subject to income tax in a foreign country as a corporation (or otherwise at the entity level) either on its worldwide income or on a residence basis; and
(C) Is not a pass-through entity under the laws of the applicable foreign country. For purposes of applying the preceding sentence, the applicable foreign country is the foreign country in which the relevant foreign branch separate unit is located, or the foreign country that subjects the relevant hybrid entity (an interest in which is a separate unit) or dual resident corporation to an income tax either on its worldwide income or on a residence basis.
(ii) Example. A U.S. limited liability company (LLC) does not elect to be taxed as an association for Federal tax purposes and is not subject to income tax in a foreign country as a corporation (or otherwise at the entity level) either on its worldwide income or on a residence basis. The LLC is owned by a hybrid entity (an interest in which is a separate unit) that is the relevant hybrid entity. Provided the LLC is not treated as a pass-through entity by the applicable foreign country that subjects the relevant hybrid entity to an income tax either on its worldwide income or on a residence basis, the LLC would qualify as a transparent entity. See also Sec. 1.1503(d)-7(c) Example 26.
(17) Disregarded entity means an entity that is disregarded as an entity separate from its owner, under Secs. 301.7701-1 through 301.7701-3 of this chapter, for Federal tax purposes.
(18) Partnership means an entity that is classified as a partnership, under Secs. 301.7701-1 through 301.7701-3 of this chapter, for Federal tax purposes.
(19) Indirectly, when used in reference to ownership, means ownership through a partnership, a disregarded entity, or a grantor trust, regardless of whether the partnership, disregarded entity, or grantor trust is a U.S. person.
(20) Certification period means the period of time up to and including the fifth taxable year following the year in which the dual consolidated loss that is the subject of a domestic use agreement (as described in Sec. 1.1503(d)-6(d)(1)) was incurred.
(c) Special rules for filings under section 1503(d)--(1) Reasonable cause exception. A person that is permitted or required to file an election, agreement, statement, rebuttal, computation, or other information pursuant to section 1503(d) and these regulations, that fails to make such filing in a timely manner, shall be considered to have satisfied the timeliness requirement with respect to such filing if the person is able to demonstrate, to the Area Director, Field Examination, Small Business/Self Employed or the Director of Field Operations, Large and Mid-Size Business (Director) having jurisdiction of the taxpayer's tax return for the taxable year, that such failure was due to reasonable cause and not willful neglect. In determining whether the taxpayer has reasonable cause, the Director shall consider whether the taxpayer acted reasonably and in good faith. In general, the taxpayer must demonstrate that it exercised ordinary care and prudence in meeting its tax obligations but nonetheless did not comply with the prescribed duty within the prescribed time. Whether the taxpayer acted reasonably and in good faith will be determined after considering all the facts and circumstances. The Director shall notify the person in writing within 120 days of the filing if it is determined that the failure to comply was not due to reasonable cause, or if additional time will be needed to make such determination. For this purpose, the 120-day period shall begin on the date the taxpayer is notified in writing that the request has been received and assigned for review. If, once such period commences, the taxpayer is not again notified within 120 days, then the taxpayer shall be deemed to have established reasonable cause. The reasonable cause exception of this paragraph (c) shall only apply if, once the person becomes aware of its failure to file the election, agreement, statement, rebuttal, computation or other information in a timely manner, the person complies with the requirements of paragraph (c)(2) of this section.
(1) Reasonable cause exception. A person that is permitted or required to file an election, agreement, statement, rebuttal, computation, or other information pursuant to section 1503(d) and these regulations, that fails to make such filing in a timely manner, shall be considered to have satisfied the timeliness requirement with respect to such filing if the person is able to demonstrate, to the Area Director, Field Examination, Small Business/Self Employed or the Director of Field Operations, Large and Mid-Size Business (Director) having jurisdiction of the taxpayer's tax return for the taxable year, that such failure was due to reasonable cause and not willful neglect. In determining whether the taxpayer has reasonable cause, the Director shall consider whether the taxpayer acted reasonably and in good faith. In general, the taxpayer must demonstrate that it exercised ordinary care and prudence in meeting its tax obligations but nonetheless did not comply with the prescribed duty within the prescribed time. Whether the taxpayer acted reasonably and in good faith will be determined after considering all the facts and circumstances. The Director shall notify the person in writing within 120 days of the filing if it is determined that the failure to comply was not due to reasonable cause, or if additional time will be needed to make such determination. For this purpose, the 120-day period shall begin on the date the taxpayer is notified in writing that the request has been received and assigned for review. If, once such period commences, the taxpayer is not again notified within 120 days, then the taxpayer shall be deemed to have established reasonable cause. The reasonable cause exception of this paragraph (c) shall only apply if, once the person becomes aware of its failure to file the election, agreement, statement, rebuttal, computation or other information in a timely manner, the person complies with the requirements of paragraph (c)(2) of this section.
(2) Requirements for reasonable cause relief--(i) Time of submission. Requests for reasonable cause relief will only be considered if once the person becomes aware of the failure to file the election, agreement, statement, rebuttal, computation or other information, the person attaches all the documents that should have been filed, as well as a written statement setting forth the reasons for the failure to timely comply, to an amended return that amends the return to which the documents should have been attached pursuant to the rules of section 1503(d) and these regulations.
(i) Time of submission. Requests for reasonable cause relief will only be considered if once the person becomes aware of the failure to file the election, agreement, statement, rebuttal, computation or other information, the person attaches all the documents that should have been filed, as well as a written statement setting forth the reasons for the failure to timely comply, to an amended return that amends the return to which the documents should have been attached pursuant to the rules of section 1503(d) and these regulations.
(ii) Notice requirement. In addition to the requirements of paragraph (c)(2)(i) of this section, the taxpayer must provide a copy of the amended return and all required attachments to the Director as follows:
(A) If the taxpayer is under examination for any taxable year when the taxpayer requests relief, the taxpayer must provide a copy of the amended return and attachments to the personnel conducting the examination.
(B) If the taxpayer is not under examination for any taxable year when the taxpayer requests relief, the taxpayer must provide a copy of the amended return and attachments to the Director having jurisdiction of the taxpayer's return.
(3) Signature requirement. When an election, agreement, statement, rebuttal, computation, or other information is required pursuant to section 1503(d) and these regulations to be attached to and filed by the due date (including extensions) of a U.S. tax return and signed under penalties of perjury by the person who signs the return, the attachment and filing of an unsigned copy is considered to satisfy such requirement, provided the taxpayer retains the original in its records in the manner specified by Sec. 1.6001-1(e). [T.D. 9315, 72 FR 12914, Mar. 19, 2007] Sec. 1.1503(d)-2 Domestic use.
A domestic use of a dual consolidated loss shall be deemed to occur when the dual consolidated loss is made available to offset, directly or indirectly, the income of a domestic affiliate (other than the dual resident corporation or separate unit that, in each case, incurred the dual consolidated loss) in the taxable year in which the dual consolidated loss is recognized, or in any other taxable year, regardless of whether the dual consolidated loss offsets income under the income tax laws of a foreign country and regardless of whether any income that the dual consolidated loss may offset in the foreign country is, has been, or will be subject to tax in the United States. A domestic use shall be deemed to occur in the year the dual consolidated loss is included in the computation of the taxable income of a consolidated group, unaffiliated dual resident corporation, or an unaffiliated domestic owner, as applicable, even if no tax benefit results from such inclusion in that year. See Sec. 1.1503(d)-7(c) Examples 2 through 4. [T.D. 9315, 72 FR 12914, Mar. 19, 2007] Sec. 1.1503(d)-3 Foreign use.
(a) Foreign use--(1) In general. Except as provided in paragraph (c) of this section, a foreign use of a dual consolidated loss shall be deemed to occur when any portion of a deduction or loss taken into account in computing the dual consolidated loss is made available under the income tax laws of a foreign country to offset or reduce, directly or indirectly, any item that is recognized as income or gain under such laws and that is, or would be, considered under U.S. tax principles to be an item of--
(1) In general. Except as provided in paragraph (c) of this section, a foreign use of a dual consolidated loss shall be deemed to occur when any portion of a deduction or loss taken into account in computing the dual consolidated loss is made available under the income tax laws of a foreign country to offset or reduce, directly or indirectly, any item that is recognized as income or gain under such laws and that is, or would be, considered under U.S. tax principles to be an item of--
(i) A foreign corporation as defined in section 7701(a)(3) and (a)(5); or
(ii) A direct or indirect owner of an interest in a hybrid entity, provided such interest is not a separate unit. See Sec. 1.1503(d)-7(c) Examples 5 through 10 and 37.
(2) Indirect use--(i) General rule. Except to the extent provided in paragraph (a)(2)(ii) of this section, an item of deduction or loss shall be deemed to be made available indirectly if--
(i) General rule. Except to the extent provided in paragraph (a)(2)(ii) of this section, an item of deduction or loss shall be deemed to be made available indirectly if--
(A) One or more items are taken into account as deductions or losses for foreign tax purposes, but do not give rise to corresponding items of income or gain for U.S. tax purposes; and
(B) The item or items described in paragraph (a)(2)(i)(A) of this section have the effect of making an item of deduction or loss composing the dual consolidated loss available for a foreign use as described in paragraph (a)(1) of this section.
(ii) Exception. The general rule provided in paragraph (a)(2)(i) of this section shall not apply if the consolidated group, unaffiliated domestic owner, or unaffiliated dual resident corporation demonstrates, to the satisfaction of the Commissioner, that the item or items described in paragraph (a)(2)(i)(A) of this section that gave rise to the indirect foreign use--
(A) Were not incurred, or taken into account, with a principal purpose of avoiding the provisions of section 1503(d). For purposes of this paragraph (a)(2)(ii), an item incurred or taken into account as interest for foreign tax purposes, but disregarded for U.S. tax purposes, shall be deemed to have been incurred, or taken into account, with a principal purpose of avoiding the provisions of section 1503(d). Similarly, for purposes of this paragraph (a)(2)(ii), an item incurred or taken into account as the result of an instrument that is treated as debt for foreign tax purposes and equity for U.S. tax purposes, shall be deemed to have been incurred, or taken into account, with a principal purpose of avoiding the provisions of section 1503(d); and
(B) Were incurred, or taken into account, in the ordinary course of the dual resident corporation's or separate unit's trade or business.
(iii) Examples. See Sec. 1.1503(d)-7(c) Examples 6 through 8.
(3) Deemed use. See paragraph (e) of this section for a deemed foreign use pursuant to the mirror legislation rule.
(b) Available for use. A foreign use shall be deemed to occur in the year in which any portion of a deduction or loss taken into account in computing the dual consolidated loss is made available for an offset described in paragraph (a) of this section, regardless of whether it actually offsets or reduces any items of income or gain under the income tax laws of the foreign country in such year, and regardless of whether any of the items that may be so offset or reduced are regarded as income under U.S. tax principles.
(c) Exceptions--(1) In general. Paragraphs (c)(2) through (9) of this section provide exceptions to the general definition of foreign use set forth in paragraphs (a) and (b) of this section. These exceptions only apply to a foreign use that occurs solely as a result of the conditions or circumstances described therein, and do not apply if a foreign use occurs in any other case or by any other means. For example, the exception under paragraph (c)(4) of this section (regarding certain interests in partnerships or grantor trusts) shall not apply where the item of deduction or loss is made available through a foreign consolidation regime (or similar method). In addition, these exceptions do not apply when attempting to demonstrate that no foreign use of a dual consolidated loss can occur in any other year by any means under Sec. 1.1503(d)-6(c), (e)(2)(i), or (j)(2). But see Sec. 1.1503(d)-6(e)(2)(ii), which takes into account the exception under paragraph (c)(7) of this section for purposes of rebutting certain asset transfers.
(1) In general. Paragraphs (c)(2) through (9) of this section provide exceptions to the general definition of foreign use set forth in paragraphs (a) and (b) of this section. These exceptions only apply to a foreign use that occurs solely as a result of the conditions or circumstances described therein, and do not apply if a foreign use occurs in any other case or by any other means. For example, the exception under paragraph (c)(4) of this section (regarding certain interests in partnerships or grantor trusts) shall not apply where the item of deduction or loss is made available through a foreign consolidation regime (or similar method). In addition, these exceptions do not apply when attempting to demonstrate that no foreign use of a dual consolidated loss can occur in any other year by any means under Sec. 1.1503(d)-6(c), (e)(2)(i), or (j)(2). But see Sec. 1.1503(d)-6(e)(2)(ii), which takes into account the exception under paragraph (c)(7) of this section for purposes of rebutting certain asset transfers.
(2) Election or merger required to enable foreign use. Where the laws of a foreign country provide an election that would enable a foreign use, a foreign use shall be considered to occur only if the election is made. Similarly, where the laws of a foreign country would enable a foreign use through a sale, merger, or similar transaction, a foreign use shall be considered to occur only if the sale, merger, or similar transaction occurs.
(3) Presumed use where no foreign country rule for determining use. This paragraph (c)(3) applies if the losses or deductions composing the dual consolidated loss are made available under the laws of a foreign country both to offset income that would constitute a foreign use and to offset income that would not constitute a foreign use, and the laws of the foreign country do not provide applicable rules for determining which income is offset by the losses or deductions. In such a case, the losses or deductions shall be deemed to be made available to offset the income that does not constitute a foreign use, to the extent of such income, before being considered to be made available to offset the income that does constitute a foreign use. See Sec. 1.1503(d)-7(c) Example 11.
(4) Certain interests in partnerships or grantor trusts--(i) General rule. Except to the extent provided in paragraph (c)(4)(iii) of this section, this paragraph (c)(4)(i) applies to a dual consolidated loss attributable to an interest in a hybrid entity partnership or a hybrid entity grantor trust, or to a separate unit owned indirectly through a partnership or grantor trust. In such a case, a foreign use will not be considered to occur if the foreign use is solely the result of another person's ownership of an interest in the partnership or grantor trust, as applicable, and the allocation or carry forward of an item of deduction or loss composing such dual consolidated loss as a result of such ownership. See Sec. 1.1503(d)-7(c) Example 13.
(i) General rule. Except to the extent provided in paragraph (c)(4)(iii) of this section, this paragraph (c)(4)(i) applies to a dual consolidated loss attributable to an interest in a hybrid entity partnership or a hybrid entity grantor trust, or to a separate unit owned indirectly through a partnership or grantor trust. In such a case, a foreign use will not be considered to occur if the foreign use is solely the result of another person's ownership of an interest in the partnership or grantor trust, as applicable, and the allocation or carry forward of an item of deduction or loss composing such dual consolidated loss as a result of such ownership. See Sec. 1.1503(d)-7(c) Example 13.
(ii) Combined separate unit. This paragraph applies to a dual consolidated loss attributable to a combined separate unit that includes an individual separate unit to which paragraph (c)(4)(i) of this section would apply, but for the application of the separate unit combination rule provided under Sec. 1.1503(d)-1(b)(4)(ii). In such a case, paragraph (c)(4)(i) of this section shall apply to the portion of the dual consolidated loss of such combined separate unit that is attributable, as provided under Sec. 1.1503(d)-5(c) through (e), to the individual separate unit (otherwise described in paragraph (c)(4)(i) of this section) that is a component of the combined separate unit. See Sec. 1.1503(d)-7(c) Example 14.
(iii) Reduction in interest. The exception under paragraph (c)(4)(i) of this section shall not apply if, at any time following the year in which the dual consolidated loss is incurred, there is more than a de minimis reduction in the domestic owner's percentage interest in the partnership or grantor trust, as applicable, as described in paragraph (c)(5) of this section. In such a case, a foreign use shall be deemed to occur at the time the reduction in interest exceeds the de minimis amount. See Sec. 1.1503(d)-7(c) Example 13.
(5) De minimis reduction of an interest in a separate unit--(i) General rule. This paragraph applies to a de minimis reduction of a domestic owner's interest in a separate unit (including an interest described in paragraph (c)(4)(i) of this section). Except to the extent provided in paragraph (c)(5)(ii) of this section, no foreign use shall be considered to occur with respect to a dual consolidated loss as a result of an item of deduction or loss composing such dual consolidated loss being made available solely as a result of a reduction in the domestic owner's interest in the separate unit, as provided under paragraph (c)(5)(iii) of this section. See Sec. 1.1503(d)-7(c) Example 5.
(i) General rule. This paragraph applies to a de minimis reduction of a domestic owner's interest in a separate unit (including an interest described in paragraph (c)(4)(i) of this section). Except to the extent provided in paragraph (c)(5)(ii) of this section, no foreign use shall be considered to occur with respect to a dual consolidated loss as a result of an item of deduction or loss composing such dual consolidated loss being made available solely as a result of a reduction in the domestic owner's interest in the separate unit, as provided under paragraph (c)(5)(iii) of this section. See Sec. 1.1503(d)-7(c) Example 5.
(ii) Limitations. The exception provided in paragraph (c)(5)(i) of this section shall not apply if--
(A) During any 12-month period the domestic owner's percentage interest in the separate unit is reduced by 10 percent or more, as determined by reference to the domestic owner's interest at the beginning of the 12-month period; or
(B) At any time the domestic owner's percentage interest in the separate unit is reduced by 30 percent or more, as determined by reference to the domestic owner's interest at the end of the taxable year in which the dual consolidated loss was incurred.
(iii) Reduction in interest. The following rules apply for purposes of paragraphs (c)(4) and (5) of this section. A reduction of a domestic owner's interest in a separate unit shall include a reduction resulting from another person acquiring through sale, exchange, contribution, or other means, an interest in the foreign branch or hybrid entity, as applicable. A reduction may occur either directly or indirectly, including through an interest in a partnership, a disregarded entity, or a grantor trust through which a separate unit is carried on or owned. In the case of an interest in a hybrid entity partnership or a separate unit all or a portion of which is carried on or owned through a partnership, an interest in such separate unit (or portion of such separate unit) is determined by reference to the owner's interest in the profits or the capital in the separate unit. In the case of an interest in a hybrid entity grantor trust or a separate unit all or a portion of which is carried on or owned through a grantor trust, an interest in such separate unit (or portion of such separate unit) is determined by reference to the domestic owner's share of the assets and liabilities of the separate unit.
(iv) Examples and coordination with exceptions to other triggering events. See Sec. 1.1503(d)-7(c) Examples 5, 13, and 14. See also Sec. 1.1503(d)-6(f)(3) and (f)(5) for rules that coordinate the de minimis exception to foreign use with exceptions to other triggering events described in Sec. 1.1503(d)-6(e)(1), and provide an exception to foreign use following certain compulsory transfers.
(6) Certain asset basis carryovers. No foreign use shall be considered to occur with respect to a dual consolidated loss solely as a result of items of deduction or loss composing such dual consolidated loss being made available as a result of the transfer of assets of a dual resident corporation or separate unit, provided--
(i) Such items of loss and deduction are made available solely as a result of the basis of the transferred assets being determined, under foreign law, in whole or in part by reference to the basis of the assets in the hands of the dual resident corporation or separate unit;
(ii) The aggregate adjusted basis, as determined under U.S. tax principles, of all the assets so transferred during any 12-month period is less than 10 percent of the aggregate adjusted basis, as determined under U.S. tax principles, of all the dual resident corporation's or separate unit's assets, determined by reference to the assets held at the beginning of such 12-month period; and
(iii) The aggregate adjusted basis, as determined under U.S. tax principles, of all the assets so transferred at any time is less than 30 percent of the aggregate adjusted basis, as determined under U.S. tax principles, of all the dual resident corporation's or separate unit's assets, determined by reference to the assets held at the end of the taxable year in which the dual consolidated loss was generated. See Sec. 1.1503(d)-7(c) Example 15.
(7) Assumption of certain liabilities--(i) In general. Except to the extent provided in paragraph (c)(7)(ii) of this section, no foreign use shall be considered to occur with respect to any dual consolidated loss solely as a result of an item of deduction or loss composing such dual consolidated loss being made available following the assumption of liabilities of a dual resident corporation or separate unit, provided such availability arises solely as the result of an item of deduction or loss incurred with respect to, or as a result of, such liabilities. See Sec. 1.1503(d)-7(c) Example 16.
(i) In general. Except to the extent provided in paragraph (c)(7)(ii) of this section, no foreign use shall be considered to occur with respect to any dual consolidated loss solely as a result of an item of deduction or loss composing such dual consolidated loss being made available following the assumption of liabilities of a dual resident corporation or separate unit, provided such availability arises solely as the result of an item of deduction or loss incurred with respect to, or as a result of, such liabilities. See Sec. 1.1503(d)-7(c) Example 16.
(ii) Ordinary course limitation. Paragraph (c)(7)(i) of this section shall apply only to the extent the liabilities assumed were incurred in the ordinary course of the dual resident corporation's, or separate unit's, trade or business. For purposes of this paragraph, liabilities incurred in the ordinary course of a trade or business shall include debt incurred to finance the trade or business of the dual resident corporation or separate unit.
(8) Multiple-party events. This paragraph applies to a transaction that qualifies for the triggering event exception described in Sec. 1.1503(d)-6(f)(2)(i)(B) where the acquiring unaffiliated domestic corporation or consolidated group owns, directly or indirectly, more than 90 percent, but less than 100 percent, of the transferred assets or interests immediately after the transaction. In such a case, no foreign use shall be considered to occur with respect to a dual consolidated loss of the dual resident corporation or separate unit whose assets or interests were acquired, solely as a result of the less than 10 percent direct or indirect ownership of the acquired assets or interests by persons other than the acquiring unaffiliated domestic corporation or consolidated group, as applicable, immediately after the transaction. See Sec. 1.1503(d)-7(c) Example 37.
(9) Additional guidance. The Commissioner may provide, by guidance published in the Internal Revenue Bulletin, that certain events or transactions do or do not result in a foreign use. Such guidance may also modify the triggering events and rebuttals described in Sec. 1.1503(d)-6(e), and the exceptions thereto under Sec. 1.1503(d)-6(f), as appropriate.
(d) Ordering rules for determining the foreign use of losses. If the laws of a foreign country provide for the foreign use of losses of a dual resident corporation or a separate unit, but do not provide applicable rules for determining the order in which such losses are used in a taxable year, the following rules shall apply:
(1) Any net loss, or net income, that the dual resident corporation or separate unit has in a taxable year shall first be used to offset net income, or loss, recognized by its affiliates in the same taxable year before any carry over of its losses is considered to be used to offset any income from the taxable year.
(2) If under the laws of the foreign country the dual resident corporation or separate unit has losses from different taxable years, it shall be deemed to use first the losses which would not constitute a triggering event that would result in the recapture of a dual consolidated loss pursuant to Sec. 1.1503(d)-6(h). Thereafter, it shall be deemed to use first the losses from the most recent taxable year from which a loss may be carried forward or back for foreign law purposes.
(3) Where different losses or deductions (for example, capital losses and ordinary losses) of a dual resident corporation or separate unit incurred in the same taxable year are available for foreign use, the different losses shall be deemed to be used on a pro rata basis. See Sec. 1.1503(d)-7(c) Example 12.
(e) Mirror legislation rule--(1) In general. Except as provided in paragraph (e)(2) of this section and Sec. 1.1503(d)-6(b) (relating to agreements entered into between the United States and a foreign country), a foreign use shall be deemed to occur if the income tax laws of a foreign country would deny any opportunity for the foreign use of the dual consolidated loss in the year in which the dual consolidated loss is incurred (mirror legislation), determined by assuming that such foreign country had recognized the dual consolidated loss in such year, for any of the following reasons:
(1) In general. Except as provided in paragraph (e)(2) of this section and Sec. 1.1503(d)-6(b) (relating to agreements entered into between the United States and a foreign country), a foreign use shall be deemed to occur if the income tax laws of a foreign country would deny any opportunity for the foreign use of the dual consolidated loss in the year in which the dual consolidated loss is incurred (mirror legislation), determined by assuming that such foreign country had recognized the dual consolidated loss in such year, for any of the following reasons:
(i) The dual resident corporation or separate unit that incurred the loss is subject to income taxation by another country (for example, the United States) on its worldwide income or on a residence basis.
(ii) The loss may be available to offset income (other than income of the dual resident corporation or separate unit) under the laws of another country (for example, the United States).
(iii) The deductibility of any portion of a deduction or loss taken into account in computing the dual consolidated loss depends on whether such amount is deductible under the laws of another country (for example, the United States). See Sec. 1.1503(d)-7(c) Examples 17 through 19.
(2) Stand-alone exception--(i) In general. This paragraph (e)(2) applies if, in the absence of the mirror legislation described in paragraph (e)(1) of this section, no item of deduction or loss composing the dual consolidated loss of such dual resident corporation or separate unit would otherwise be available for a foreign use in the taxable year in which such dual consolidated loss is incurred. This determination is made without regard to whether such availability is limited by election (or other similar procedure). However, for purposes of this paragraph (e)(2)(i), no item of deduction or loss composing the dual consolidated loss of a dual resident corporation or separate unit is considered to be made available for foreign use solely because the laws of a foreign country would enable a foreign use through a sale, merger, or similar transaction (provided no such sale, merger, or similar transaction actually occurs). In such a case, no foreign use shall be considered to occur pursuant to paragraph (e)(1) of this section with respect to the dual consolidated loss, provided the requirements of paragraph (e)(2)(ii) of this section are satisfied. See Sec. 1.1503(d)-7(c) Examples 17 through 19.
(i) In general. This paragraph (e)(2) applies if, in the absence of the mirror legislation described in paragraph (e)(1) of this section, no item of deduction or loss composing the dual consolidated loss of such dual resident corporation or separate unit would otherwise be available for a foreign use in the taxable year in which such dual consolidated loss is incurred. This determination is made without regard to whether such availability is limited by election (or other similar procedure). However, for purposes of this paragraph (e)(2)(i), no item of deduction or loss composing the dual consolidated loss of a dual resident corporation or separate unit is considered to be made available for foreign use solely because the laws of a foreign country would enable a foreign use through a sale, merger, or similar transaction (provided no such sale, merger, or similar transaction actually occurs). In such a case, no foreign use shall be considered to occur pursuant to paragraph (e)(1) of this section with respect to the dual consolidated loss, provided the requirements of paragraph (e)(2)(ii) of this section are satisfied. See Sec. 1.1503(d)-7(c) Examples 17 through 19.
(ii) Stand-alone domestic use agreement. In order to qualify for the exception under paragraph (e)(2)(i) of this section, the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner, as the case may be, must enter into a domestic use agreement in accordance with the provisions of Sec. 1.1503(d)-6(d) and, in addition, must include the following items in such domestic use agreement:
(A) A statement that the document is also being submitted under the provisions of paragraph (e)(2) of this section.
(B) A certification that the conditions of paragraph (e)(2)(i) of this section are satisfied during the taxable year in which the dual consolidated loss is incurred.
(C) An agreement to include with each annual certification required under Sec. 1.1503(d)-6(g), a certification that the conditions described in paragraph (e)(2)(i) of this section are satisfied during the taxable year of each such certification.
(iii) Termination of stand-alone domestic use agreement. This paragraph (e)(2)(iii) applies to a consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner, as the case may be, that entered into a domestic use agreement pursuant to paragraph (e)(2)(ii) of this section, with respect to a dual consolidated loss, and which subsequently makes an election pursuant to Sec. 1.1503(d)-6(b) (relating to agreements entered into between the United States and a foreign country) with respect to such dual consolidated loss. In such a case, the dual consolidated loss shall be subject to the election under Sec. 1.1503(d)-6(b) (and any related agreements, representations and conditions), and the domestic use agreement entered into pursuant to paragraph (e)(2)(ii) of this section shall terminate and have no further effect. [T.D. 9315, 72 FR 12914, Mar. 19, 2007] Sec. 1.1503(d)-4 Domestic use limitation and related operating rules.
(a) Scope. This section prescribes rules that apply when the general limitation on the domestic use of a dual consolidated loss under paragraph (b) of this section applies. Thus, the rules of this section do not apply when an exception to the domestic use limitation applies (for example, as a result of a domestic use election under Sec. 1.1503(d)-6(d)). In general, when the domestic use limitation applies, the dual consolidated loss of a dual resident corporation or separate unit is subject to the separate return limitation year (SRLY) provisions of Sec. 1.1502-21(c), as modified under this section. Paragraph (c) of this section provides rules that determine the effect of a dual consolidated loss on a consolidated group, an unaffiliated dual resident corporation, or an unaffiliated domestic owner. Paragraph (d) of this section provides rules that eliminate dual consolidated losses following certain transactions or events. Paragraph (e) of this section contains provisions that prevent dual consolidated losses from offsetting tainted income. Finally, paragraph (f) of this section provides rules for computing foreign tax credits.
(b) Limitation on domestic use of a dual consolidated loss. Except as provided in Sec. 1.1503(d)-6, the domestic use of a dual consolidated loss is not permitted. See Sec. 1.1503(d)-2 for the definition of a domestic use. See also Sec. 1.1503(d)-7(c) Examples 2 through 4.
(c) Effect of a dual consolidated loss on a consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner. For any taxable year in which a dual resident corporation or separate unit has a dual consolidated loss that is subject to the domestic use limitation of paragraph (b) of this section, the following rules shall apply:
(1) Dual resident corporation. This paragraph (c)(1) applies to a dual consolidated loss of a dual resident corporation. The unaffiliated dual resident corporation, or consolidated group that includes the dual resident corporation, shall compute its taxable income (or loss), or consolidated taxable income (or loss), respectively, without taking into account those items of deduction and loss that compose the dual resident corporation's dual consolidated loss. For this purpose, the dual consolidated loss shall be treated as composed of a pro rata portion of each item of deduction and loss of the dual resident corporation taken into account in calculating the dual consolidated loss. The dual consolidated loss is subject to the limitations on its use contained in paragraph (c)(3) of this section and, subject to such limitations, may be carried over or back for use in other taxable years as a separate net operating loss carryover or carryback of the dual resident corporation arising in the year incurred. If the dual resident corporation owns a separate unit or an interest in a transparent entity, the limitations contained in paragraph (c)(3) of this section shall apply to the dual resident corporation as if the separate unit or interest in a transparent entity were a separate domestic corporation that filed a consolidated return with the unaffiliated dual resident corporation, or with the consolidated group of the affiliated dual resident corporation, as applicable.
(2) Separate unit. This paragraph (c)(2) applies to a dual consolidated loss that is attributable to a separate unit. The unaffiliated domestic owner of a separate unit, or the consolidated group of an affiliated domestic owner of a separate unit, shall compute its taxable income (or loss) or consolidated taxable income (or loss), respectively, without taking into account those items of deduction and loss that compose the separate unit's dual consolidated loss. For this purpose, the dual consolidated loss shall be treated as composed of a pro rata portion of each item of deduction and loss of the separate unit taken into account in calculating the dual consolidated loss. The dual consolidated loss is subject to the limitations contained in paragraph (c)(3) of this section as if the separate unit to which the dual consolidated loss is attributable were a separate domestic corporation that filed a consolidated return with its unaffiliated domestic owner or with the consolidated group of its affiliated domestic owner, as applicable. Subject to such limitations, the dual consolidated loss may be carried over or back for use in other taxable years as a separate net operating loss carryover or carryback of the separate unit arising in the year incurred. See Sec. 1.1503(d)-7(c) Examples 29 and 38.
(3) SRLY limitation. The dual consolidated loss shall be treated as a loss incurred by the dual resident corporation or separate unit in a separate return limitation year and shall be subject to all of the limitations of Sec. 1.1502-21(c) (SRLY limitation), subject to the following modifications--
(i) Notwithstanding Sec. 1.1502-1(f)(2)(i), the SRLY limitation is applied to any dual consolidated loss of a common parent that is a dual resident corporation, or any dual consolidated loss attributable to a separate unit of a common parent;
(ii) The SRLY limitation is applied without regard to Sec. 1.1502-21(c)(2) (SRLY subgroup limitation) and 1.1502-21(g) (overlap with section 382);
(iii) For purposes of calculating the general SRLY limitation under Sec. 1.1502-21(c)(1)(i), the calculation of aggregate consolidated taxable income shall only include items of income, gain, deduction, and loss generated--
(A) In the case of a hybrid entity separate unit, in years in which the hybrid entity (an interest in which is a separate unit) is taxed as a corporation (or otherwise at the entity level) either on its worldwide income or as a resident in the same foreign country in which it was so taxed during the year in which the dual consolidated loss was generated; and
(B) In the case of a foreign branch separate unit, in years in which the foreign branch qualified as a separate unit in the same foreign country in which it so qualified during the year in which the dual consolidated loss was generated.
(iv) For purposes of calculating the general SRLY limitation under Sec. 1.1502-21(c)(1)(i), the calculation of aggregate consolidated taxable income shall not include any amount included in income pursuant to Sec. 1.1503(d)-6(h) (relating to the recapture of a dual consolidated loss).
(4) Items of a dual consolidated loss used in other taxable years. A pro rata portion of each item of deduction or loss that composes the dual consolidated loss shall be considered to be used when the dual consolidated loss is used in other taxable years. See Sec. 1.1503(d)-7(c) Examples 29 and 38.
(5) Reconstituted net operating losses. For additional rules and limitations that apply to reconstituted net operating losses, see Sec. 1.1503(d)-6(h)(6).
(d) Elimination of a dual consolidated loss after certain transactions--(1) General rule. In general, a dual resident corporation has a net operating loss (and, therefore, a dual consolidated loss) only if it sustains such loss, or succeeds to such loss as a result of acquiring the assets of a corporation that sustained the loss in a transaction described in section 381(a). Similarly, a net loss generally is attributable to a separate unit of a domestic owner (and therefore is a dual consolidated loss) only if the domestic owner incurs the deductions or losses, or succeeds to such deductions or losses in a transaction described in section 381(a). Except as provided in Sec. 1.1503(d)-6(h)(6)(iii), section 1503(d) and these regulations do not alter these general rules. Thus, the provisions of Secs. 1.1503(d)-1 through 1.1503(d)-8 generally do not cause a corporation to have a dual consolidated loss if it did not sustain (or inherit) the loss. Instead, these regulations either eliminate a dual consolidated loss that a corporation sustained (or inherited), or prevent the carryover of a dual consolidated loss under section 381 that would ordinarily occur, as a result of certain transactions.
(1) General rule. In general, a dual resident corporation has a net operating loss (and, therefore, a dual consolidated loss) only if it sustains such loss, or succeeds to such loss as a result of acquiring the assets of a corporation that sustained the loss in a transaction described in section 381(a). Similarly, a net loss generally is attributable to a separate unit of a domestic owner (and therefore is a dual consolidated loss) only if the domestic owner incurs the deductions or losses, or succeeds to such deductions or losses in a transaction described in section 381(a). Except as provided in Sec. 1.1503(d)-6(h)(6)(iii), section 1503(d) and these regulations do not alter these general rules. Thus, the provisions of Secs. 1.1503(d)-1 through 1.1503(d)-8 generally do not cause a corporation to have a dual consolidated loss if it did not sustain (or inherit) the loss. Instead, these regulations either eliminate a dual consolidated loss that a corporation sustained (or inherited), or prevent the carryover of a dual consolidated loss under section 381 that would ordinarily occur, as a result of certain transactions.
(i) Transactions described in section 381(a). This paragraph (d)(1)(i) applies to a dual consolidated loss of a dual resident corporation, or of a domestic owner attributable to a separate unit, that is subject to the domestic use limitation rule of paragraph (b) of this section. In such a case, and except as provided in paragraph (d)(2) of this section, the dual consolidated loss shall not carry over to another corporation in a transaction described in section 381(a) and, as a result, shall be eliminated. See Sec. 1.1503(d)-7(c) Example 20.
(ii) Cessation of separate unit status. This paragraph (d)(1)(ii) applies when a separate unit of an unaffiliated domestic owner ceases to be a separate unit of its domestic owner, or when a separate unit of an affiliated domestic owner ceases to be a separate unit with respect to its domestic owner and all other members of the affiliated domestic owner's consolidated group. In such a case, and except as provided in paragraph (d)(2)(iii) of this section, a dual consolidated loss of the domestic owner attributable to such separate unit, that is subject to the domestic use limitation of paragraph (b) of this section, shall be eliminated. For purposes of this paragraph (d)(1)(ii), a separate unit may cease to be a separate unit if, for example, such separate unit is terminated, dissolved, liquidated, sold, or otherwise disposed of. See Sec. 1.1503(d)-7(c) Example 21.
(2) Exceptions--(i) Certain section 368(a)(1)(F) reorganizations. Paragraph (d)(1)(i) of this section (relating to transactions described in section 381(a)) shall not apply to a dual consolidated loss of a dual resident corporation that undergoes a reorganization described in section 368(a)(1)(F) in which the resulting corporation is a domestic corporation. In such a case, the dual consolidated loss of the resulting corporation continues to be subject to the limitations of paragraphs (b) and (c) of this section, applied as if the resulting corporation incurred the dual consolidated loss.
(i) Certain section 368(a)(1)(F) reorganizations. Paragraph (d)(1)(i) of this section (relating to transactions described in section 381(a)) shall not apply to a dual consolidated loss of a dual resident corporation that undergoes a reorganization described in section 368(a)(1)(F) in which the resulting corporation is a domestic corporation. In such a case, the dual consolidated loss of the resulting corporation continues to be subject to the limitations of paragraphs (b) and (c) of this section, applied as if the resulting corporation incurred the dual consolidated loss.
(ii) Acquisition of a dual resident corporation by another dual resident corporation. If a dual resident corporation transfers its assets to another dual resident corporation in a transaction described in section 381(a), and the transferee corporation is a resident of (or is taxed on its worldwide income by) the same foreign country of which the transferor was a resident (or was taxed on its worldwide income), then paragraph (d)(1)(i) of this section shall not apply with respect to dual consolidated losses of the dual resident corporation, and income generated by the transferee may be offset by the carryover dual consolidated losses of the transferor, subject to the limitations of paragraphs (b) and (c) of this section applied as if the transferee incurred the dual consolidated loss. Dual consolidated losses of the transferor dual resident corporation may not, however, be used to offset income attributable to separate units or interests in transparent entities owned by the transferee because they constitute domestic affiliates under Sec. 1.1503(d)-1(b)(12)(iii) and (iv), respectively.
(iii) Acquisition of a separate unit by a domestic corporation. This paragraph (d)(2)(iii) provides exceptions to the general rules in paragraphs (d)(1)(i) and (ii) of this section that eliminate the dual consolidated loss of a domestic owner that is attributable to a separate unit following certain transactions or events. The exceptions set forth in this paragraph (d)(2)(iii) shall only apply where a domestic owner transfers its assets to a domestic corporation (transferee corporation) in a transaction described in section 381(a).
(A) Acquisition by a corporation that is not a member of the same consolidated group--(1) General rule. If a domestic owner transfers either an individual separate unit or a combined separate unit to a transferee corporation that is not a member of its consolidated group in a transaction described in section 381(a), and the transferee corporation, or a member of the transferee's consolidated group, is a domestic owner of the transferred separate unit immediately after the transaction, then paragraphs (d)(1)(i) and (ii) of this section shall not apply to such transfer. In addition, income of the transferee, or a member of the transferee's consolidated group, that is attributable to the transferred separate unit may be offset by the carryover dual consolidated losses of the transferor domestic owner that were attributable to the transferred separate unit, subject to the limitations of paragraphs (b) and (c) of this section applied as if the transferee incurred the dual consolidated losses and such losses were attributable to the separate unit. See Sec. 1.1503(d)-7(c) Example 21.
(2) Combination with separate units of the transferee. This paragraph (d)(2)(iii)(A)(2) applies to a transaction described in paragraph (d)(2)(iii)(A)(1) of this section where the transferred separate unit is combined with another separate unit of the transferee, or another member of the transferee's consolidated group, immediately after the transfer as provided under Sec. 1.1503(d)-1(b)(4)(ii). In such a case, income generated by the transferee, or another member of the transferee's consolidated group, that is attributable to the combined separate unit may be offset by the carryover dual consolidated losses that were attributable to the transferred separate unit, subject to the limitations of paragraphs (b) and (c) of this section, applied as if the transferee incurred the dual consolidated losses and such losses were attributable to the combined separate unit.
(B) Acquisition by a member of the same consolidated group. If an affiliated domestic owner transfers its assets to another member of its consolidated group in a transaction described in section 381(a), and the transferee corporation or another member of such consolidated group is a domestic owner of the separate unit to which the dual consolidated loss was attributable, then paragraphs (d)(1)(i) and (ii) of this section shall not apply. In addition, income generated by the transferee that is attributable to the transferred separate unit may be offset by the carryover dual consolidated losses that were attributable to the transferred separate unit, subject to the limitations of paragraphs (b) and (c) of this section, applied as if the transferee incurred the dual consolidated losses and such losses were attributable to the separate unit. See Sec. 1.1503(d)-7(c) Example 21.
(iv) Special rules for foreign insurance companies. See Sec. 1.1503(d)-6(a) for additional limitations that apply where the transferor is a foreign insurance company that is a dual resident corporation under Sec. 1.1503(d)-1(b)(2)(ii).
(e) Special rule denying the use of a dual consolidated loss to offset tainted income--(1) In general. Dual consolidated losses incurred by a dual resident corporation that are subject to the domestic use limitation rule under paragraph (b) of this section shall not be used to offset income it earns after it ceases to be a dual resident corporation to the extent that such income is tainted income.
(1) In general. Dual consolidated losses incurred by a dual resident corporation that are subject to the domestic use limitation rule under paragraph (b) of this section shall not be used to offset income it earns after it ceases to be a dual resident corporation to the extent that such income is tainted income.
(2) Tainted income--(i) Definition. For purposes of paragraph (e)(1) of this section, the term tainted income means--
(i) Definition. For purposes of paragraph (e)(1) of this section, the term tainted income means--
(A) Income or gain recognized on the sale or other disposition of tainted assets; and
(B) Income derived as a result of holding tainted assets.
(ii) Income presumed to be derived from holding tainted assets. In the absence of evidence establishing the actual amount of income that is attributable to holding tainted assets, the portion of a corporation's income in a particular taxable year that is treated as tainted income derived as a result of holding tainted assets shall be an amount equal to the corporation's taxable income for the year (other than income described in paragraph (e)(2)(i)(A) of this section) multiplied by a fraction, the numerator of which is the fair market value of all tainted assets acquired by the corporation (determined at the time such assets were so acquired) and the denominator of which is the fair market value of the total assets owned by the corporation at the end of such taxable year. To establish the actual amount of income that is attributable to holding tainted assets, documentation must be attached to, and filed by the due date (including extensions) of, the domestic corporation's tax return or the consolidated tax return of an affiliated group of which it is a member, as the case may be, for the taxable year in which the income is generated. See Sec. 1.1503(d)-7(c) Example 22.
(3) Tainted assets defined. For purposes of paragraph (e)(2) of this section, tainted assets are any assets acquired by a domestic corporation in a nonrecognition transaction, as defined in section 7701(a)(45), any assets otherwise transferred to the corporation as a contribution to capital, or any assets otherwise received from a separate unit or a transparent entity owned by such domestic corporation, at any time during the three taxable years immediately preceding the taxable year in which the corporation ceases to be a dual resident corporation or at any time thereafter.
(4) Exceptions. Income derived from assets acquired by a domestic corporation shall not be subject to the limitation described in paragraph (e)(1) of this section, and in addition shall not be treated as tainted assets as defined in paragraph (e)(3) of this section, if--
(i) For the taxable year in which the assets were acquired, the corporation did not have a dual consolidated loss (or a carryforward of a dual consolidated loss to such year); or
(ii) The assets were acquired as replacement property in the ordinary course of business.
(f) Computation of foreign tax credit limitation. If a dual consolidated loss is subject to the domestic use limitation rule under paragraph (b) of this section, the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner shall compute its foreign tax credit limitation by applying the limitations of paragraph (c) of this section. Thus, the items constituting the dual consolidated loss are not taken into account until the year in which such items are absorbed. [T.D. 9315, 72 FR 12914, Mar. 19, 2007] Sec. 1.1503(d)-5 Attribution of items and basis adjustments.
(a) In general. This section provides rules for determining the amount of income or dual consolidated loss of a dual resident corporation. This section also provides rules for determining the income or dual consolidated loss attributable to a separate unit, as well as the income or loss attributable to an interest in a transparent entity. Paragraph (b) of this section provides rules with respect to dual resident corporations. Paragraph (c) of this section provides rules with respect to separate units and interests in transparent entities. These determinations are required for various purposes under section 1503(d). For example, it is necessary for purposes of applying the domestic use limitation rule under Sec. 1.1503(d)-4(b) to a dual consolidated loss, and for determining the extent to which a dual consolidated loss is available to offset income as provided under Sec. 1.1503(d)-4(c). These determinations are also necessary for purposes of determining whether the amount subject to recapture may be reduced pursuant to Sec. 1.1503(d)-6(h)(2). Paragraph (d) of this section provides rules with respect to the foreign tax treatment of items. Paragraph (e) of this section provides rules regarding the treatment of items where a dual resident corporation, separate unit, or transparent entity only qualified as such during a portion of a taxable year. Paragraph (f) of this section provides rules for determining the assets and liabilities of a separate unit. Finally, paragraph (g) of this section provides rules for making basis adjustments to stock of certain members of a consolidated group and to certain interests in partnerships. The rules in this section apply for purposes of Secs. 1.1503(d)-1 through 1.1503(d)-7.
(b) Determination of amount of income or dual consolidated loss of a dual resident corporation--(1) In general. For purposes of determining whether a dual resident corporation has income or a dual consolidated loss for the taxable year, and except as provided in paragraph (b)(2) of this section, the dual resident corporation shall compute its income or dual consolidated loss taking into account only those items of income, gain, deduction, and loss from such year (including any items recognized by such corporation as a result of an election under section 338). In the case of an affiliated dual resident corporation, such calculation shall be made in accordance with the rules set forth in the regulations under section 1502 governing the computation of consolidated taxable income. See also paragraphs (d) and (e) of this section.
(1) In general. For purposes of determining whether a dual resident corporation has income or a dual consolidated loss for the taxable year, and except as provided in paragraph (b)(2) of this section, the dual resident corporation shall compute its income or dual consolidated loss taking into account only those items of income, gain, deduction, and loss from such year (including any items recognized by such corporation as a result of an election under section 338). In the case of an affiliated dual resident corporation, such calculation shall be made in accordance with the rules set forth in the regulations under section 1502 governing the computation of consolidated taxable income. See also paragraphs (d) and (e) of this section.
(2) Exceptions. For purposes of determining the income or dual consolidated loss of a dual resident corporation, the following shall not be taken into account--
(i) Any net capital loss of the dual resident corporation;
(ii) Any carryover or carryback losses; or
(iii) Any items of income, gain, deduction, and loss that are attributable to a separate unit or an interest in a transparent entity of the dual resident corporation.
(c) Determination of amount of income or dual consolidated loss attributable to a separate unit, and income or loss attributable to an interest in a transparent entity--(1) In general--(i) Scope and purpose. Paragraphs (c) through (e) of this section apply for purposes of determining the income or dual consolidated loss attributable to a separate unit, and the income or loss attributable to an interest in a transparent entity, for the taxable year. In the case of an affiliated domestic owner, this determination shall be made in accordance with the rules set forth in the regulations under section 1502 governing the computation of consolidated taxable income. These rules apply solely for purposes of section 1503(d).
(1) In general--(i) Scope and purpose. Paragraphs (c) through (e) of this section apply for purposes of determining the income or dual consolidated loss attributable to a separate unit, and the income or loss attributable to an interest in a transparent entity, for the taxable year. In the case of an affiliated domestic owner, this determination shall be made in accordance with the rules set forth in the regulations under section 1502 governing the computation of consolidated taxable income. These rules apply solely for purposes of section 1503(d).
(i) Scope and purpose. Paragraphs (c) through (e) of this section apply for purposes of determining the income or dual consolidated loss attributable to a separate unit, and the income or loss attributable to an interest in a transparent entity, for the taxable year. In the case of an affiliated domestic owner, this determination shall be made in accordance with the rules set forth in the regulations under section 1502 governing the computation of consolidated taxable income. These rules apply solely for purposes of section 1503(d).
(ii) Only items of domestic owner taken into account. The computation made under paragraphs (c) through (e) of this section shall be made using only those existing items of income, gain, deduction, and loss of the separate unit's or transparent entity's domestic owner (or owners, in the case of certain combined separate units), as determined for U.S. tax purposes. These items must be translated into U.S. dollars (if necessary) at the appropriate exchange rate provided under section 989(b), as modified by regulations. The computation shall be made as if the separate unit or interest in a transparent entity were a domestic corporation, using items that are attributable to the separate unit or interest in a transparent entity. However, for purposes of making this computation, net capital losses, and carryover or carryback losses, of the domestic owner shall not be taken into account. Items of income, gain, deduction, and loss that are otherwise disregarded for U.S. tax purposes shall not be regarded or taken into account for purposes of this section. See Sec. 1.1503(d)-7(c) Examples 6 and 23 through 25.
(iii) Separate application. The attribution rules of this section shall apply separately to each separate unit or interest in a transparent entity. Thus, an item of income, gain, deduction, or loss shall not be considered attributable to more than one separate unit or interest in a transparent entity. In addition, for purposes of this section items of income, gain, deduction, and loss attributable to a separate unit or an interest in a transparent entity shall not offset items of income, gain, deduction, and loss of another separate unit or interest in a transparent entity. See Sec. 1.1503(d)-7(c) Example 24. See also the separate unit combination rule in Sec. 1.1503(d)-1(b)(4)(ii).
(2) Foreign branch separate unit--(i) In general. Except to the extent provided in paragraph (c)(4) of this section, for purposes of determining the items of income, gain, deduction (other than interest), and loss of a domestic owner that are attributable to the domestic owner's foreign branch separate unit, the principles of section 864(c)(2), (c)(4), and (c)(5), as set forth in Sec. 1.864-4(c), and Secs. 1.864-5 through 1.864-7, shall apply. The principles apply without regard to limitations imposed on the effectively connected treatment of income, gain, or loss under the trade or business safe harbors in section 864(b) and the limitations for treating foreign source income as effectively connected under section 864(c)(4)(D). Except as provided in paragraph (c)(2)(iii) of this section, for purposes of determining the domestic owner's interest expense that is attributable to a foreign branch separate unit, the principles of Sec. 1.882-5, as modified in paragraph (c)(2)(ii) of this section, shall apply. When applying the principles of section 864(c) (as modified by this paragraph) and Sec. 1.882-5 (as modified in paragraph (c)(2)(ii) of this section), the foreign branch separate unit's domestic owner shall be treated as a foreign corporation, the foreign branch separate unit shall be treated as a trade or business within the United States, and the other assets of the domestic owner shall be treated as assets that are not U.S. assets.
(i) In general. Except to the extent provided in paragraph (c)(4) of this section, for purposes of determining the items of income, gain, deduction (other than interest), and loss of a domestic owner that are attributable to the domestic owner's foreign branch separate unit, the principles of section 864(c)(2), (c)(4), and (c)(5), as set forth in Sec. 1.864-4(c), and Secs. 1.864-5 through 1.864-7, shall apply. The principles apply without regard to limitations imposed on the effectively connected treatment of income, gain, or loss under the trade or business safe harbors in section 864(b) and the limitations for treating foreign source income as effectively connected under section 864(c)(4)(D). Except as provided in paragraph (c)(2)(iii) of this section, for purposes of determining the domestic owner's interest expense that is attributable to a foreign branch separate unit, the principles of Sec. 1.882-5, as modified in paragraph (c)(2)(ii) of this section, shall apply. When applying the principles of section 864(c) (as modified by this paragraph) and Sec. 1.882-5 (as modified in paragraph (c)(2)(ii) of this section), the foreign branch separate unit's domestic owner shall be treated as a foreign corporation, the foreign branch separate unit shall be treated as a trade or business within the United States, and the other assets of the domestic owner shall be treated as assets that are not U.S. assets.
(ii) Principles of Sec. 1.882-5. For purposes of paragraph (c)(2)(i) of this section, the principles of Sec. 1.882-5 shall be applied, subject to the following modifications--
(A) Except as otherwise provided in this section, only the assets, liabilities, and interest expense of the domestic owner shall be taken into account in the Sec. 1.882-5 formula;
(B) Except as provided under paragraph (c)(2)(ii)(C) of this section, a taxpayer may use the alternative tax book value method under Sec. 1.861-9(i) for purposes of determining the value of its U.S. assets pursuant to Sec. 1.882-5(b)(2) and its worldwide assets pursuant to Sec. 1.882-5(c)(2);
(C) For purposes of determining the value of a U.S. asset pursuant to Sec. 1.882-5(b)(2), and worldwide assets pursuant to Sec. 1.882-5(c)(2), the taxpayer must use the same methodology under Sec. 1.861-9T(g) (that is, tax book value, alternative tax book value, or fair market value) that the taxpayer uses for purposes of allocating and apportioning interest expense for the taxable year under section 864(e);
(D) Asset values shall be determined pursuant to Sec. 1.861-9T(g)(2); and
(E) For purposes of determining the step-two U.S. connected liabilities, the amounts of worldwide assets and liabilities under Sec. 1.882-5(c)(2)(iii) and (iv) must be determined in accordance with U.S. tax principles, rather than substantially in accordance with U.S. tax principles.
(iii) Exception where foreign country attributes interest expense solely by reference to books and records. The principles of Sec. 1.882-5 shall not apply if the foreign country in which the foreign branch separate unit is located determines, for purposes of computing taxable income (or loss) of a permanent establishment or branch of a nonresident corporation under the laws of the foreign country, the interest expense of the foreign branch separate unit by taking into account only the items of interest expense reflected on the foreign branch separate unit's books and records. In such a case, only those items of the domestic owner's interest expense reflected on the foreign branch separate unit's books and records (as provided in paragraph (c)(3)(i) of this section), adjusted to conform to U.S. tax principles, shall be attributable to the foreign branch separate unit. This paragraph shall not apply where the foreign country does not use a method of attributing interest based solely on the interest that is reflected on the books and records. For example, this paragraph does not apply if the foreign country uses a method for attributing interest expense similar to Sec. 1.882-5 or that set forth in the Organization for Economic Co-operation and Development Report on the Attribution of Profits to Permanent Establishments, Part II (Banks), December 2006. See http://www.oecd.org.
(3) Hybrid entity separate unit and an interest in a transparent entity--(i) General rule. This paragraph (c)(3) applies to determine the items of income, gain, deduction, and loss of a domestic owner that are attributable to a hybrid entity separate unit, or an interest in a transparent entity, of such domestic owner. Except to the extent provided in paragraph (c)(4) of this section, the domestic owner's items of income, gain, deduction, and loss are attributable to the extent they are reflected on the books and records of the hybrid entity or transparent entity, as applicable, as adjusted to conform to U.S. tax principles. See Sec. 1.1503(d)-7(c) Examples 23 through 26. For purposes of this paragraph (c)(3), the term ``books and records'' has the meaning provided under Sec. 1.989(a)-1(d). The treatment of items for foreign tax purposes, including under any type of foreign anti-deferral regime, is not relevant for purposes of determining whether items are reflected on the books and records of the entity, or for purposes of making adjustments to such items to conform to U.S. tax principles. The method described in the second sentence of this paragraph shall not apply to the extent that the Commissioner determines that booking practices are employed with a principal purpose of avoiding the principles of section 1503(d), including inconsistently treating the same or similar items of income, gain, deduction, and loss. In such a case, the Commissioner may reallocate the items of income, gain, deduction, and loss between or among a domestic owner, its hybrid entities, its transparent entities (and interests therein), its separate units, or any other entity, as applicable, in a manner consistent with the principles of section 1503(d) and which properly reflects income (or loss).
(i) General rule. This paragraph (c)(3) applies to determine the items of income, gain, deduction, and loss of a domestic owner that are attributable to a hybrid entity separate unit, or an interest in a transparent entity, of such domestic owner. Except to the extent provided in paragraph (c)(4) of this section, the domestic owner's items of income, gain, deduction, and loss are attributable to the extent they are reflected on the books and records of the hybrid entity or transparent entity, as applicable, as adjusted to conform to U.S. tax principles. See Sec. 1.1503(d)-7(c) Examples 23 through 26. For purposes of this paragraph (c)(3), the term ``books and records'' has the meaning provided under Sec. 1.989(a)-1(d). The treatment of items for foreign tax purposes, including under any type of foreign anti-deferral regime, is not relevant for purposes of determining whether items are reflected on the books and records of the entity, or for purposes of making adjustments to such items to conform to U.S. tax principles. The method described in the second sentence of this paragraph shall not apply to the extent that the Commissioner determines that booking practices are employed with a principal purpose of avoiding the principles of section 1503(d), including inconsistently treating the same or similar items of income, gain, deduction, and loss. In such a case, the Commissioner may reallocate the items of income, gain, deduction, and loss between or among a domestic owner, its hybrid entities, its transparent entities (and interests therein), its separate units, or any other entity, as applicable, in a manner consistent with the principles of section 1503(d) and which properly reflects income (or loss).
(ii) Interests in certain disregarded entities, partnerships, and grantor trusts owned by a hybrid entity or transparent entity. This paragraph (c)(3)(ii) applies if a hybrid entity or transparent entity to which paragraph (c)(3)(i) of this section applies owns, directly or indirectly (other than through a hybrid entity or transparent entity), an interest in an entity that is treated as a disregarded entity, partnership, or grantor trust for U.S. tax purposes, but is not a hybrid entity or a transparent entity. For example, the rules of this paragraph would apply when a hybrid entity holds an interest in a limited partnership created in the United States and, for both U.S. and foreign tax purposes the entity is considered a partnership. In such a case, and except to the extent provided in paragraph (c)(4) of this section, items of income, gain, deduction, and loss that are reflected on the books and records of such disregarded entity, partnership or grantor trust, as determined under paragraph (c)(3)(i) of this section, shall be treated as being reflected on the books and records of the hybrid entity or transparent entity for purposes of applying paragraph (c)(3)(i) of this section. See Sec. 1.1503(d)-7(c) Example 26.
(4) Special rules. The following special rules shall apply for purposes of attributing items to separate units or interests in transparent entities under this section:
(i) Allocation of items between certain tiered separate units and interests in transparent entities--(A) Foreign branch separate unit. This paragraph (c)(4)(i) applies where a hybrid entity or transparent entity owns directly or indirectly (other than through a hybrid entity or a transparent entity), a foreign branch separate unit. For purposes of determining items of income, gain, deduction, and loss of the domestic owner that are attributable to the domestic owner's foreign branch separate unit described in the preceding sentence, only items of income, gain, deduction, and loss that are attributable to the domestic owner's interest in the hybrid entity, or transparent entity, as provided in paragraph (c)(3) of this section, shall be taken into account. Further, only assets, liabilities, and activities of the domestic owner's interest in the hybrid entity or the transparent entity shall be taken into account under paragraph (c)(2) of this section when applying the principles of 864(c)(2), (c)(4), (c)(5) (as set forth in Sec. 1.864-4(c), and Secs. 1.864-5 through 1.864- 7), and Sec. 1.882-5 (as modified in paragraph (c)(2)(ii) of this section). See Sec. 1.1503(d)-7(c) Examples 25 and 26.
(A) Foreign branch separate unit. This paragraph (c)(4)(i) applies where a hybrid entity or transparent entity owns directly or indirectly (other than through a hybrid entity or a transparent entity), a foreign branch separate unit. For purposes of determining items of income, gain, deduction, and loss of the domestic owner that are attributable to the domestic owner's foreign branch separate unit described in the preceding sentence, only items of income, gain, deduction, and loss that are attributable to the domestic owner's interest in the hybrid entity, or transparent entity, as provided in paragraph (c)(3) of this section, shall be taken into account. Further, only assets, liabilities, and activities of the domestic owner's interest in the hybrid entity or the transparent entity shall be taken into account under paragraph (c)(2) of this section when applying the principles of 864(c)(2), (c)(4), (c)(5) (as set forth in Sec. 1.864-4(c), and Secs. 1.864-5 through 1.864- 7), and Sec. 1.882-5 (as modified in paragraph (c)(2)(ii) of this section). See Sec. 1.1503(d)-7(c) Examples 25 and 26.
(B) Hybrid entity separate unit or interest in a transparent entity. For purposes of determining items of income, gain, deduction, and loss that are attributable to a hybrid entity separate unit or an interest in a transparent entity described in paragraph (c)(3) of this section, such items shall not be taken into account to the extent they are attributable to a foreign branch separate unit pursuant to paragraph (c)(4)(i)(A) of this section. See Sec. 1.1503(d)-7(c) Examples 25 and 26.
(ii) Combined separate unit. If two or more individual separate units defined in Sec. 1.1503(d)-1(b)(4)(i) are treated as one combined separate unit pursuant to Sec. 1.1503(d)-1(b)(4)(ii), the items of income, gain, deduction, and loss that are attributable to the combined separate unit shall be determined as follows:
(A) Items of income, gain, deduction, and loss are first attributed to each individual separate unit without regard to Sec. 1.1503(d)-1(b)(4)(ii), pursuant to the rules of paragraphs (c) through (e) of this section.
(B) The combined separate unit then takes into account all of the items of income, gain, deduction, and loss attributable to its individual separate units pursuant to paragraph (c)(4)(ii)(A) of this section. See Sec. 1.1503(d)-7(c) Examples 25 and 26.
(iii) Gain or loss on the direct or indirect disposition of a separate unit or an interest in a transparent entity--(A) In general. This paragraph (c)(4)(iii) applies for purposes of attributing items of income, gain, deduction, and loss that are recognized on the sale, exchange, or other disposition of a separate unit or an interest in a transparent entity (or an interest in a disregarded entity, partnership, or grantor trust that owns, directly or indirectly, a separate unit or an interest in a transparent entity). For purposes of this paragraph (c)(4)(iii), items taken into account on the sale, exchange, or other disposition include loss recapture income or gain under section 367(a)(3)(C) or 904(f)(3), and gain or loss recognized by the domestic owner as the result of an election under section 338. In cases where this paragraph (c)(4)(iii)(A) applies, items taken into account on the sale, exchange, or other disposition shall be attributable to the separate unit or the interest in the transparent entity to the extent of gain or loss that would have been recognized had the separate unit or transparent entity sold all its assets (as determined in paragraph (f) of this section) in a taxable exchange, immediately before the sale, exchange, or other disposition (deemed sale). For purposes of a deemed sale described in this paragraph (c)(4)(iii), the assets are treated as being sold for an amount equal to their fair market value, plus the assumption of the liabilities of the separate unit or interest in a transparent entity (as determined in paragraph (f) of this section). See Sec. 1.1503(d)-7(c) Example 27.
(A) In general. This paragraph (c)(4)(iii) applies for purposes of attributing items of income, gain, deduction, and loss that are recognized on the sale, exchange, or other disposition of a separate unit or an interest in a transparent entity (or an interest in a disregarded entity, partnership, or grantor trust that owns, directly or indirectly, a separate unit or an interest in a transparent entity). For purposes of this paragraph (c)(4)(iii), items taken into account on the sale, exchange, or other disposition include loss recapture income or gain under section 367(a)(3)(C) or 904(f)(3), and gain or loss recognized by the domestic owner as the result of an election under section 338. In cases where this paragraph (c)(4)(iii)(A) applies, items taken into account on the sale, exchange, or other disposition shall be attributable to the separate unit or the interest in the transparent entity to the extent of gain or loss that would have been recognized had the separate unit or transparent entity sold all its assets (as determined in paragraph (f) of this section) in a taxable exchange, immediately before the sale, exchange, or other disposition (deemed sale). For purposes of a deemed sale described in this paragraph (c)(4)(iii), the assets are treated as being sold for an amount equal to their fair market value, plus the assumption of the liabilities of the separate unit or interest in a transparent entity (as determined in paragraph (f) of this section). See Sec. 1.1503(d)-7(c) Example 27.
(B) Multiple separate units or interests in transparent entities. This paragraph (c)(4)(iii)(B) applies to a sale, exchange, or other disposition described in paragraph (c)(4)(iii)(A) of this section that results in more than one separate unit or interest in a transparent entity being, directly or indirectly, disposed of. In such a case, items of income, gain, deduction, and loss recognized on such sale, exchange, or other disposition are allocated and attributed to each separate unit or interest in a transparent entity, based on the relative gain or loss that would have been recognized by each separate unit or interest in a transparent entity pursuant to a deemed sale of their assets. See Sec. 1.1503(d)-7(c) Example 28.
(iv) Inclusions on stock. Any amount included in income of a domestic owner arising from ownership of stock in a foreign corporation (for example, under sections 78, 951, or 986(c)) through a separate unit, or interest in a transparent entity, shall be attributable to the separate unit or interest in a transparent entity, if an actual dividend from such foreign corporation would have been so attributed. See Sec. 1.1503(d)-7(c) Example 24.
(v) Foreign currency gain or loss recognized under section 987. Foreign currency gain or loss of a domestic owner recognized under section 987 as a result of a transfer or remittance shall not be attributable to a separate unit or an interest in a transparent entity.
(vi) Recapture of dual consolidated loss. If all or a portion of a dual consolidated loss that was attributable to a separate unit is included in the gross income of a domestic owner under the recapture provisions of Sec. 1.1503(d)-6(h), such amount shall be attributable to the separate unit that incurred the dual consolidated loss being recaptured. See Sec. 1.1503(d)-7(c) Examples 38 and 40.
(d) Foreign tax treatment disregarded. The fact that a particular item taken into account in computing the income or dual consolidated loss of a dual resident corporation or a separate unit, or the income or loss of an interest in a transparent entity, is not taken into account in computing income (or loss) subject to a foreign country's income tax shall not cause such item to be excluded from being taken into account under paragraph (b), (c), or (e) of this section.
(e) Items generated or incurred while a dual resident corporation, a separate unit, or a transparent entity. For purposes of determining the amount of the dual consolidated loss of a dual resident corporation for the taxable year, only the items of income, gain, deduction, and loss generated or incurred during the period the dual resident corporation qualified as such shall be taken into account. For purposes of determining the amount of income of a dual resident corporation for the taxable year, all the items of income, gain, deduction, and loss generated or incurred during the year shall be taken into account. For purposes of determining the amount of the income or dual consolidated loss attributable to a separate unit, or the income or loss attributable to an interest in a transparent entity, for the taxable year, only the items of income, gain, deduction, and loss generated or incurred during the period the separate unit or the interest in the transparent entity qualified as such shall be taken into account. For purposes of this paragraph (e), the allocation of items to periods shall be made under the principles of Sec. 1.1502-76(b).
(f) Assets and liabilities of a separate unit or an interest in a transparent entity. A separate unit or an interest in a transparent entity shall be treated as owning assets to the extent items of income, gain, deduction, and loss from such assets would be attributable to the separate unit or interest in the transparent entity under paragraphs (c) through (e) of this section. Similarly, liabilities shall be treated as liabilities of a separate unit, or an interest in a transparent entity, to the extent interest expense incurred on such liabilities would be attributable to the separate unit, or the interest in a transparent entity, under paragraphs (c) through (e) of this section.
(g) Basis adjustments--(1) Affiliated dual resident corporation or affiliated domestic owner. If a member of a consolidated group owns stock in an affiliated dual resident corporation or an affiliated domestic owner that is a member of the same consolidated group, the member shall adjust the basis of the stock in accordance with the provisions of Sec. 1.1502-32. Corresponding adjustments shall be made to the stock of other members in accordance with the provisions of Sec. 1.1502-32. In the case where two or more individual separate units are treated as a combined separate unit pursuant to Sec. 1.1503(d)-1(b)(4)(ii), see paragraph (g)(3) of this section.
(1) Affiliated dual resident corporation or affiliated domestic owner. If a member of a consolidated group owns stock in an affiliated dual resident corporation or an affiliated domestic owner that is a member of the same consolidated group, the member shall adjust the basis of the stock in accordance with the provisions of Sec. 1.1502-32. Corresponding adjustments shall be made to the stock of other members in accordance with the provisions of Sec. 1.1502-32. In the case where two or more individual separate units are treated as a combined separate unit pursuant to Sec. 1.1503(d)-1(b)(4)(ii), see paragraph (g)(3) of this section.
(2) Interests in hybrid entities that are partnerships or interests in partnerships through which a separate unit is owned indirectly--(i) Scope. This paragraph (g)(2) applies for purposes of determining the adjusted basis of an interest in--
(i) Scope. This paragraph (g)(2) applies for purposes of determining the adjusted basis of an interest in--
(A) A hybrid entity that is a partnership; and
(B) A partnership through which a domestic owner indirectly owns a separate unit.
(ii) Determination of basis of partner's interest. The adjusted basis of an interest described in paragraph (g)(2)(i) of this section shall be adjusted in accordance with section 705 and this paragraph (g)(2). The adjusted basis shall not be decreased for any amount of a dual consolidated loss that is attributable to the partnership interest, or separate unit owned indirectly through the partnership interest, as applicable, that is not absorbed as a result of the application of Sec. 1.1503(d)-4(b) and (c). The adjusted basis shall, however, be decreased for the amount of such dual consolidated loss that is absorbed in a carryover or carryback taxable year. The adjusted basis shall be increased for any amount included in income pursuant to Sec. 1.1503(d)-6(h) as a result of the recapture of a dual consolidated loss that was attributable to the interest in the hybrid partnership, or separate unit owned indirectly through the partnership interest, as applicable.
(3) Combined separate units. This paragraph (g)(3) applies where two or more individual separate units of one or more affiliated domestic owners are treated as one combined separate unit pursuant to Sec. 1.1503(d)-1(b)(4)(ii). In such a case, a member owning stock in an affiliated domestic owner of the combined separate unit shall adjust the basis in the stock of such domestic owner as provided in paragraph (g)(1) of this section, and an affiliated domestic owner shall adjust its basis in a partnership, as provided in paragraph (g)(2) of this section, taking into account only those items of income, gain, deduction, or loss attributable to each individual separate unit, prior to combination. For purposes of this rule, if the dual consolidated loss attributable to a combined separate unit is subject to the domestic use limitation of Sec. 1.1503(d)-4(b), then for purposes of this paragraph (g) and Sec. 1.1502-32, the dual consolidated loss shall be allocated to an individual separate unit to the extent such individual separate unit contributed items of deduction or loss giving rise to the dual consolidated loss. In addition, if one or more affiliated domestic owners are required to recapture all or a portion of a dual consolidated loss pursuant to paragraph (h) of this section, such recapture amount shall be allocated to the affiliated domestic owner of the individual separate units composing the combined separate unit, to the extent such individual separate units contributed items of deduction or loss giving rise to the recaptured dual consolidated loss. [T.D. 9315, 72 FR 12914, Mar. 19, 2007; 72 FR 20424, Apr. 25, 2007] Sec. 1.1503(d)-6 Exceptions to the domestic use limitation rule.
(a) In general--(1) Scope and purpose. This section provides certain exceptions to the domestic use limitation rule of Sec. 1.1503(d)-4(b). Paragraph (b) of this section provides an exception for bilateral elective agreements. Paragraph (c) of this section provides rules regarding an exception that applies when there is no possibility of a foreign use. Paragraphs (d) through (h) of this section provide rules for an exception where a domestic use election is made. Paragraph (e) of this section provides rules with respect to triggering events, and paragraph (f) of this section provides rules regarding exceptions to triggering events. Paragraph (g) of this section provides rules with respect to the annual certification reporting requirement. Paragraph (h) of this section provides rules regarding the recapture of dual consolidated losses. Finally, paragraph (j) of this section provides rules regarding the termination of domestic use agreements and the annual certification requirement.
(1) Scope and purpose. This section provides certain exceptions to the domestic use limitation rule of Sec. 1.1503(d)-4(b). Paragraph (b) of this section provides an exception for bilateral elective agreements. Paragraph (c) of this section provides rules regarding an exception that applies when there is no possibility of a foreign use. Paragraphs (d) through (h) of this section provide rules for an exception where a domestic use election is made. Paragraph (e) of this section provides rules with respect to triggering events, and paragraph (f) of this section provides rules regarding exceptions to triggering events. Paragraph (g) of this section provides rules with respect to the annual certification reporting requirement. Paragraph (h) of this section provides rules regarding the recapture of dual consolidated losses. Finally, paragraph (j) of this section provides rules regarding the termination of domestic use agreements and the annual certification requirement.
(2) Absence of foreign affiliate or foreign consolidation regime. The absence of a foreign affiliate or a foreign consolidation regime alone does not constitute an exception to the domestic use limitation rule. This is the case because it is still possible that all or a portion of the dual consolidated loss may be put to a foreign use. For example, there may be a foreign use with respect to an affiliate acquired in a year subsequent to the year in which the dual consolidated loss was incurred. In addition, a foreign use may occur in the absence of a foreign consolidation regime through a sale, merger, or similar transaction. See Sec. 1.1503(d)-7(c) Example 2.
(3) Foreign insurance companies treated as domestic corporations. The exceptions contained in this section shall not apply to losses of a foreign insurance company that is a dual resident corporation under Sec. 1.1503(d)-1(b)(2)(ii), or to losses attributable to any separate unit of such foreign insurance company. In addition, these exceptions shall not apply to losses described in the preceding sentence that, subject to the rules of Sec. 1.1503(d)-4(d), carry over to a domestic corporation pursuant to a transaction described in section 381(a).
(b) Elective agreement in place between the United States and a foreign country-- (1) In general. The domestic use limitation rule of Sec. 1.1503(d)-4(b) shall not apply to a dual consolidated loss to the extent the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner, as the case may be, elects to deduct the loss in the United States pursuant to an agreement entered into between the United States and a foreign country that puts into place an elective procedure through which losses in a particular year may be used to offset income in only one country. This exception shall apply only if all the terms and conditions required under such agreement are satisfied, including any reporting or filing requirements. See Sec. 1.1503(d)-3(e)(2)(iii) for the effect of an agreement described in this paragraph on a stand-alone domestic use agreement.
(1) In general. The domestic use limitation rule of Sec. 1.1503(d)-4(b) shall not apply to a dual consolidated loss to the extent the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner, as the case may be, elects to deduct the loss in the United States pursuant to an agreement entered into between the United States and a foreign country that puts into place an elective procedure through which losses in a particular year may be used to offset income in only one country. This exception shall apply only if all the terms and conditions required under such agreement are satisfied, including any reporting or filing requirements. See Sec. 1.1503(d)-3(e)(2)(iii) for the effect of an agreement described in this paragraph on a stand-alone domestic use agreement.
(2) Application to combined separate units. This paragraph (b)(2) applies where two or more individual separate units are treated as one combined separate unit pursuant to Sec. 1.1503(d)-1(b)(4)(ii), and an agreement described in paragraph (b)(1) of this section would apply to at least one of the individual separate units. In such a case, and except to the extent provided in the agreement, the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner, as the case may be, may apply the agreement to the individual separate units, as applicable, provided the terms and conditions of the agreement are otherwise satisfied. See Sec. 1.1503(d)-7(c) Example 19.
(c) No possibility of foreign use--(1) In general. The domestic use limitation rule of Sec. 1.1503(d)-4(b) shall not apply to a dual consolidated loss if the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner, as the case may be--
(1) In general. The domestic use limitation rule of Sec. 1.1503(d)-4(b) shall not apply to a dual consolidated loss if the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner, as the case may be--
(i) Demonstrates, to the satisfaction of the Commissioner, that no foreign use (as defined in Sec. 1.1503(d)-3) of the dual consolidated loss occurred in the year in which it was incurred, and that no foreign use can occur in any other year by any means; and
(ii) Prepares a statement described in paragraph (c)(2) of this section that is attached to, and filed by the due date (including extensions) of, its U.S. income tax return for the taxable year in which the dual consolidated loss is incurred. See Sec. 1.1503(d)-7(c) Examples 2, 30, and 31.
(2) Statement. The statement described in this paragraph (c)(2) must be signed under penalties of perjury by the person who signs the tax return. The statement must be labeled ``No Possibility of Foreign Use of Dual Consolidated Loss Statement'' at the top of the page and must include the following items, in paragraphs labeled to correspond with the items set forth in paragraphs (c)(2)(i) through (iv) of this section:
(i) A statement that the document is submitted under the provisions of paragraph (c) of this section.
(ii) The name, address, taxpayer identification number, and place and date of incorporation of the dual resident corporation, and the country or countries that tax the dual resident corporation on its worldwide income or on a residence basis, or, in the case of a separate unit, identification of the separate unit, including the name under which it conducts business, its principal activity, and the country in which its principal place of business is located. In the case of a combined separate unit, such information must be provided for each individual separate unit that is treated as part of the combined separate unit under Sec. 1.1503(d)-1(b)(4)(ii).
(iii) A statement of the amount of the dual consolidated loss at issue.
(iv) An analysis, in reasonable detail and specificity, of the treatment of the losses and deductions composing the dual consolidated loss under the relevant facts. The analysis must include the reasons supporting the conclusion that no foreign use of the dual consolidated loss can occur as described in paragraph (c)(1)(i) of this section. The analysis must be supported with official or certified English translations of the relevant provisions of foreign law. The analysis may, for example, be based on the taxpayer's interpretation of foreign law, on advice received from local tax advisers in an opinion, or on a ruling from local country tax authorities. In all cases, however, the determination must be made to the satisfaction of the Commissioner.
(d) Domestic use election--(1) In general. The domestic use limitation rule of Sec. 1.1503(d)-4(b) shall not apply to a dual consolidated loss if an election to be bound by the provisions of paragraphs (d) through (j) of this section is made by the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner, as the case may be (elector). In order to elect such relief, an agreement described in this paragraph (d)(1) (domestic use agreement) must be attached to, and filed by the due date (including extensions) of, the U.S. income tax return of the elector for the taxable year in which the dual consolidated loss is incurred. The domestic use agreement must be signed under penalties of perjury by the person who signs the return. If dual consolidated losses of more than one dual resident corporation or separate unit requires the filing of domestic use agreements by the same elector, the agreements may be combined in a single document, but the information required by paragraphs (d)(1)(ii) and (iv) of this section must be provided separately with respect to each dual consolidated loss. The domestic use agreement must be labeled ``Domestic Use Election and Agreement'' at the top of the page and must include the following items, in paragraphs labeled to correspond with the following:
(1) In general. The domestic use limitation rule of Sec. 1.1503(d)-4(b) shall not apply to a dual consolidated loss if an election to be bound by the provisions of paragraphs (d) through (j) of this section is made by the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner, as the case may be (elector). In order to elect such relief, an agreement described in this paragraph (d)(1) (domestic use agreement) must be attached to, and filed by the due date (including extensions) of, the U.S. income tax return of the elector for the taxable year in which the dual consolidated loss is incurred. The domestic use agreement must be signed under penalties of perjury by the person who signs the return. If dual consolidated losses of more than one dual resident corporation or separate unit requires the filing of domestic use agreements by the same elector, the agreements may be combined in a single document, but the information required by paragraphs (d)(1)(ii) and (iv) of this section must be provided separately with respect to each dual consolidated loss. The domestic use agreement must be labeled ``Domestic Use Election and Agreement'' at the top of the page and must include the following items, in paragraphs labeled to correspond with the following:
(i) A statement that the document submitted is an election and an agreement under the provisions of paragraph (d) of this section.
(ii) The information required by paragraph (c)(2)(ii) of this section.
(iii) An agreement by the elector to comply with all of the provisions of paragraphs (d) through (j) of this section, as applicable.
(iv) A statement of the amount of the dual consolidated loss at issue.
(v) A certification that there has not been, and will not be, a foreign use (as defined in Sec. 1.1503(d)-3) during the certification period (as defined in Sec. 1.1503(d)-1(b)(20)).
(vi) A certification that arrangements have been made to ensure that there will be no foreign use of the dual consolidated loss during the certification period, and that the elector will be informed of any such foreign use of the dual consolidated loss during such period.
(vii) If applicable, a notification that an excepted triggering event under paragraph (f)(2) of this section has occurred with respect to the dual consolidated loss within the taxable year in which the loss is incurred. See paragraph (g) of this section for notification of excepted triggering events occurring during the certification period.
(2) No domestic use election available if there is a triggering event in the year the dual consolidated loss is incurred. Except as otherwise provided in this section, if a dual resident corporation or separate unit incurs a dual consolidated loss in a taxable year and a triggering event, as described in paragraph (e)(1) of this section, occurs (and no exception applies) with respect to the dual consolidated loss in such taxable year, then the consolidated group, unaffiliated dual resident corporation, or unaffiliated domestic owner, as the case may be, may not make a domestic use election with respect to such dual consolidated loss and the loss will be subject to the domestic use limitation rule of Sec. 1.1503(d)-4(b). See Sec. 1.1503(d)-7(c) Examples 5 through 7. See also Sec. 1.1503(d)-4(d) for rules that eliminate a dual consolidated loss after certain transactions.
(e) Triggering events requiring the recapture of a dual consolidated loss--(1) Events. Except as provided under paragraphs (e)(2) (rebuttal of triggering events) and (f) (exceptions to triggering events) of this section, if there is a triggering event described in this paragraph (e)(1) with respect to a dual consolidated loss of a dual resident corporation or a separate unit during the certification period (as defined in Sec. 1.1503(d)-1(b)(20)), the elector will recapture and report as ordinary income the amount of such dual consolidated loss as provided in paragraph (h) of this section on its tax return for the taxable year in which the triggering event occurs (or, when the triggering event is a foreign use of the dual consolidated loss, the taxable year that includes the last day of the foreign taxable year during which such use occurs). In addition, the elector must pay any applicable interest charge required by paragraph (h) of this section. For purposes of this section, any of the following events shall constitute a triggering event:
(1) Events. Except as provided under paragraphs (e)(2) (rebuttal of triggering events) and (f) (exceptions to triggering events) of this section, if there is a triggering event described in this paragraph (e)(1) with respect to a dual consolidated loss of a dual resident corporation or a separate unit during the certification period (as defined in Sec. 1.1503(d)-1(b)(20)), the elector will recapture and report as ordinary income the amount of such dual consolidated loss as provided in paragraph (h) of this section on its tax return for the taxable year in which the triggering event occurs (or, when the triggering event is a foreign use of the dual consolidated loss, the taxable year that includes the last day of the foreign taxable year during which such use occurs). In addition, the elector must pay any applicable interest charge required by paragraph (h) of this section. For purposes of this section, any of the following events shall constitute a triggering event:
(i) Foreign use. A foreign use (as defined in Sec. 1.1503(d)-3) of the dual consolidated loss. See Sec. 1.1503(d)-3(c) for exceptions to foreign use.
(ii) Disaffiliation. An affiliated dual resident corporation or affiliated domestic owner that incurred directly or through a separate unit, respectively, a dual consolidated loss that is subject to a domestic use election, ceases to be a member of the consolidated group that made the domestic use election. For purposes of this paragraph (e)(1)(ii), an affiliated dual resident corporation or affiliated domestic owner shall be considered to cease to be a member of the consolidated group if it is no longer a member of the group within the meaning of Sec. 1.1502-1(b), or if the group ceases to exist (for example, when the group no longer files a consolidated return). See Sec. 1.1503(d)-7(c) Example 34. Any consequences resulting from this triggering event (for example, recapture of a dual consolidated loss) shall be taken into account on the tax return of the consolidated group for the taxable year that includes the date on which the affiliated dual resident corporation or affiliated domestic owner ceases to be a member of the consolidated group. This paragraph (e)(1)(ii) shall not apply to an acquisition described in Sec. 1.1502-75(d)(3) where the consolidated group that includes the affiliated dual resident corporation or affiliated domestic owner, as applicable, is treated as remaining in existence.
(iii) Affiliation. An unaffiliated dual resident corporation or unaffiliated domestic owner becomes a member of a consolidated group. Any consequences resulting from this triggering event (for example, recapture of a dual consolidated loss) shall be taken into account on the tax return of the unaffiliated dual resident corporation or unaffiliated domestic owner for the taxable year that ends at the end of the day on which such corporation becomes a member of the consolidated group.
(iv) Transfer of assets. Fifty percent or more of the dual resident corporation's or separate unit's gross assets (measured by the fair market value of the assets at the time of such transaction or, for multiple transactions, at the time of the first transaction) is sold or otherwise disposed of in either a single transaction or a series of transactions within a twelve-month period. See Sec. 1.1503(d)-7(c) Examples 5 and 35 through 37. In determining whether fifty percent or more of such assets is sold or otherwise disposed of, any dispositions occurring in the ordinary course of the dual resident corporation's or separate unit's trade or business shall be disregarded. In addition, for purposes of this paragraph (e)(1)(iv), an interest in another separate unit and the shares of a dual resident corporation shall not be treated as assets of a separate unit or a dual resident corporation.
(v) Transfer of an interest in a separate unit. Fifty percent or more of the interest in a separate unit (measured by voting power or value at the time of such transaction, or for multiple transactions, at the time of the first transaction) of the domestic owner, as determined by reference to such domestic owner's percentage interest on the last day of the taxable year in which the dual consolidated loss was incurred, is sold or otherwise disposed of either in a single transaction or a series of transactions within a twelve-month period. See Sec. 1.1503(d)-7(c) Examples 5 and 35 through 37.
(vi) Conversion to a foreign corporation. An unaffiliated dual resident corporation, unaffiliated domestic owner, or hybrid entity an interest in which is a separate unit, that incurred the dual consolidated loss, becomes a foreign corporation (for example, as a result of a reorganization or an election to be classified as a corporation under Sec. 301.7701-3(c) of this chapter).
(vii) Conversion to a regulated investment company, a real estate investment trust, or an S corporation. An unaffiliated dual resident corporation or unaffiliated domestic owner elects to be a regulated investment company pursuant to section 851(b)(1), a real estate investment trust pursuant to section 856(c)(1), or an S corporation pursuant to section 1362(a).
(viii) Failure to certify. The elector fails to file a certification with respect to a dual consolidated loss as required under paragraph (g) of this section.
(ix) Cessation of stand-alone status. In the case of a dual consolidated loss that is subject to the stand-alone exception described in Sec. 1.1503(d)-3(e)(2), the conditions described in Sec. 1.1503(d)-3(e)(2)(i) are no longer satisfied. See Sec. 1.1503(d)-7(c) Example 18.
(2) Rebuttal--(i) General rule. An event described in paragraph (e)(1) of this section shall not constitute a triggering event if the elector demonstrates, to the satisfaction of the Commissioner, that there can be no foreign use (as defined in Sec. 1.1503(d)-3) of the dual consolidated loss during the remaining certification period by any means. See paragraph (j)(1) of this section for rules regarding the termination of domestic use agreements and annual certifications following rebuttals under this general rule.
(i) General rule. An event described in paragraph (e)(1) of this section shall not constitute a triggering event if the elector demonstrates, to the satisfaction of the Commissioner, that there can be no foreign use (as defined in Sec. 1.1503(d)-3) of the dual consolidated loss during the remaining certification period by any means. See paragraph (j)(1) of this section for rules regarding the termination of domestic use agreements and annual certifications following rebuttals under this general rule.
(ii) Certain asset transfers. An event described in paragraph (e)(1)(iv) of this section shall not constitute a triggering event if the elector demonstrates, to the satisfaction of the Commissioner, that the transfer of assets did not result in a carryover under foreign law of the dual resident corporation's, or separate unit's, losses, expenses, or deductions to the transferee of the assets. For purposes of this determination, the exception to foreign use in Sec. 1.1503(d)-3(c)(7) shall be taken into account. Following rebuttal under this paragraph (e)(2)(ii), the domestic use agreement continues in effect.
(iii) Reporting. In order to satisfy the requirements of paragraph (e)(2)(i) or (ii) of this section, the elector must prepare a statement, labeled ``Rebuttal of Triggering Event'' at the top of the page, that indicates that it is submitted under the provisions of this paragraph (e)(2). The statement must include the information described in paragraphs (c)(2)(ii) and (iii) of this section. The statement must also include the information described in paragraph (c)(2)(iv) of this section that supports the conclusions under paragraph (e)(2)(i) or (ii) of this section, as applicable. The statement must be attached to, and filed by the due date (including extensions) of, the elector's income tax return for the taxable year in which the presumed triggering event occurs.
(iv) Examples. See Sec. 1.1503(d)-7(c) Examples 32 and 33.
(f) Triggering event exceptions--(1) Continuing ownership of assets or interests. The following events shall not constitute triggering events, requiring the recapture of the dual consolidated loss under paragraph (h) of this section:
(1) Continuing ownership of assets or interests. The following events shall not constitute triggering events, requiring the recapture of the dual consolidated loss under paragraph (h) of this section:
(i) Disaffiliation as a result of a transaction described in section 381. An affiliated dual resident corporation or affiliated domestic owner ceases to be a member of a consolidated group solely by reason of a transaction in which a member of the same consolidated group succeeds to the tax attributes of the dual resident corporation or domestic owner under the provisions of section 381.
(ii) Continuing ownership by consolidated group. This paragraph (f)(1)(ii) applies when assets of an affiliated dual resident corporation, or assets of, or interests in, a separate unit of an affiliated domestic owner are sold or otherwise disposed of. In such a case, the sale or disposition shall not be treated as a triggering event to the extent the assets or interests are acquired by one or more members of the consolidated group that includes the affiliated dual resident corporation or affiliated domestic owner, or by a partnership or a grantor trust, but only if immediately after the acquisition more than 90 percent of the partnership's or grantor trust's interests is owned, directly or indirectly, by members of such consolidated group.
(iii) Continuing ownership by unaffiliated dual resident corporation or unaffiliated domestic owner. This paragraph (f)(1)(iii) applies when assets of an unaffiliated dual resident corporation, or assets of, or interests in, a separate unit of an unaffiliated domestic owner, are sold or otherwise disposed of. In such a case, the sale or disposition shall not be a triggering event to the extent such assets or interests are acquired by the unaffiliated dual resident corporation, or unaffiliated domestic owner, as applicable, or by a partnership or grantor trust, but only if immediately after the acquisition more than 90 percent of the partnership's or grantor trust's interests is owned, directly or indirectly, by the unaffiliated dual resident corporation or unaffiliated domestic owner. For example, this paragraph (f)(1)(iii) applies when an unaffiliated domestic owner acquires direct ownership of the assets of a separate unit that it had immediately before owned indirectly through a partnership.
(2) Transactions requiring a new domestic use agreement--(i) Multiple-party events. If all the requirements of paragraph (f)(2)(iii) of this section are satisfied, the following events shall not constitute triggering events requiring the recapture of the dual consolidated loss under paragraph (h) of this section:
(i) Multiple-party events. If all the requirements of paragraph (f)(2)(iii) of this section are satisfied, the following events shall not constitute triggering events requiring the recapture of the dual consolidated loss under paragraph (h) of this section:
(A) An affiliated dual resident corporation or affiliated domestic owner becomes an unaffiliated domestic corporation or a member of a new consolidated group (other than in a transaction described in paragraph (f)(2)(ii)(B) of this section).
(B) Assets of a dual resident corporation or assets of, or interests in, a separate unit, are sold or otherwise disposed of in a transaction in which such assets or interests are acquired by an unaffiliated domestic corporation, one or more members of a new consolidated group, or by a partnership or grantor trust, but only if immediately after the sale or disposition more than 90 percent of the partnership's or grantor trust's interests is owned, directly or indirectly, by the unaffiliated domestic owner or by members of a new consolidated group, as applicable. See the related exception to foreign use provided under Sec. 1.1503(d)-3(c)(8). See also Sec. 1.1503(d)-7(c) Examples 36 and 37.
(ii) Events resulting in a single consolidated group. If the requirements of paragraph (f)(2)(iii)(A) of this section are satisfied, the following events shall not constitute triggering events requiring the recapture of the dual consolidated loss under paragraph (h) of this section:
(A) An unaffiliated dual resident corporation or unaffiliated domestic owner becomes a member of a consolidated group.
(B) A consolidated group ceases to exist as a result of a transaction described in Sec. 1.1502-13(j)(5)(i) (relating to acquisitions of the common parent of the consolidated group), other than a transaction in which any member of the terminating group, or the successor-in-interest of such member, is not a member of the surviving group immediately after the terminating group ceases to exist. See Sec. 1.1503(d)-7(c) Example 34.
(iii) Requirements--(A) New domestic use agreement. The unaffiliated domestic corporation or new consolidated group (subsequent elector) must file an agreement described in paragraph (d)(1) of this section (new domestic use agreement). The new domestic use agreement must be labeled ``New Domestic Use Agreement'' at the top of the page, and must be attached to and filed by the due date (including extensions) of, the subsequent elector's income tax return for the taxable year in which the event described in paragraph (f)(2)(i) or (f)(2)(ii) of this section occurs. The new domestic use agreement must be signed under penalties of perjury by the person who signs the return and must include the following items:
(1) A statement that the document submitted is an election and agreement under the provisions of paragraph (f)(2) of this section.
(2) An agreement to assume the same obligations with respect to the dual consolidated loss as the unaffiliated dual resident corporation, unaffiliated domestic owner, or consolidated group, as applicable, that filed the original domestic use agreement (original elector) with respect to that loss. In such a case, obligations of an elector provided under this section shall also be considered to be obligations of a subsequent elector.
(3) In the event of a transaction described in section 384(a) involving the subsequent elector, an agreement to treat any potential recapture amount under paragraph (h) of this section with respect to the dual consolidated loss as unrealized built-in gain for purposes of section 384(a), subject to any applicable exceptions (for example, the threshold requirements under section 382(h)(3)(B)). The potential recapture amount treated as unrealized built-in gain under this paragraph (f)(2)(iii)(A)(3) may be reduced to the extent permitted by paragraph (h)(2)(i) of this section.
(4) In the case of a multiple-party event described in paragraph (f)(2)(i) of this section, an agreement to be subject to the rules provided in paragraph (h)(3) of this section.
(5) The name, U.S. taxpayer identification number, and address of the original elector and prior subsequent electors, if any, with respect to the dual consolidated loss.
(B) Statement filed by original elector. In the case of a multiple-party event described in paragraph (f)(2)(i) of this section, the original elector must file a statement that is attached to and filed by the due date (including extensions) of its income tax return for the taxable year in which the event occurs. The statement must be labeled ``Original Elector Statement'' at the top of the page, must be signed under penalties of perjury by the person who signs the tax return, and must include the following items:
(1) A statement that the document submitted is an election and agreement under the provisions of paragraph (f)(2) of this section.
(2) An agreement to be subject to the rules provided in paragraph (h)(3) of this section.
(3) The name, U.S. taxpayer identification number, and address of the subsequent elector.
(3) Certain transfers qualifying for the de minimis exception to foreign use. If a transaction or event qualifies for the de minimis exception to foreign use described in Sec. 1.1503(d)-3(c)(5), the transaction or event shall not constitute a triggering event under paragraph (e)(1)(iv) (transfers of assets) or (v) (transfers of an interest in a separate unit) of this section. For purposes of the preceding sentence, the transaction or event shall include deemed transfers that occur as a result of the transaction or event. See, for example, deemed transfers occurring pursuant to Rev. Rul. 99-5 (1999-1 CB 434), see Sec. 601.601(d)(2)(ii)(b), and section 708 and the related regulations. See also Sec. 1.1503(d)-7 Example 5. This paragraph (f)(3) only applies if the entire transaction or event qualifies for the de minimis exception to foreign use. For example, if a domestic owner sells five percent of a separate unit to a foreign corporation, which would qualify for the de minimis exception to foreign use if it were the only transfer, but pursuant to the same transaction also sells 70 percent of the same separate unit to another corporation in a manner that results in a triggering event under paragraph (e)(1)(v) of this section, this paragraph shall not apply to prevent the transaction from resulting in a triggering event.
(4) Deemed transactions as a result of certain transfers that do not result in a foreign use. The rules in this paragraph (f)(4) apply where the assets of, or the interests in, a separate unit are transferred in a transaction that would not result in a foreign use and, but for resulting deemed transactions or events, would not result in a triggering event described in paragraph (e)(1) of this section. For purposes of this paragraph (f)(4), deemed transactions or events shall include transactions or events that are deemed to occur pursuant to Rev. Rul. 99-5 and section 708 and the related regulations. In such a case, the deemed transactions shall not result in a triggering event under paragraph (e)(1)(iv) (transfers of assets) or (v) (transfers of an interest in a separate unit) of this section. See also Sec. 1.1503(d)-7 Example 35.
(5) Compulsory transfers. Transfers of the assets or stock of a dual resident corporation, or of the assets or interests in a separate unit, shall not constitute a triggering event (including a foreign use that occurs as a result of, or following, the transfer) if such transfers are--
(i) Legally required by a foreign government as a necessary condition of doing business in a foreign country;
(ii) Compelled by a genuine threat of immediate expropriation by a foreign government; or
(iii) The result of the expropriation of assets by the foreign government.
(6) Subsequent triggering events. Any triggering event described in paragraph (e) of this section that occurs subsequent to one of the transactions described in this paragraph (f), and that itself does not meet any of the exceptions provided in this paragraph (f), shall require recapture under paragraph (h) of this section by the elector or subsequent elector, as applicable.
(g) Annual certification reporting requirement. Unless and until the domestic use agreement is terminated pursuant to paragraph (j) of this section, the elector must file a certification, labeled ``Certification of Dual Consolidated Loss'' at the top of the page, that is attached to, and filed by the due date (including extensions) of, its income tax return for each taxable year during the certification period. The certification must provide that there has been no foreign use of the dual consolidated loss. The certification must identify the dual consolidated loss to which it pertains by setting forth the elector's year in which the loss was incurred and the amount of such loss. In addition, the certification must warrant that arrangements have been made to ensure that there will be no foreign use of the dual consolidated loss and that the elector will be informed of any such foreign use. If applicable, the certification must include a notification that an excepted triggering event under paragraph (f)(2) of this section has occurred with respect to the dual consolidated loss within the taxable year being certified. If dual consolidated losses of more than one taxable year are subject to the rules of this paragraph (g), the certification for those years may be combined in a single document, but each dual consolidated loss must be separately identified. See Sec. 1.1503(d)-3(e)(2)(ii) for additional certifications required where taxpayers elect the stand-alone exception of Sec. 1.1503(d)-3(e)(2).
(h) Recapture of dual consolidated loss and interest charge--(1) Presumptive rules--(i) Amount of recapture. Except as otherwise provided in this section, upon the occurrence of a triggering event described in paragraph (e) of this section that does not meet any of the exceptions provided in paragraph (f) of this section, the dual resident corporation or domestic owner of the separate unit shall recapture as gross income the total amount of the dual consolidated loss to which the triggering event applies on its income tax return for the taxable year in which the triggering event occurs (or, when the triggering event is a foreign use of the dual consolidated loss, the taxable year that includes the last day of the foreign taxable year during which such foreign use occurs). See Sec. 1.1503(d)-5(c)(4)(vi) for rules with respect to the attribution of recapture income to a separate unit. See also Sec. 1.1503(d)-7 Examples 38 through 40.
(1) Presumptive rules--(i) Amount of recapture. Except as otherwise provided in this section, upon the occurrence of a triggering event described in paragraph (e) of this section that does not meet any of the exceptions provided in paragraph (f) of this section, the dual resident corporation or domestic owner of the separate unit shall recapture as gross income the total amount of the dual consolidated loss to which the triggering event applies on its income tax return for the taxable year in which the triggering event occurs (or, when the triggering event is a foreign use of the dual consolidated loss, the taxable year that includes the last day of the foreign taxable year during which such foreign use occurs). See Sec. 1.1503(d)-5(c)(4)(vi) for rules with respect to the attribution of recapture income to a separate unit. See also Sec. 1.1503(d)-7 Examples 38 through 40.
(i) Amount of recapture. Except as otherwise provided in this section, upon the occurrence of a triggering event described in paragraph (e) of this section that does not meet any of the exceptions provided in paragraph (f) of this section, the dual resident corporation or domestic owner of the separate unit shall recapture as gross income the total amount of the dual consolidated loss to which the triggering event applies on its income tax return for the taxable year in which the triggering event occurs (or, when the triggering event is a foreign use of the dual consolidated loss, the taxable year that includes the last day of the foreign taxable year during which such foreign use occurs). See Sec. 1.1503(d)-5(c)(4)(vi) for rules with respect to the attribution of recapture income to a separate unit. See also Sec. 1.1503(d)-7 Examples 38 through 40.
(ii) Interest charge. In connection with the recapture, the elector shall pay an interest charge. An interest charge may be due even if the amount of recapture income is reduced to zero pursuant to paragraph (h)(2)(i) of this section. See Sec. 1.1503(d)-7(c) Example 39. Except as otherwise provided in this section, the amount of the interest shall be computed under the rules of section 6601(a) by treating the additional tax resulting from the recapture as though it had been due and unpaid as of the date for payment of the tax for the taxable year in which the taxpayer received a tax benefit from the dual consolidated loss. For purposes of this paragraph (h)(1)(ii), a tax benefit shall be considered to have arisen in a taxable year in which the losses or deductions taken into account in computing the dual consolidated loss reduced U.S. taxable income. For the purpose of computing the interest charge, the additional tax resulting from the recapture is determined by treating the recapture income as the last income earned in the year of recapture. The interest shall be computed to the date for payment of the tax for the year of recapture and the interest thus computed becomes a part of the tax liability for that taxable year. See section 6601 for the computation of interest on a tax liability that it is not paid timely. The recapture interest charge shall be deductible to the same extent as interest under section 6601.
(2) Reduction of presumptive recapture amount and presumptive interest charge--(i) Amount of recapture. The dual resident corporation or domestic owner may recapture an amount less than the total dual consolidated loss if the elector demonstrates, to the satisfaction of the Commissioner, the lesser amount described in this paragraph (h)(2)(i). The reduction in the amount of recapture is the amount by which the dual consolidated loss would have offset other taxable income reported on a timely filed U.S. income tax return for any taxable year up to and including the taxable year of the triggering event (or, when the triggering event is a foreign use of the dual consolidated loss, the taxable year that includes the last day of the foreign taxable year during which such foreign use occurs) if no domestic use election had been made for the loss such that it was subject to the domestic use limitation of Sec. 1.1503(d)-4(b) (and therefore subject to the limitation under Sec. 1.1503(d)-4(c)). For this purpose, the rules for attributing items of income, gain, deduction, and loss under Sec. 1.1503(d)-5 shall apply. An elector using this rebuttal rule must prepare a separate accounting showing the income for each year that would have offset the dual resident corporation's or separate unit's recapture amount if no domestic use election had been made for the dual consolidated loss. The separate accounting must be signed under penalties of perjury by the person who signs the elector's tax return, must be labeled ``Reduction of Recapture Amount'' at the top of the page, and must indicate that it is submitted under the provisions of this paragraph (h)(2)(i). The accounting must be attached to, and filed by the due date (including extensions) of, the elector's income tax return for the taxable year in which the triggering event occurs. See Sec. 1.1503(d)-7(c) Examples 38 through 40.
(i) Amount of recapture. The dual resident corporation or domestic owner may recapture an amount less than the total dual consolidated loss if the elector demonstrates, to the satisfaction of the Commissioner, the lesser amount described in this paragraph (h)(2)(i). The reduction in the amount of recapture is the amount by which the dual consolidated loss would have offset other taxable income reported on a timely filed U.S. income tax return for any taxable year up to and including the taxable year of the triggering event (or, when the triggering event is a foreign use of the dual consolidated loss, the taxable year that includes the last day of the foreign taxable year during which such foreign use occurs) if no domestic use election had been made for the loss such that it was subject to the domestic use limitation of Sec. 1.1503(d)-4(b) (and therefore subject to the limitation under Sec. 1.1503(d)-4(c)). For this purpose, the rules for attributing items of income, gain, deduction, and loss under Sec. 1.1503(d)-5 shall apply. An elector using this rebuttal rule must prepare a separate accounting showing the income for each year that would have offset the dual resident corporation's or separate unit's recapture amount if no domestic use election had been made for the dual consolidated loss. The separate accounting must be signed under penalties of perjury by the person who signs the elector's tax return, must be labeled ``Reduction of Recapture Amount'' at the top of the page, and must indicate that it is submitted under the provisions of this paragraph (h)(2)(i). The accounting must be attached to, and filed by the due date (including extensions) of, the elector's income tax return for the taxable year in which the triggering event occurs. See Sec. 1.1503(d)-7(c) Examples 38 through 40.
(ii) Interest charge. The interest charge imposed under this section may be reduced if the elector demonstrates, to the satisfaction of the Commissioner, that the net interest owed would have been less than that provided in paragraph (h)(1)(ii) of this section if the elector had filed an amended return for the taxable year in which the recaptured dual consolidated loss was incurred, and for any other affected taxable years up to and including the taxable year of recapture, if no domestic use election had been made for the dual consolidated loss such that it had been subject to the restrictions of Sec. 1.1503(d)-4(b) (and therefore subject to the limitations under Sec. 1.1503(d)-4(c)). An elector using this rebuttal rule must prepare a computation demonstrating the reduction in the net interest owed as a result of treating the dual consolidated loss as a loss subject to the restrictions of Sec. 1.1503(d)-4(b) (and therefore subject to the limitations under Sec. 1.1503(d)-4(c)). The computation must be labeled ``Reduction of Interest Charge'' at the top of the page and must indicate that it is submitted under the provisions of this paragraph (h)(2)(ii). The computation must be signed under penalties of perjury by the person who signs the elector's tax return, and must be attached to, and filed by the due date (including extensions) of, the elector's income tax return for the taxable year in which the triggering event occurs. See Sec. 1.1503(d)-7(c) Examples 39 and 40.
(3) Rules regarding multiple-party event exceptions to triggering events--(i) Scope. The rules of this paragraph (h)(3) apply when, after a triggering event described in paragraph (e) of this section with respect to which the requirements of paragraph (f)(2)(i) of this section were met (excepted event), a triggering event under paragraph (e) of this section occurs, and no exception applies to such triggering event under paragraph (f) of this section (subsequent triggering event). See Sec. 1.1503(d)-7(c) Examples 36 and 37.
(i) Scope. The rules of this paragraph (h)(3) apply when, after a triggering event described in paragraph (e) of this section with respect to which the requirements of paragraph (f)(2)(i) of this section were met (excepted event), a triggering event under paragraph (e) of this section occurs, and no exception applies to such triggering event under paragraph (f) of this section (subsequent triggering event). See Sec. 1.1503(d)-7(c) Examples 36 and 37.
(ii) Original elector and prior subsequent electors not subject to recapture or interest charge--(A) Except to the extent otherwise provided in this paragraph (h)(3), neither the original elector nor any prior subsequent elector shall be subject to the rules of this paragraph (h) with respect to dual consolidated losses subject to the original domestic use agreement.
(A) Except to the extent otherwise provided in this paragraph (h)(3), neither the original elector nor any prior subsequent elector shall be subject to the rules of this paragraph (h) with respect to dual consolidated losses subject to the original domestic use agreement.
(B) In the case of a dual consolidated loss with respect to which multiple excepted events have occurred, only the subsequent elector that owns the dual resident corporation or separate unit at the time of the subsequent triggering event shall be subject to the recapture rules of this paragraph (h). For purposes of this paragraph (h), the term prior subsequent elector refers to all other subsequent electors.
(iii) Recapture tax amount and required statement--(A) In general. If a subsequent triggering event occurs, the subsequent elector shall take into account the recapture tax amount as determined under paragraph (h)(3)(iii)(B) of this section. The subsequent elector must prepare a statement that computes the recapture tax amount, as provided under paragraph (h)(3)(iii)(B) of this section, with respect to the dual consolidated loss subject to the new domestic use agreement. This statement must be attached to, and filed by the due date (including extensions) of, the subsequent elector's income tax return for the taxable year in which the subsequent triggering event occurs (or, when the subsequent triggering event is a foreign use of the dual consolidated loss, the taxable year that includes the last day of the foreign taxable year during which such foreign use occurs). The statement must be signed under penalties of perjury by the person who signs the return. The statement must be labeled ``Statement Identifying Liability'' at the top and, in addition to the calculation of the recapture tax amount, must include the following items, in paragraphs labeled to correspond with the items set forth in paragraphs (h)(3)(iii)(A)(1) through (3) of this section:
(1) A statement that the document is submitted under the provisions of Sec. 1.1503(d)-6(h)(3)(iii).
(2) A statement identifying the amount of the dual consolidated losses at issue and the taxable years in which they were used.
(3) The name, address, and taxpayer identification number of the original elector and all prior subsequent electors.
(B) Recapture tax amount. The recapture tax amount equals the excess (if any) of--
(1) The income tax liability of the subsequent elector for the taxable year that includes the amount of recapture and related interest charge with respect to the dual consolidated losses that are recaptured as a result of the subsequent triggering event, as provided under paragraphs (h)(1) and (h)(2) of this section; over
(2) The income tax liability of the subsequent elector for such taxable year, computed by excluding the amount of recapture and related interest charge described in paragraph (h)(3)(iii)(B)(1) of this section.
(iv) Tax assessment and collection procedures--(A) In general--(1) Subsequent elector. An assessment identifying an income tax liability of the subsequent elector is considered an assessment of the recapture tax amount where the recapture tax amount is part of the income tax liability being assessed and the recapture tax amount is reflected in a statement attached to the subsequent elector's income tax return as provided under paragraph (h)(3)(iii) of this section.
(2) Original elector and prior subsequent electors. The assessment of the recapture tax amount as set forth in paragraph (h)(3)(iv)(A)(1) of this section shall be considered as having been properly assessed as an income tax liability of the original elector and of each prior subsequent elector, if any. The date of such assessment shall be the date the income tax liability of the subsequent elector was properly assessed. The Commissioner may collect all or a portion of such recapture tax amount from the original elector and/or the prior subsequent electors under the circumstances set forth in paragraph (h)(3)(iv)(B) of this section.
(B) Collection from original elector and prior subsequent electors; joint and several liability--(1) In general. If the subsequent elector does not pay in full the income tax liability that includes a recapture tax amount, the Commissioner may collect that portion of the unpaid balance of such income tax liability attributable to the recapture tax amount in full or in part from the original elector and/or from any prior subsequent elector, provided that the following conditions are satisfied with respect to such elector:
(i) The Commissioner properly has assessed the recapture tax amount pursuant to paragraph (h)(3)(iv)(A)(1) of this section.
(ii) The Commissioner has issued a notice and demand for payment of the recapture tax amount to the subsequent elector in accordance with Sec. 301.6303-1 of this chapter.
(iii) The subsequent elector has failed to pay all of the recapture tax amount by the date specified in such notice and demand.
(iv) The Commissioner has issued a notice and demand for payment of the unpaid portion of the recapture tax amount to the original elector, or prior subsequent elector (as the case may be), in accordance with Sec. 301.6303-1 of this chapter.
(2) Joint and several liability. The liability imposed under this paragraph (h)(3)(iv)(B) on the original elector and each prior subsequent elector shall be joint and several.
(C) Allocation of partial payments of tax. If the subsequent elector's income tax liability for a taxable period includes a recapture tax amount, and if such income tax liability is satisfied in part by payment, credit, or offset, such payment, credit or offset shall be allocated first to that portion of the income tax liability that is not attributable to the recapture tax amount, and then to that portion of the income tax liability that is attributable to the recapture tax amount.
(D) Refund. If the Commissioner makes a refund of any income tax liability that includes a recapture tax amount, the Commissioner shall allocate and pay the refund to each elector who paid a portion of such income tax liability as follows:
(1) The Commissioner shall first determine the total amount of recapture tax paid by and/or collected from the original elector and from any prior subsequent electors. The Commissioner shall then allocate and pay such refund to the original elector and prior subsequent electors, with each such elector receiving an amount of such refund on a pro rata basis, not to exceed the amount of recapture tax paid by and/or collected from such elector.
(2) The Commissioner shall pay the balance of such refund, if any, to the subsequent elector.
(v) Definition of income tax liability. Solely for purposes of paragraph (h)(3) of this section, the term income tax liability means the income tax liability imposed on a domestic corporation under title 26 of the United States Code for a taxable year, including additions to tax, additional amounts, penalties, and any interest charge related to such income tax liability.
(vi) Example. See Sec. 1.1503(d)-7(c) Example 36.
(4) Computation of taxable income in year of recapture--(i) Presumptive rule. Except to the extent provided in paragraph (h)(4)(ii) of this section, for purposes of computing the taxable income for the year of recapture, no current, carryover or carryback losses may offset and absorb the recapture amount.
(i) Presumptive rule. Except to the extent provided in paragraph (h)(4)(ii) of this section, for purposes of computing the taxable income for the year of recapture, no current, carryover or carryback losses may offset and absorb the recapture amount.
(ii) Exception to presumptive rule. The recapture amount included in gross income may be offset and absorbed by that portion of the elector's net operating loss carryover that is attributable to the dual resident corporation or separate unit that incurred the dual consolidated loss being recaptured, if the elector demonstrates, to the satisfaction of the Commissioner, the amount of such portion of the carryover. The principles of Sec. 1.1502-21(b)(2)(iv) shall apply for purposes of determining whether any portion of a net operating loss carryover is attributable to the dual resident corporation or separate unit. In the case of a separate unit, such determination shall be made by treating the separate unit as a domestic corporation and a member of the consolidated group composing its unaffiliated domestic owner, or members of the consolidated group of which its affiliated domestic owner is a member, as appropriate. An elector utilizing this rebuttal rule must prepare a computation demonstrating the amount of net operating loss carryover that, under this paragraph (h)(4)(ii), may absorb the recapture amount included in gross income. Such computation must be signed under penalties of perjury and attached to and filed by the due date (including extensions) of, the income tax return for the taxable year in which the triggering event occurs (or, when the triggering event is a foreign use of the dual consolidated loss, the taxable year that includes the last day of the foreign taxable year during which such foreign use occurs).
(5) Character and source of recapture income. The amount recaptured under this paragraph (h) shall be treated as ordinary income. Except as provided in the prior sentence, such income shall be treated, as applicable, as income from the same source, having the same character, and falling within the same separate category, for all purposes, including sections 904(d) and 907, to which the items of deduction or loss composing the dual consolidated loss were allocated and apportioned, as provided under sections 861(b), 862(b), 863(a), 864(e), 865, and the related regulations. For this determination, the pro rata computation of the items of deduction or loss composing the dual consolidated loss as described in Sec. 1.1503(d)-4(c)(4) shall apply. See Sec. 1.1503(d)-7(c) Example 38.
(6) Reconstituted net operating loss--(i) General rule. Except as provided in paragraphs (h)(6)(ii) and (iii) of this section, commencing in the taxable year immediately following the year in which the dual consolidated loss is recaptured, the dual resident corporation, or the domestic owner of the separate unit, that incurred the dual consolidated loss that is recaptured shall be treated as having a net operating loss (reconstituted net operating loss) in an amount equal to the amount actually recaptured under this paragraph (h). If a domestic corporation (transferee) acquires the assets of the dual resident corporation or domestic owner in a transaction described in section 381(a), the preceding sentence shall be applied by treating the transferee as the dual resident corporation or domestic owner, as applicable. In a case to which this paragraph (h)(6) applies, the transferee corporation shall be treated as having a reconstituted net operating loss in an amount equal to the amount actually recaptured under this paragraph (h). In no event, however, shall more than one corporation be treated as having a reconstituted net operating loss as a result of a single dual consolidated loss being recaptured. A reconstituted net operating loss of a domestic owner shall be attributable under Sec. 1.1503(d)-5 to the separate unit that incurred the dual consolidated loss that was recaptured. Moreover, a reconstituted net operating loss shall be subject to the domestic use limitation of Sec. 1.1503(d)-4(b) (and therefore subject to the limitation under Sec. 1.1503(d)-4(c)), without regard to the exceptions contained in paragraphs (b) through (d) of this section (relating to elective agreements in place between the United States and a foreign country, the ability to demonstrate no possibility of a foreign use, and a domestic use election, respectively). The reconstituted net operating loss shall be available only for carryover, under section 172(b), to taxable years following the taxable year of recapture. For purposes of determining the remaining carryover period, the reconstituted net operating loss shall be treated as if it had been recognized in the taxable year in which the dual consolidated loss that is the basis of the recapture amount was incurred. See Sec. 1.1503(d)-7(c) Examples 36, 38, and 40.
(i) General rule. Except as provided in paragraphs (h)(6)(ii) and (iii) of this section, commencing in the taxable year immediately following the year in which the dual consolidated loss is recaptured, the dual resident corporation, or the domestic owner of the separate unit, that incurred the dual consolidated loss that is recaptured shall be treated as having a net operating loss (reconstituted net operating loss) in an amount equal to the amount actually recaptured under this paragraph (h). If a domestic corporation (transferee) acquires the assets of the dual resident corporation or domestic owner in a transaction described in section 381(a), the preceding sentence shall be applied by treating the transferee as the dual resident corporation or domestic owner, as applicable. In a case to which this paragraph (h)(6) applies, the transferee corporation shall be treated as having a reconstituted net operating loss in an amount equal to the amount actually recaptured under this paragraph (h). In no event, however, shall more than one corporation be treated as having a reconstituted net operating loss as a result of a single dual consolidated loss being recaptured. A reconstituted net operating loss of a domestic owner shall be attributable under Sec. 1.1503(d)-5 to the separate unit that incurred the dual consolidated loss that was recaptured. Moreover, a reconstituted net operating loss shall be subject to the domestic use limitation of Sec. 1.1503(d)-4(b) (and therefore subject to the limitation under Sec. 1.1503(d)-4(c)), without regard to the exceptions contained in paragraphs (b) through (d) of this section (relating to elective agreements in place between the United States and a foreign country, the ability to demonstrate no possibility of a foreign use, and a domestic use election, respectively). The reconstituted net operating loss shall be available only for carryover, under section 172(b), to taxable years following the taxable year of recapture. For purposes of determining the remaining carryover period, the reconstituted net operating loss shall be treated as if it had been recognized in the taxable year in which the dual consolidated loss that is the basis of the recapture amount was incurred. See Sec. 1.1503(d)-7(c) Examples 36, 38, and 40.
(ii) Exception. Paragraph (h)(6)(i) of this section shall not apply to the extent the dual consolidated loss that is the basis of the recapture amount would have been eliminated pursuant to Sec. 1.1503(d)-4(d) if no domestic use election had been made for such loss. See Sec. 1.1503(d)-7(c) Example 40.
(iii) Special rule for recapture following multiple-party event exception to a triggering event. This paragraph applies to an excepted event described in paragraph (f)(2)(i)(B) of this section that is followed by a subsequent triggering event requiring recapture as described in paragraph (f)(6) of this section. In such a case, the domestic corporation that owns, directly or indirectly, the assets of the dual resident corporation, or the assets of or the interests in a separate unit, immediately following the excepted event shall be treated as if it incurred the dual consolidated loss that is recaptured for purposes of applying paragraph (h)(6)(i) of this section. See Sec. 1.1503(d)-7(c) Example 36.
(i) [Reserved]
(j) Termination of domestic use agreement and annual certifications--(1) Rebuttals, exceptions to triggering events, and recapture. The domestic use agreement filed with respect to a dual consolidated loss shall terminate prior to the end of the certification period and have no further effect if--
(1) Rebuttals, exceptions to triggering events, and recapture. The domestic use agreement filed with respect to a dual consolidated loss shall terminate prior to the end of the certification period and have no further effect if--
(i) An elector is able to rebut the presumption of a triggering event pursuant to the general rule in paragraph (e)(2)(i) of this section;
(ii) An event described in paragraph (e)(1) of this section is not a triggering event as a result of the application of paragraphs (f)(2)(i) or (ii) (relating to events requiring a new domestic use agreement) of this section; this paragraph (j)(1)(ii) does not, however, apply to terminate the new domestic use agreement filed in connection with the event pursuant to paragraph (f)(2)(iii)(A) of this section. See also paragraph (h)(3)(iv) of this section regarding collection from the original elector and prior subsequent electors in certain cases; or
(iii) A dual consolidated loss is recaptured pursuant to paragraph (h) of this section. See Sec. 1.1503(d)-7(c) Examples 32 through 34.
(2) Termination of ability for foreign use--(i) In general. A domestic use agreement filed with respect to a dual consolidated loss shall terminate and have no further effect as of the end of a taxable year if the elector--
(i) In general. A domestic use agreement filed with respect to a dual consolidated loss shall terminate and have no further effect as of the end of a taxable year if the elector--
(A) Demonstrates, to the satisfaction of the Commissioner, that as of the end of such taxable year no foreign use (as defined in Sec. 1.1503(d)-3) of the dual consolidated loss can occur in any other year by any means; and
(B) Prepares a statement described in paragraph (j)(2)(ii) of this section that is attached to, and filed by the due date (including extensions) of, its U.S. income tax return for such taxable year.
(ii) Statement. The statement described in this paragraph (j)(2)(ii) must be signed under penalties of perjury by the person who signs the return. The statement must be labeled ``Termination of Ability for Foreign Use'' at the top of the page and must include the following information, in paragraphs labeled to correspond with the following:
(A) A statement that the document is submitted under the provisions of paragraph (j)(2) of this section.
(B) The information required by paragraph (c)(2)(ii) of this section.
(C) A statement of the amount of the dual consolidated loss at issue and the year in which such dual consolidated loss was incurred.
(D) The information described in paragraph (c)(2)(iv) of this section that supports the conclusion that no foreign use can occur as provided in paragraph (j)(2)(i)(A) of this section.
(3) Agreements filed in connection with stand-alone exception. See Sec. 1.1503(d)-3(e)(2)(iii) for the termination of domestic use agreements filed in connection with the stand-alone exception to the mirror legislation rule when a subsequent election is made under paragraph (b) of this section (relating to agreements entered into between the United States and a foreign country). [T.D. 9315, 72 FR 12914, Mar. 19, 2007] Sec. 1.1503(d)-7 Examples.
(a) In general. This section provides examples that illustrate the application of Secs. 1.1503(d)-1 through 1.1503(d)-6. This section also provides facts that are presumed for such examples.
(b) Presumed facts for examples. For purposes of the examples in this section, unless otherwise indicated, the following facts are presumed:
(1) Each entity has only a single class of equity outstanding, all of which is held by a single owner.
(2) P, a domestic corporation and the common parent of the P consolidated group, owns S, a domestic corporation and a member of the P consolidated group.
(3) DRCX, a domestic corporation, is subject to Country X tax on its worldwide income or on a residence basis, and is a dual resident corporation.
(4) DE1X and DE2X are both Country X entities, subject to Country X tax on their worldwide income or on a residence basis, and disregarded as entities separate from their owners for U.S. tax purposes. DE3Y is a Country Y entity, subject to Country Y tax on its worldwide income or on a residence basis, and disregarded as an entity separate from its owner for U.S. tax purposes. All the interests in DE1X, DE2X, and DE3Y constitute hybrid entity separate units.
(5) FBX is a Country X business operation that, if carried on by a U.S. person, would constitute a foreign branch, as defined in Sec. 1.367(a)-6T(g)(1), and is a Country X foreign branch separate unit.
(6) Neither the assets nor the activities of an entity constitute a foreign branch separate unit.
(7) FSX is a Country X entity that is subject to Country X tax on its worldwide income or on a residence basis and is classified as a foreign corporation for U.S. tax purposes.
(8) The applicable foreign country has a consolidation regime that--
(i) Includes as members of a consolidated group any commonly controlled branches and permanent establishments in such jurisdiction, and entities that are subject to tax in such jurisdiction on their worldwide income or on a residence basis; and
(ii) Allows the losses of members of consolidated groups to offset income of other members.
(9) There is no mirror legislation, within the meaning of Sec. 1.1503(d)-3(e)(1), in the applicable foreign country.
(10) There is no elective agreement described in Sec. 1.1503(d)-6(b) between the United States and the applicable foreign country.
(11) There is no income tax convention between the United States and the applicable foreign country.
(12) If a domestic use election, within the meaning of Sec. 1.1503(d)-6(d), is made, all the necessary filings related to such election are properly completed on a timely basis.
(13) If there is a triggering event requiring recapture of a dual consolidated loss, the amount of recapture is not reduced pursuant to Sec. 1.1503(d)-6(h)(2).
(14) There are no other items of income, gain, deduction, and loss. In addition, the United States and the applicable foreign country recognize the same items of income, gain, deduction, and loss in each taxable year.
(15) All taxpayers use the calendar year as their taxable year.
(c) Examples. The following examples illustrate the application of Secs. 1.1503(d)-1 through 1.1503(d)-6:
(i) Facts. P owns DE3Y which, in turn, owns DE1X. DE1X owns FBX. PRS, an entity treated as a partnership for both U.S. and Country X tax purposes, is owned 50 percent by P and 50 percent by an unrelated foreign person. PRS carries on a business operation in Country X that, if carried on by a U.S. person, would constitute a foreign branch within the meaning of Sec. 1.367(a)-6T(g)(1). In addition, P owns DRCX, a member of the consolidated group of which P is the parent, which carries on business operations in Country X that constitute a foreign branch within the meaning of Sec. 1.367(a)-6T(g)(1). S owns DE2X.
(ii) Result. Pursuant to Sec. 1.1503(d)-1(b)(4)(ii), the interest in DE1X, the interest in DE2X, FBX, P's share of the Country X business operations carried on by PRS (which is owned by P indirectly through its interest in PRS), and DRCX's Country X business operations are combined and treated as a single separate unit of the consolidated group of which P is the parent. This is the case regardless of whether the losses of each individual separate unit are made available to offset the income of the other individual separate units under Country X tax laws. Because DRCX is a dual resident corporation, it is not combined and treated as part of this combined separate unit and, as a result, DRCX's income or dual consolidated loss is not taken into account in determining the income or dual consolidated loss of the combined separate unit. In addition, P's interest in DE3Y is not combined and is another separate unit because it is subject to tax in Country Y, rather than Country X.
(i) Facts. P carries on business operations in Country X that constitute a permanent establishment under the U.S.-Country X income tax convention. In year 1, a loss is attributable to P's Country X permanent establishment, as determined under Sec. 1.1503(d)-5.
(ii) Result. Under Secs. 1.1503(d)-1(b)(4)(i)(A) and 1.367(a)-6T(g)(1), P's Country X permanent establishment constitutes a foreign branch separate unit. Therefore, the year 1 loss attributable to the foreign branch separate unit constitutes a dual consolidated loss pursuant to Sec. 1.1503(d)-1(b)(5)(ii). The dual consolidated loss rules apply to the dual consolidated loss even though there is no affiliate of the foreign branch separate unit in Country X, because it is still possible that all or a portion of the dual consolidated loss can be put to a foreign use. For example, there may be a foreign use with respect to a Country X affiliate acquired in a year subsequent to the year in which the dual consolidated loss was incurred. See Sec. 1.1503(d)-6(a)(2). Accordingly, unless an exception under Sec. 1.1503(d)-6 applies (such as a domestic use election), the year 1 dual consolidated loss attributable to P's Country X permanent establishment is subject to the domestic use limitation rule of Sec. 1.1503(d)-4(b). As a result, pursuant to Sec. 1.1503(d)-4(c), the year 1 dual consolidated loss cannot offset income of P that is not attributable to its Country X foreign branch separate unit, nor can it offset income of any other domestic affiliate. The loss can, however, offset income of the Country X foreign branch separate unit, subject to the application of Sec. 1.1503(d)-4(c). The result would be the same even if Country X did not have a consolidation regime that includes as members of consolidated groups Country X branches or permanent establishments of nonresident corporations. The dual consolidated loss rules apply even in the absence of a consolidation regime in the foreign country because it is possible that all or a portion of a dual consolidated loss can be put to a foreign use by other means, such as through a sale, merger, or similar transaction. See Sec. 1.1503(d)-6(a)(2).
(iii) Alternative Facts. The facts are the same as in paragraph (i) of this Example 2, except that P's Country X business operations constitute a foreign branch as defined in Sec. 1.367(a)-6T(g)(1), but do not constitute a permanent establishment under the U.S.-Country X income tax convention. Although the activities carried on by P in Country X would otherwise constitute a foreign branch separate unit as described in Sec. 1.1503(d)-1(b)(4)(i)(A), the exception under Sec. 1.1503(d)-1(b)(4)(iii) applies because the activities do not constitute a permanent establishment under the U.S.-Country X income tax convention. Thus, the Country X business operations do not constitute a foreign branch separate unit, and the year 1 loss is not subject to the dual consolidated loss rules. If P instead carried on its Country X business operations through DE1X, then the exception under Sec. 1.1503(d)-1(b)(4)(iii) would not apply because P carries on the business operations through a hybrid entity and, as a result, the business operations would constitute a foreign branch separate unit. Thus, in such a case the year 1 loss would be subject to the dual consolidated loss rules.
(i) Facts. P and S organize a partnership, PRSX, under the laws of Country X. PRSX is treated as a partnership for both U.S. and Country X tax purposes. PRSX owns FBX. PRSX earns U.S. source income that is unconnected with its FBX branch operations, and such income is not subject to tax by Country X. In addition, such U.S. source income is not attributable to FBX under Sec. 1.1503(d)-5.
(ii) Result. Under Sec. 1.1503(d)-1(b)(4)(i)(A), P's and S's shares of FBX owned indirectly through their interests in PRSX are individual foreign branch separate units. Pursuant to Sec. 1.1503(b)-1(b)(4)(ii), these individual separate units are combined and treated as a single separate unit of the consolidated group of which P is the parent. Unless an exception under Sec. 1.1503(d)-6 applies, any dual consolidated loss attributable to FBX cannot offset income of P or S (other than income attributable to FBX, subject to the application of Sec. 1.1503(d)-4(c)), including their distributive share of the U.S. source income earned through their interests in PRSX, nor can it offset income of any other domestic affiliates.
(i) Facts. HPSX is a Country X entity that is subject to Country X tax on its worldwide income. HPSX is classified as a partnership for Federal tax purposes. P, S, and FSX, are the sole partners of HPSX. For U.S. tax purposes, P, S, and FSX each has an equal interest in each item of HPSX's profit or loss. HPSX carries on operations in Country Y that, if carried on by a U.S. person, would constitute a foreign branch within the meaning of Sec. 1.367(a)-6T(g)(1).
(ii) Result. Under Sec. 1.1503(d)-1(b)(4)(i)(B), the partnership interests in HPSX held by P and S are individual hybrid entity separate units. These individual separate units are combined into a single separate unit under Sec. 1.1503(d)-1(b)(4)(ii). In addition, P's and S's share of the Country Y operations owned indirectly through their interests in HPSX are individual foreign branch separate units under Sec. 1.1503(d)-1(b)(4)(i)(B). These individual separate units are also combined into a single separate unit under Sec. 1.1503(d)-1(b)(4)(ii). Unless an exception under Sec. 1.1503(d)-6 applies, dual consolidated losses attributable to P's and S's combined interests in HPSX can only be used to offset income attributable to their combined interests in HPSX (other than income attributable to P's and S's combined interests in the Country Y foreign branch separate unit), subject to the application of Sec. 1.1503(d)-4(c). Similarly, dual consolidated losses attributable to P's and S's combined interests in the Country Y operations of HPSX can only be used to offset income attributable to their combined interests in such Country Y operations, subject to the application of Sec. 1.1503(d)-4(c). Neither FSX's interest in HPSX, nor its share of the Country Y operations owned by HPSX, is a separate unit because FSX is not a domestic corporation.
(i) Facts. P owns DE1X. DE1X owns FSX. In year 1, there is a $100x loss attributable to P's interest in DE1X that is a dual consolidated loss. Also in year 1, FSX earns $200x of income. DE1X and FSX file a Country X consolidated tax return. For Country X tax purposes, the year 1 $100x loss of DE1X is used to offset $100x of year 1 income generated by FSX. Under Country X tax law, unused losses are carried forward and available to offset income in subsequent taxable years.
(ii) Result. The $100x loss attributable to P's interest in DE1X is available to, and in fact does, offset FSX's income under the laws of Country X. In addition, under U.S. tax principles, such income is considered to be an item of FSX, a foreign corporation. As a result, under Sec. 1.1503(d)-3(a), there has been a foreign use of the year 1 dual consolidated loss attributable to P's interest in DE1X. Therefore, P cannot make a domestic use election with respect to the loss as provided under Sec. 1.1503(d)-6(d)(2), and such loss will be subject to the domestic use limitation rule of Sec. 1.1503(d)-4(b). The result would be the same even if FSX, under Country X tax law, had no income against which the dual consolidated loss of DE1X could be offset (unless FSX's ability to use the loss under Country X tax law requires an election, and no such election is made).
(iii) Alternative Facts. The facts are the same as in paragraph (i) of this Example 5, except that FSX cannot use the loss of DE1X under Country X tax law without an election, and no such election is made. Pursuant to the exception in Sec. 1.1503(d)-3(c)(2), there is no foreign use of the year 1 dual consolidated loss attributable to P's interest in DE1X. In addition, P files a domestic use election with respect to the year 1 dual consolidated loss attributable to its interest in DE1X and, at the beginning of year 3, P sells its interest in DE1X to F, a Country Y entity that is a foreign corporation. The sale of the interest in DE1X to F results in a foreign use triggering event pursuant to Sec. 1.1503(d)-6(e)(1)(i) because, immediately after the sale, the loss attributable to the interest in DE1X carries over under Country X law and, therefore, is available under U.S. tax principles to offset income of the owner of the interest in DE1X which, in the hands of F, is not a separate unit. It is also a foreign use because the loss is available under U.S. tax principles to offset the income of F, a foreign corporation. See Sec. 1.1503(d)-3(a)(1). Finally, the transfer is a triggering event pursuant to Sec. 1.1503(d)-6(e)(1)(iv) and (v).
(iv) Alternative Facts. The facts are the same as in paragraph (iii), of this Example 5, except that P only sells 5 percent of its interest in DE1X to F. Pursuant to Rev. Rul. 99-5 (1999-1 CB 434), see Sec. 601.601(d)(2)(ii)(b) of this chapter, the transaction is treated as if P sold 5 percent of its interest in each of DE1X's assets to F, and then immediately thereafter P and F transferred their interests in the assets of DE1X to a partnership in exchange for an ownership interest therein. The sale of the 5 percent interest in DE1X generally results in a foreign use triggering event because a portion of the dual consolidated loss carries over under Country X tax law and is available under U.S. tax principles to offset income of the owner of the interest in DE1X, a hybrid entity, which in the hands of F is not a separate unit. It is also a foreign use because the loss is available under U.S. tax principles to offset the income of F, a foreign corporation. See Sec. 1.1503(d)-3(a)(1). However, pursuant to the exception under Sec. 1.1503(d)-3(c)(5) (relating to a de minimis reduction of an interest in a separate unit), such availability does not result in a foreign use. In addition, pursuant to Sec. 1.1503(d)-6(f)(1) and (3), the deemed transfers pursuant to Rev. Rul. 99-5 as a result of the sale are not treated as triggering events described in Sec. 1.1503(d)-6(e)(1)(iv) or (v).
(i) Facts. P owns DE1X. DE1X owns 99 percent and S owns 1 percent of FRHX, a Country X partnership that elected to be treated as a corporation for U.S. tax purposes. FRHX conducts a trade or business in Country X. In year 1, DE1X incurs interest expense on a third-party loan, which constitutes a dual consolidated loss attributable to P's interest in DE1X. In year 1, for Country X tax purposes, DE1X takes into account its distributive share of income generated by FRHX and offsets such income with its interest expense.
(ii) Result. In year 1, the dual consolidated loss attributable to P's interest in DE1X is available to, and in fact does, offset income recognized in Country X and, under U.S. tax principles, the income is considered to be income of FRHX, a foreign corporation. Accordingly, pursuant to Sec. 1.1503(d)-3(a)(1), there is a foreign use of the dual consolidated loss. Therefore, P cannot make a domestic use election with respect to the year 1 dual consolidated loss attributable to its interest in DE1X, as provided under Sec. 1.1503(d)-6(d)(2), and such loss will be subject to the domestic use limitation rule of Sec. 1.1503(d)-4(b).
(iii) Alternative Facts. (A) The facts are the same as in paragraph (i) of this Example 6, except as follows. Instead of owning DE1X, P owns DE3Y which, in turn, owns DE1X. In addition, DE3Y, rather than DE1X, is the obligor on the third-party loan and therefore incurs the interest expense on such loan. Finally, DE3Y on-lends the loan proceeds from the third-party loan to DE1X, and DE1X pays interest to DE3Y on such loan that is generally disregarded for U.S. tax purposes.
(A) The facts are the same as in paragraph (i) of this Example 6, except as follows. Instead of owning DE1X, P owns DE3Y which, in turn, owns DE1X. In addition, DE3Y, rather than DE1X, is the obligor on the third-party loan and therefore incurs the interest expense on such loan. Finally, DE3Y on-lends the loan proceeds from the third-party loan to DE1X, and DE1X pays interest to DE3Y on such loan that is generally disregarded for U.S. tax purposes.
(B) Pursuant to Sec. 1.1503(d)-5(c)(1)(ii), for purposes of calculating income or a dual consolidated loss, DE3Y and DE1X do not take into account interest income or interest expense, respectively, with respect to amounts paid on the disregarded loan from DE3Y to DE1X. As a result, such items neither create a dual consolidated loss with respect to the interest in DE1X, nor do they reduce (or eliminate) the dual consolidated loss attributable to the interest in DE3Y. Thus, in year 1, there is a dual consolidated loss attributable to P's interest in DE3Y, but not to P's indirect interest in DE1X.
(C) In year 1, interest expense paid by DE1X to DE3Y on the disregarded loan is taken into account as a deduction in computing DE1X's taxable income for Country X tax purposes, but does not give rise to a corresponding item of income or gain for U.S. tax purposes (because it is generally disregarded). In addition, such interest has the effect of making an item of deduction or loss composing the dual consolidated loss attributable to P's interest in DE3Y available for a foreign use. This is the case because it may reduce or offset items of deduction or loss composing the dual consolidated loss for foreign tax purposes, and creates another deduction or loss that may reduce or offset income of DE1X for foreign tax purposes that, under U.S. tax principles, is treated as income of FRHX, a foreign corporation. Moreover, because the disregarded item is incurred or taken into account as interest for foreign tax purposes, it is deemed to have been incurred or taken into account with a principal purpose of avoiding the provisions of section 1503(d). Accordingly, there is an indirect foreign use of the year 1 dual consolidated loss attributable to P's interest in DE3Y, and P cannot make a domestic use election with respect to such loss as provided under Sec. 1.1503(d)-6(d)(2). Thus, the loss will be subject to the domestic use limitation rule of Sec. 1.1503(d)-4(b).
(i) Facts. P owns DE1X which, in turn, owns FSX. DE1X borrows cash from an unrelated lender and transfers the cash to FSX in exchange for an instrument (hybrid instrument). The hybrid instrument is treated as equity for U.S. tax purposes and debt for Country X tax purposes. Interest expense on the loan from the unrelated lender results in a dual consolidated loss being attributable to P's interest in DE1X in year 1. DE1X does not elect under Country X law to consolidate with FSX. In year 1, FSX distributes its stock as a payment on the hybrid instrument to DE1X. For U.S. tax purposes, such payment is excluded from P's gross income under section 305. However, for Country X tax purposes, such payment is treated as interest and gives rise to a deduction taken into account in computing FSX's Country X tax liability; the payment also gives rise to interest income to DE1X for Country X tax purposes.
(ii) Result. The payment on the hybrid instrument does not give rise to an item of income or gain for U.S. tax purposes and therefore does not reduce (or eliminate) the dual consolidated loss attributable to P's interest in DE1X. In addition, such payment is taken into account as a deduction in computing FSX's taxable income for Country X tax purposes. Moreover, such payment has the effect of making an item of deduction or loss composing the dual consolidated loss attributable to P's interest in DE1X available for a foreign use. This is the case because it may reduce or offset items of deduction or loss composing the dual consolidated loss for foreign tax purposes, and creates a deduction that reduces or offsets income of FSX for foreign tax purposes that, under U.S. tax principles, is income of a foreign corporation. Further, because the item is incurred, or taken into account, using an instrument that is treated as equity for U.S. tax purposes and debt for foreign tax purposes, it is deemed to have been engaged in with the principal purpose of avoiding the provisions of section 1503(d). As a result, there has been an indirect foreign use of the year 1 dual consolidated loss, and P cannot make a domestic use election with respect to such loss, as provided under Sec. 1.1503(d)-6(d)(2). Thus, the year 1 dual consolidated loss will be subject to the domestic use limitation rule of Sec. 1.1503(d)-4(b).
(i) Facts. P owns DE1X and FBY. FBY is a foreign branch separate unit located in Country Y. DE1X owns FBX and FSX. P's interest in DE1X and FBX are combined and treated as a single separate unit (Country X separate unit) pursuant to Sec. 1.1503(d)-1(b)(4)(ii). Under Country X tax laws, DE1X elects to consolidate with FSX. FBY engages in the business of providing services and, in connection with its ordinary course of business, provides services to unrelated third parties and to DE1X. As compensation for services, DE1X makes a payment to FBY. Under Country X tax law, the payment is deductible. However, the payment is generally disregarded for U.S. tax purposes and, pursuant to Sec. 1.1503(d)-5(c)(1)(ii), is not taken into account in calculating the income or dual consolidated loss attributable to the Country X separate unit or FBY. In year 1, the Country X separate unit and FBY each has a dual consolidated loss. The dual consolidated loss attributable to the Country X separate unit is subject to the domestic use limitation under Sec. 1.1503(d)-4(b) because DE1X and FSX elect to consolidate and, as a result, the dual consolidated loss is put to a foreign use.
(ii) Result. The payment made by DE1X to FBY in connection with the performance of services is taken into account as a deduction in computing DE1X's taxable income for Country X tax purposes, but does not give rise to an item of income or gain for U.S. tax purposes. In addition, such payment has the effect of making an item of deduction or loss composing the dual consolidated loss attributable to FBY available for a foreign use. This is the case because it may reduce or offset items of deduction or loss composing the dual consolidated loss of FBY for foreign tax purposes, and creates another deduction that reduces or offsets income of FSX for foreign tax purposes (because DE1X and FSX elect to file a consolidated return) that, under U.S. tax principles, is income of a foreign corporation. However, the transaction between DE1X and FBY was entered into in the ordinary course of FBY's trade or business. As a result, if P can demonstrate to the satisfaction of the Commissioner that the transaction was not entered into with a principal purpose of avoiding the provisions of section 1503(d), FBY's year 1 dual consolidated loss will not be treated as having been made available for an indirect foreign use. In such a case, P would be entitled to make a domestic use election with respect to such loss.
(i) Facts. P owns DRCX, a member of the P consolidated group. DRCX owns 80 percent of HPSX, a Country X entity that is subject to Country X tax on its worldwide income. HPSX is classified as a partnership for U.S. tax purposes. FSX owns the remaining 20 percent of HPSX. In year 1, DRCX generates a $100x net operating loss (without regard to items attributable to DRCX's interest in HPSX). Also in year 1, HPSX generates $100x of income, $80x of which is attributable to DRCX's interest in HPSX. DRCX and HPSX file a consolidated tax return for Country X tax purposes, and HPSX offsets its $100x of income with the $100x loss generated by DRCX.
(ii) Result. DRCX and its interest in HPSX are not combined because DRCX is a dual resident corporation and the combination rule under Sec. 1.1503(d)-1(b)(4)(ii) only applies to separate units. The $100x year 1 net operating loss incurred by DRCX (without regard to items attributable to DRCX's interest in HPSX) is a dual consolidated loss. In addition, HPSX is a hybrid entity and DRCX's interest in HPSX is a hybrid entity separate unit; however, there is no dual consolidated loss attributable to such separate unit in year 1 (instead, there is $80x of income attributable to such separate unit). DRCX's year 1 dual consolidated loss offsets $100x of income for Country X purposes, and $20x of such income is, under U.S. tax principles, income of FSX, which owns an interest in HPSX that is not a separate unit (in addition, FSX is a foreign corporation). As a result, pursuant to Sec. 1.1503(d)-3(a), there is a foreign use of the year 1 dual consolidated loss of DRCX, and P cannot make a domestic use election with respect to such loss pursuant to Sec. 1.1503(d)-6(d)(2). Therefore, such loss will be subject to the domestic use limitation rule of Sec. 1.1503(d)-4(b). The result would be the same even if HPSX, under Country X laws, had no income against which the dual consolidated loss could be offset (unless the ability to use the loss under Country X laws required an election, and no such election is made).
(i) Facts. F1 and F2, nonresident alien individuals, each owns 50 percent of FPX, a Country X entity that is subject to Country X tax on its worldwide income. FPX is classified as a foreign corporation for U.S. tax purposes. FPX owns DRCX. DRCX is the parent of a consolidated group that includes as a member DS, a domestic corporation. In year 1, DRCX incurs a dual consolidated loss of $100x and, for Country X tax purposes, FPX generates $100x of income. In year 1, FPX elects to consolidate with DRCX for Country X tax purposes, and the $100x year 1 loss of DRCX is used to offset the income of FPX under the laws of Country X. For U.S. tax purposes, the items of FPX do not constitute items of income in year 1.
(ii) Result. The year 1 dual consolidated loss of DRCX offsets the income of FPX under the laws of Country X. Pursuant to Sec. 1.1503(d)-3(a), the offset constitutes a foreign use because the items constituting such income are considered under U.S. tax principles to be items of a foreign corporation. This is the case even though the United States does not recognize such items as income in year 1. Therefore, DRCX cannot make a domestic use election with respect to its year 1 dual consolidated loss pursuant to Sec. 1.1503(d)-6(d)(2). As a result, such loss will be subject to the domestic use limitation rule of Sec. 1.1503(d)-4(b).
(iii) Alternative Facts. The facts are the same as in paragraph (i) of this Example 10, except that FPX is classified as a partnership for U.S. tax purposes. The result would be the same as in paragraph (ii) of this Example 10, because the offset of the income generated by FPX is a foreign use pursuant to Sec. 1.1503(d)-3(a). This is the case because the items constituting such income are considered under U.S. tax principles to be items of F1 and F2, the owners of interests in FPX (a hybrid entity), that are not separate units. Moreover, the result would be the same if F1 and F2 owned their interests in FPX indirectly through another partnership.
(i) Facts. P owns DE1X and DRCX. DRCX is a member of the P consolidated group and owns FSX. DE1X owns FBX. P's interest in DE1X and P's indirect interest in FBX are individual separate units that are combined into a single separate unit (Country X separate unit) pursuant to Sec. 1.1503(d)-1(b)(4)(ii). In year 1, DRCX incurs a $200x net operating loss and $200x of income is attributable to P's Country X separate unit. The $200x net operating loss incurred by DRCX is a dual consolidated loss. FSX also earns $200x of income in year 1. DRCX, DE1X, and FSX file a Country X consolidated tax return. However, Country X has no applicable rules for determining which income is offset by DRCX's year 1 $200x loss.
(ii) Result. Under Sec. 1.1503(d)-3(c)(3), DRCX's $200x loss shall be treated as having been made available to offset the $200x of income attributable to P's Country X separate unit. P's Country X separate unit is not, under U.S. tax principles, a foreign corporation, and there is no interest in DE1X (which is a hybrid entity) that is not a separate unit. As a result, DRCX's loss being made available to offset the income attributable to P's Country X separate unit is not considered a foreign use of such loss. Therefore, P can make a domestic use election with respect to DRCX's year 1 dual consolidated loss.
(iii) Alternative Facts. The facts are the same as in paragraph (i) of this Example 11, except that in year 1 only $150x of income is attributable to P's Country X separate unit. Because only $150x of income is attributed to P's Country X separate unit, $50x of DRCX's year 1 dual consolidated loss is treated as being made available to offset the income of FSX, a foreign corporation, and therefore constitutes a foreign use. As a result, DRCX cannot make a domestic use election with respect to its year 1 dual consolidated loss pursuant to Sec. 1.1503(d)-6(d)(2), and such loss will be subject to the domestic use limitation rule of Sec. 1.1503(d)-4(b).
(i) Facts. (A) P owns DRCX, a member of the P consolidated group. DRCX owns FSX. Under the Country X consolidation regime, a consolidated group may elect in any given year to use all or a portion of the losses of one consolidated group member to offset income of other consolidated group members. If no such election is made in a year in which losses are generated by a consolidated member, such losses carry forward and are available, at the election of the consolidated group, to offset income of consolidated group members in subsequent taxable years. Country X law does not provide ordering rules for determining when a loss from a particular taxable year is used because, under Country X law, losses never expire. In addition, Country X law does not provide ordering rules for determining when a particular type of loss (for example, capital or ordinary) is used.
(A) P owns DRCX, a member of the P consolidated group. DRCX owns FSX. Under the Country X consolidation regime, a consolidated group may elect in any given year to use all or a portion of the losses of one consolidated group member to offset income of other consolidated group members. If no such election is made in a year in which losses are generated by a consolidated member, such losses carry forward and are available, at the election of the consolidated group, to offset income of consolidated group members in subsequent taxable years. Country X law does not provide ordering rules for determining when a loss from a particular taxable year is used because, under Country X law, losses never expire. In addition, Country X law does not provide ordering rules for determining when a particular type of loss (for example, capital or ordinary) is used.
(B) In year 1, DRCX incurs a capital loss of $80x which, under Sec. 1.1503(d)-5(b)(2), is not a dual consolidated loss. DRCX also incurs a net operating loss of $80x in year 1 which is a dual consolidated loss. FSX generates $60x of capital gain in year 1 which, for Country X purposes, can be offset by capital losses and net operating losses. Under the laws of Country X, DRCX elects to use $60x of its total year 1 loss of $160x to offset the $60x of capital gain generated by FSX in year 1; the remaining $100x of year 1 loss carries forward. In both year 2 and year 3, DRCX incurs a net operating loss of $100x, while FSX incurs no income or loss in years 2 and 3. DRCX's $100x losses incurred in year 2 and year 3 are dual consolidated losses. Because DRCX does not elect under the laws of Country X to use all or a portion of its year 2 or year 3 net operating losses of $100x to offset the income of other members of the Country X consolidated group, P is permitted to make (and in fact does make) a domestic use election with respect to both the year 2 and year 3 dual consolidated losses of DRCX. In year 4, DRCX has a net operating loss of $10x and FSX generates $125x of income. Country X law permits, upon an election, FSX's $125x of income generated in year 4 to be offset by losses (including carryover losses from prior years) of other group members. Accordingly, in year 4, DRCX elects to use $125x of its accumulated losses to offset the $125x of year 4 income generated by FSX.
(ii) Result. (A) Under the ordering rules of Sec. 1.1503(d)-3(d)(3), a pro rata amount of DRCX's year 1 net operating loss ($30x) and capital loss ($30x) is considered to be used to offset FSX's year 1 $60x capital gain. As a result, P cannot make a domestic use election with respect to DRCX's year 1 $80x dual consolidated loss because a portion of such loss is put to a foreign use.
(A) Under the ordering rules of Sec. 1.1503(d)-3(d)(3), a pro rata amount of DRCX's year 1 net operating loss ($30x) and capital loss ($30x) is considered to be used to offset FSX's year 1 $60x capital gain. As a result, P cannot make a domestic use election with respect to DRCX's year 1 $80x dual consolidated loss because a portion of such loss is put to a foreign use.
(B) DRCX's $10x year 4 net operating loss is also a dual consolidated loss. Under the ordering rules of Sec. 1.1503(d)-3(d)(1), such loss is considered to be used to offset $10x of FSX's year 4 $125x of income. Consequently, P cannot make a domestic use election with respect to such loss. Under the ordering rules of Sec. 1.1503(d)-3(d)(2), $50x of capital loss carryover and $50x of ordinary loss from year 1 will be considered to offset $100x of FSX's year 4 income because the income is first deemed to have been offset by losses the use of which would not constitute a triggering event that would result in the recapture of a dual consolidated loss. The remaining $15x of FSX's year 4 income is considered to be offset by losses from year 3 because it is the most recent taxable year from which a loss may be carried forward. Thus, a portion of the year 3 dual consolidated loss has been put to a foreign use and the entire year 3 dual consolidated loss is recaptured. However, none of DRCX's $100x year 2 net operating loss will be deemed to offset FSX's year 4 income. As a result, DRCX's year 2 dual consolidated loss will not be recaptured.
(i) Facts. (A) P owns 80 percent of HPSX, a Country X entity subject to Country X tax on its worldwide income. FSZ, an unrelated foreign corporation, owns the remaining 20 percent of HPSX. HPSX is classified as a partnership for Federal tax purposes and carries on operations in Country X that, if carried on by a U.S. person, would constitute a foreign branch within the meaning of Sec. 1.367(a)-6T(g)(1). P's interest in HPSX and P's indirect interest in the Country X branch are individual separate units that are combined into a single separate unit (Country X separate unit) pursuant to Sec. 1.1503(d)-1(b)(4)(ii).
(A) P owns 80 percent of HPSX, a Country X entity subject to Country X tax on its worldwide income. FSZ, an unrelated foreign corporation, owns the remaining 20 percent of HPSX. HPSX is classified as a partnership for Federal tax purposes and carries on operations in Country X that, if carried on by a U.S. person, would constitute a foreign branch within the meaning of Sec. 1.367(a)-6T(g)(1). P's interest in HPSX and P's indirect interest in the Country X branch are individual separate units that are combined into a single separate unit (Country X separate unit) pursuant to Sec. 1.1503(d)-1(b)(4)(ii).
(B) In year 1, HPSX incurs a loss of $100x, $80x of which is attributable to P's Country X separate unit. The $80x of loss attributable to P's Country X separate unit constitutes a dual consolidated loss and P makes a domestic use election with respect to such loss. In year 2, HPSX generates $50x of income, $40x of which is attributable to P's interest in the Country X separate unit. Under Country X income tax laws, the $100x of year 1 loss incurred by HPSX is carried forward and offsets the $50x of income generated by HPSX in year 2; the remaining $50x of loss is carried forward and is available to offset income generated by HPSX in subsequent years. P and FSZ maintain their ownership interests in HPSX throughout years 1 and 2.
(ii) Result. In year 2, under the laws of Country X, the $100x of year 1 loss, which includes the $80x dual consolidated loss attributable to P's Country X separate unit, is made available to offset income of HPSX. Such income is attributable to P's interest in HPSX, which is a separate unit. Such income also is income of FSZ, a foreign corporation that is an owner of an interest in HPSX, which is not a separate unit. However, pursuant to Sec. 1.1503(d)-3(c)(4), there is no foreign use of the year 1 dual consolidated loss in year 2. This is the case because P's interest in HPSX as of the end of year 1 has not been reduced by more than a de minimis amount, and the portion of the $80x dual consolidated loss was made available for a foreign use in year 2 solely as a result of FSZ's ownership in HPSX and the allocation or carry forward of the dual consolidated loss as a result of such ownership.
(iii) Alternative Facts. The facts are the same as in paragraph (i) of this Example 13, except that P also owns FSX. In addition, FSX and HPSX elect to file a consolidated return under Country X law. The exception to foreign use under Sec. 1.1503(d)-3(c)(4) does not apply because there is a foreign use other than by reason of the dual consolidated loss being made available as a result of FSZ's ownership in HPSX and the allocation or carry forward of the dual consolidated loss as a result of such ownership. That is, the exception does not apply because there is also a foreign use of the dual consolidated loss as a result of FSX and HPSX filing a consolidated return under Country X law.
(iv) Alternative Facts. The facts are the same as in paragraph (i) of this Example 13, except that at the end of year 2, FSZ contributes cash to HPSX in exchange for additional equity of HPSX. As a result of the contribution, FSZ's interest in HPSX increases from 20 percent to 30 percent, and P's interest in HPSX decreases from 80 percent to 70 percent. P's interest in HPSX is reduced within a single 12-month period by 12.5 percent (10/80), as compared to P's interest in HPSX as of the beginning of such 12-month period. Accordingly, pursuant to Sec. 1.1503(d)-3(c)(4)(iii), the exception to foreign use provided under Sec. 1.1503(d)-3(c)(4)(i) does not apply. Therefore, in year 2 there is a foreign use of the $80x year 1 dual consolidated loss attributable to P's Country X separate unit. Such foreign use constitutes a triggering event in year 2 and the $80x year 1 dual consolidated loss is recaptured. Alternatively, if FSZ were a domestic corporation, there would not be a foreign use of the $80x year 1 dual consolidated loss because the loss would not be available to offset income that, under U.S. tax principles, is income of a foreign corporation or a direct or indirect owner of an interest in a hybrid entity that is not a separate unit.
(i) Facts. (A) P and FSX form PRSX. P and FSX each own 50 percent of PRSX throughout years 1 and 2. PRSX is treated as a partnership for both U.S. and Country X tax purposes. PRSX owns DEY. DEY is a Country Y entity subject to Country Y tax on its worldwide income and disregarded as an entity separate from its owner for U.S. tax purposes. DEY conducts business operations in Country Y that, if carried on by a U.S. person, would constitute a foreign branch as defined in Sec. 1.367(a)-6T(g)(1). P's interest in the Country Y operations conducted by DEY is an individual foreign branch separate unit. P's interest in DEY, owned indirectly through PRSX, is a hybrid entity individual separate unit. P also owns FBY, a Country Y foreign branch individual separate unit. Under Sec. 1.1503(d)-1(b)(4)(ii), FBY and P's indirect interests in DEY and DEY's Country Y business operations are treated as a combined separate unit (Country Y separate unit).
(A) P and FSX form PRSX. P and FSX each own 50 percent of PRSX throughout years 1 and 2. PRSX is treated as a partnership for both U.S. and Country X tax purposes. PRSX owns DEY. DEY is a Country Y entity subject to Country Y tax on its worldwide income and disregarded as an entity separate from its owner for U.S. tax purposes. DEY conducts business operations in Country Y that, if carried on by a U.S. person, would constitute a foreign branch as defined in Sec. 1.367(a)-6T(g)(1). P's interest in the Country Y operations conducted by DEY is an individual foreign branch separate unit. P's interest in DEY, owned indirectly through PRSX, is a hybrid entity individual separate unit. P also owns FBY, a Country Y foreign branch individual separate unit. Under Sec. 1.1503(d)-1(b)(4)(ii), FBY and P's indirect interests in DEY and DEY's Country Y business operations are treated as a combined separate unit (Country Y separate unit).
(B) In year 1, there is a $100x loss attributable to the Country Y business operations conducted by DEY. Thus, there is a $50x loss attributable to P's interest in DEY's Country Y business operations in year 1. Also in year 1, there is a $200x loss attributable to FBY. No income or loss is attributable to P's interest in DEY in year 1. Under Sec. 1.1503(d)-5(c)(4)(ii), the dual consolidated loss attributable to P's combined Country Y separate unit is $250x ($50x loss attributable to P's indirect interest in DEY's Country Y operations, plus $200x loss attributable to FBY). In year 2, neither DEY nor DEY's Country Y operations generates income or loss. Under Country Y law, the $100x of year 1 loss incurred by DEY is carried forward and is available to offset income of DEY in year 2.
(ii) Result. As a result of the carryover of the year 1 $100x loss (which includes $50x of the year 1 dual consolidated loss) under Country Y law, a portion of such loss will be available to offset income of DEY that is attributable to P's interest in DEY owned indirectly through PRSX. A portion of such loss will also be available to offset income of DEY that is attributable to FSX's indirect ownership of DEY. Accordingly, under Sec. 1.1503(d)-3(a), there would be a foreign use of a portion of P's $250x year 1 dual consolidated loss because it is available to offset an item of income of the owner of an interest in a hybrid entity, which is not a separate unit (there would also be a foreign use in this case because FSX is a foreign corporation). However, there has not been a reduction of P's interest in DEY, DEY has not consolidated under the laws of Country Y, and there has not been any other foreign use of the dual consolidated losses. As a result, no foreign use occurs as a result of the carryforward pursuant to Sec. 1.1503(d)-3(c)(4)(i) and (ii).
(i) Facts. P owns FBX and FSX. In year 1, there is a dual consolidated loss attributable to FBX. P's items of income, gain, deduction, and loss that are taken into account in calculating FBX's dual consolidated loss include depreciation deductions attributable to FBX's assets. P makes a domestic use election under Sec. 1.1503(d)-6(d) with respect to the year 1 dual consolidated loss of FBX. At the end of year 2, P contributes a portion of FBX's assets to FSX, in exchange for stock in FSX. The aggregate adjusted basis of the assets transferred by P to FSX is less than 10 percent of the aggregate adjusted basis of all of FBX's assets held at the beginning of year 2. In addition, no other assets of FBX are transferred during the certification period. Under Country X law, FSX's basis in the transferred assets is determined by reference to P's basis in such assets. In addition, under Country X law, a portion of the depreciation deductions that were taken into account in year 1 for U.S. tax purposes, are taken into account in year 2 for Country X tax purposes.
(ii) Result. As a result of the transfer of assets from P to FSX, a portion of the year 1 dual consolidated loss is available for a foreign use. This is the case because a portion of the basis in FBX's assets, which gave rise to depreciation deductions that were taken into account in computing the year 1 dual consolidated loss, will give rise to a depreciation deduction under Country X laws that will be available, under U.S. tax principles, to offset the income of FSX, a foreign corporation, in year 2. However, the aggregate adjusted basis of all the assets transferred by P to FSX, within the 12-month period ending at the end of year 2, is less than 10 percent of the aggregate adjusted basis of all of FBX's assets at the beginning of such 12-month period. Moreover, the aggregate adjusted basis of the assets transferred by P to FSX at any time during the certification period is less than 30 percent of the aggregate adjusted basis of FBX's assets held at the end of year 1. In addition, the item of deduction giving rise to the foreign use is being made available solely as a result of the adjusted basis of the transferred assets being determined in whole, or in part, by reference to the adjusted basis of such transferred assets in the hands of FBX. As a result, this transfer will not result in a foreign use pursuant to Sec. 1.1503(d)-3(c)(6).
(i) Facts. P owns FBX. In year 1, there is a dual consolidated loss attributable to FBX for which P makes a domestic use election under Sec. 1.1503(d)-6(d). The dual consolidated loss includes a deduction for salary expense that was deductible for U.S. tax purposes at the end of year 1, even though it was not paid until year 2. The deduction was incurred in the ordinary course of FBX's trade or business. During year 2, and before the accrued salary expense liability was paid, P sells all the assets of FBX to FSX in exchange for cash and FSX's assumption of the liabilities of the FBX trade or business, including the obligation to pay the accrued salary expense. Under Country X law, the accrued salary expense of FBX is deductible, and is taken into account for purposes of computing the taxable income of FBX, when paid. FBX pays the accrued salary expense after the sale of FBX to FSX.
(ii) Result. (A) As a result of FSX's assumption of the FBX liabilities, including the accrued salary expense, a portion of the dual consolidated loss is available for a foreign use in year 2. This is the case because the deduction that was taken into account in year 1 in computing the dual consolidated loss under U.S. tax principles will, under Country X tax law, be taken into account and will be available to offset the income of FSX, a foreign corporation, in year 2. However, because this item of expense is made available solely as a result of the assumption of a liability of FBX, and such liability was incurred in the ordinary course of FBX's trade or business, there will not be a foreign use of the year 1 dual consolidated loss pursuant to Sec. 1.1503(d)-3(c)(7).
(A) As a result of FSX's assumption of the FBX liabilities, including the accrued salary expense, a portion of the dual consolidated loss is available for a foreign use in year 2. This is the case because the deduction that was taken into account in year 1 in computing the dual consolidated loss under U.S. tax principles will, under Country X tax law, be taken into account and will be available to offset the income of FSX, a foreign corporation, in year 2. However, because this item of expense is made available solely as a result of the assumption of a liability of FBX, and such liability was incurred in the ordinary course of FBX's trade or business, there will not be a foreign use of the year 1 dual consolidated loss pursuant to Sec. 1.1503(d)-3(c)(7).
(B) The transfer of all the assets of FBX to FSX is a triggering event under Sec. 1.1503(d)-6(e)(1)(iv), unless P can rebut the triggering event under Sec. 1.1503(d)-6(e)(2). For purposes of determining whether, under Sec. 1.1503(d)-6(e)(2)(ii), the transfer of assets resulted in a carryover under foreign law of FBX's losses, expenses, or deductions, the exception to foreign use for the assumption of liabilities is taken into account. However, the other exceptions to foreign use do not apply for this purpose (or for purposes of demonstrating that no foreign use of a dual consolidated loss can occur in any other year under Sec. 1.1503(d)-6(c), (e)(2)(i) or (j)(2)). See Sec. 1.1503(d)-3(c)(1). Provided the other requirements of Sec. 1.1503(d)-6(e)(2)(ii) and (iii) are satisfied, P may be able to rebut the occurrence of a triggering event upon the transfer of FBX's assets to FSX.
(i) Facts. P owns DRCX, a member of the P consolidated group. DRCX owns FSX. In year 1, DRCX incurs a $100x net operating loss that is a dual consolidated loss. To prevent corporations like DRCX from offsetting losses both against income of affiliates in Country X and against income of foreign affiliates under the tax laws of another country, Country X mirror legislation prevents a corporation that is subject to the income tax of another country on its worldwide income or on a residence basis from using the Country X form of consolidation. Accordingly, the Country X mirror legislation prevents the loss of DRCX from being made available to offset income of FSX.
(ii) Result. Under Sec. 1.1503(d)-3(e), because the losses of DRCX are subject to Country X's mirror legislation, there is a deemed foreign use of DRCX's year 1 dual consolidated loss. The stand-alone exception to the mirror rule in Sec. 1.1503(d)-3(e)(2) does not apply because, absent the mirror legislation, DRCX's year 1 dual consolidated loss would be available for a foreign use (as defined in Sec. 1.1503(d)-3), without regard to whether such availability is limited by election or similar procedure. That is, absent the mirror legislation, all or a portion of the dual consolidated loss would be available to offset the income of FSX under the Country X consolidation regime. This is the case even if Country X did not recognize DRCX as having a loss in year 1. Therefore, P may not make a domestic use election with respect to DRCX's year 1 dual consolidated loss pursuant to Sec. 1.1503(d)-3(d)(2).
(iii) Alternative Facts. The facts are the same as in paragraph (i) of this Example 17, except that P owns DE1X (rather than DRCX) and, in year 1, there is a $100 dual consolidated loss attributable to P's interest in DE1X (rather than of DRCX). The Country X mirror legislation only applies to Country X dual resident corporations and, therefore, does not apply to losses attributable to P's interest in DE1X. As a result, the mirror legislation rule under Sec. 1.1503(d)-3(e) would not deny the opportunity of such loss from being put to a foreign use (for example, by offsetting the income of FSX through the Country X consolidation regime). Therefore, a domestic use election can be made with respect to the dual consolidated loss (provided the conditions for such an election are otherwise satisfied).
(i) Facts. P owns FBX. In year 1, there is a $100x dual consolidated loss attributable to FBX. Country X enacted mirror legislation to prevent Country X branches and permanent establishments of nonresident corporations from offsetting losses both against income of Country X affiliates and against other income of its owner (or foreign affiliates thereof) under the tax laws of another country. The Country X mirror legislation prevents a Country X branch or permanent establishment of a nonresident corporation from offsetting its losses against the income of Country X affiliates if such losses may be deductible against income (other than income of the Country X branch or permanent establishment) under the laws of another country.
(ii) Result. In general, under Sec. 1.1503(d)-3(e), because the losses of FBX are subject to Country X's mirror legislation, there is a deemed foreign use of FBX's year 1 dual consolidated loss. However, in the absence of the Country X mirror legislation, no item of deduction or loss composing FBX's year 1 dual consolidated loss would be available in the year incurred for a foreign use (as defined in Sec. 1.1503(d)-3), without regard to whether such availability is limited by election or otherwise. This is the case because there is no Country X entity through which the dual consolidated loss could be put to a foreign use (absent a sale, merger, or similar transaction involving FBX). As a result, the stand-alone exception in Sec. 1.1503(d)-3(e)(2) may apply, provided P complies with the requirements of Sec. 1.1503(d)-3(e)(2)(ii). Accordingly, P may make a domestic use election with respect to the year 1 dual consolidated loss of FBX pursuant to Sec. 1.1503(d)-6(d). If, however, any item of the dual consolidated loss would otherwise be available for a foreign use during the certification period (for example, as a result of P acquiring a foreign corporation that is organized under the laws of Country X such that losses of FBX could be put to a foreign use through consolidation or similar means), then such loss would be recaptured pursuant to Sec. 1.1503(d)-6(e)(1)(ix).
(iii) Alternative Facts. The facts are the same as in paragraph (i) of this Example 18, except that the Country X mirror legislation operates in a manner similar to the rules under section 1503(d). That is, it allows the taxpayer to elect to use the loss to either offset income of an affiliate in Country X, or income of an affiliate (or other income of the owner of the Country X branch or permanent establishment) in the other country, but not both. Because the Country X mirror legislation permits the taxpayer to choose to put the dual consolidated loss to a foreign use, it does not deny the opportunity to put the loss to a foreign use. Therefore, there is no deemed foreign use of the dual consolidated loss pursuant to Sec. 1.1503(d)-4(e) and a domestic use election can be made for such loss.
(i) Facts. P owns FBX, FSX, and DE1X. In year 1, there is a $50x dual consolidated loss attributable to FBX and $10x of income attributable to P's interest in DE1X. FSX has income of $100x. Pursuant to Sec. 1.1503(d)-1(b)(4)(ii), FBX and P's interest in DE1X are combined and treated as a single separate unit (Country X separate unit) which has a year 1 dual consolidated loss of $40x. Country X enacted mirror legislation to prevent Country X branches or permanent establishments of nonresident corporations from offsetting losses both against income of Country X affiliates and against other income of its owner (or foreign affiliates thereof) under the tax laws of another country. The Country X mirror legislation prevents a Country X branch or permanent establishment of a nonresident corporation from offsetting its losses against the income of Country X affiliates if such losses may be deductible against income (other than income of the Country X branch or permanent establishment) under the laws of another country. However, the United States and Country X have entered into an agreement described in Sec. 1.1503(d)-6(b) pursuant to the U.S.-Country X income tax convention (mirror agreement). The mirror agreement applies to Country X foreign branch separate units of domestic corporations, but not to Country X hybrid entity separate units. The mirror agreement provides that neither the Country X mirror legislation nor the mirror legislation rule under Sec. 1.1503(d)-3(e) will apply to losses attributable to Country X foreign branch separate units, provided certain conditions and reporting requirements are satisfied (including a domestic use election, if the loss is to be used to offset income of a domestic affiliate). Thus, losses attributable to Country X foreign branch separate units can, subject to the requirements of the mirror agreement, be used to offset income of a domestic affiliate or a Country X affiliate (but not both).
(ii) Result. The Country X mirror legislation only applies to Country X foreign branch separate units and does not apply to hybrid entity separate units. In addition, if P complies with the terms and conditions of the mirror agreement, the Country X mirror legislation would not apply to FBX. As a result, the income tax laws of Country X would not deny the opportunity of a loss of either individual separate unit that composes P's combined Country X separate unit from being put to a foreign use. Therefore, notwithstanding Sec. 1.1503(d)-3(e), a domestic use election can be made with respect to the dual consolidated loss attributable to P's Country X separate unit, provided the terms and conditions of the mirror agreement are satisfied. See Sec. 1.1503(d)-6(b)(2).
(iii) Alternative Facts. The facts are the same as in paragraph (i) of this Example 19, except that the Country X mirror legislation also applies to losses attributable to DE1X, but the mirror agreement does not apply to such losses. The mirror legislation rule would apply with respect to P's interest in DE1X and, as a result, there is a deemed foreign use of the dual consolidated loss attributable to the Country X separate unit and a domestic use election cannot be made for such loss. This is the case even though, pursuant to Sec. 1.1503(d)-5(c)(4)(ii)(A), P's interest in DE1X (which is subject to the Country X mirror legislation) does not, as an individual separate unit, have a dual consolidated loss in year 1. Further, the stand-alone exception to the mirror legislation rule in Sec. 1.1503(d)-3(e)(2) does not apply because, absent the mirror legislation, the Country X combined separate unit's dual consolidated loss would be available in the year incurred for a foreign use (as defined in Sec. 1.1503(d)-3) because it could be used to offset income of FSX under the Country X consolidation regime. This is the case even if Country X requires an election to consolidate and no such election is made. The result would be the same even if Country X did not recognize DE1X as having a loss.
(i) Facts. P owns DRCX, a member of the P consolidated group. In year 1, DRCX incurs a dual consolidated loss and P does not make a domestic use election with respect to such loss. Under Sec. 1.1503(d)-4(b), DRCX's year 1 dual consolidated loss is subject to the limitations under Sec. 1.1503(d)-4(c) and, therefore, may not be used to offset the income of P or S (or any other domestic affiliate) on the group's U.S. income tax return. At the beginning of year 2, DRCX sells all of its assets for cash and distributes the cash to P pursuant to a liquidation that qualifies under section 332.
(ii) Result. In general, under section 381, P would succeed to, and be permitted to use, DRCX's net operating loss carryover. However, Sec. 1.1503(d)-4(d)(1)(i) prohibits the dual consolidated loss of DRCX from carrying over to P. Therefore, DRCX's year 1 net operating loss carryover is eliminated.
(i) Facts. S owns DE1X which, in turn, owns FBX. S's interest in DE1X and its indirect interest in FBX are combined and treated as a single separate unit (Country X separate unit) pursuant to Sec. 1.1503(d)-1(b)(4)(ii). In year 1, a dual consolidated loss is attributable to the Country X separate unit, and P does not make a domestic use election with respect to such loss. Under Sec. 1.1503(d)-4(b), the year 1 dual consolidated loss attributable to the Country X separate unit may not be used to offset the income of P or S (other than income attributable to the Country X separate unit, subject to the application of Sec. 1.1503(d)-4(c)) on the group's consolidated U.S. income tax return (nor may it be used to offset the income of any other domestic affiliates). At the beginning of year 2, S transfers its entire interest in DE1X, and thus its entire indirect interest in FBX, to FSX in a transaction described in section 381.
(ii) Result. Section 1.1503(d)-4(d)(1)(ii) provides that the dual consolidated loss attributable to a separate unit that is subject to the domestic use limitation under Sec. 1.1503(d)-4(b) is eliminated if the separate unit ceases to be a separate unit of its affiliated domestic owner and all other members of the affiliated domestic owner's separate group. As a result of the transfer of the Country X separate unit to FSX, the Country X separate unit ceases to be a separate unit of S, and is not a separate unit of any other member of the P consolidated group. In addition, the exceptions in Sec. 1.1503(d)-4(d)(2)(iii) do not apply because FSX is not a domestic corporation. Thus, the year 1 dual consolidated loss attributable to the Country X separate unit is eliminated.
(iii) Alternative Facts. Assume the same facts as in paragraph (i) of this Example 21, except S transfers its assets to DC, a domestic corporation that is not a member of the P consolidated group, in a transaction described in section 381(a). Immediately after the transaction, the Country X separate unit is a separate unit of DC. Under Sec. 1.1503(d)-4(d)(1)(ii), the year 1 dual consolidated loss of the Country X separate unit would be eliminated because it ceases to be a separate unit of S, and is not a separate unit of any other member of the P consolidated group. However, because the transferee is a domestic corporation and the Country X separate unit is a separate unit in the hands of DC immediately after the transaction, the exception under Sec. 1.1503(d)-4(d)(2)(iii)(A) applies. As a result, the year 1 dual consolidated loss of the Country X separate unit is not eliminated and any income generated by DC that is attributable to the Country X separate unit following the transfer may be offset by the carryover dual consolidated losses attributable to the Country X separate unit, subject to the limitations of Sec. 1.1503(d)-4(b) and (c) applied as if DC generated the dual consolidated loss and such loss was attributable to the Country X separate unit.
(iv) Alternative Facts. Assume the same facts as in paragraph (iii) of this Example 21, except that P owns DE2X and the interest in DE2X is combined with and therefore included in the Country X separate unit. In addition, a portion of the dual consolidated loss of the Country X separate unit is attributable to P's interest in DE2X. Pursuant to Sec. 1.1503(d)-4(d)(2)(iii)(A), the result would be the same as in paragraph (iii) of this Example 21, with respect to the portion of the dual consolidated loss attributable to the combined separate unit that is succeeded to and taken into account by DC pursuant to section 381. The portion of the dual consolidated loss attributable to P's interest in DE2X, however, does not carry over to DC but is retained by P and continues to be subject to the limitations of Sec. 1.1503(d)-4(b) and (c) with respect to P's interest in DE2X.
(v) Alternative Facts. Assume the same facts as in paragraph (iv) of this Example 21, except that DC is a member of the P consolidated group. Pursuant to Sec. 1.1503(d)-4(d)(2)(iii)(B), the dual consolidated loss of the Country X separate unit is not eliminated and income attributable to the Country X separate unit may continue to be offset by the dual consolidated loss that is succeeded to and taken into account by DC pursuant to section 381, subject to the limitations of Sec. 1.1503(d)-4(b) and (c). The result would be the same even if the interest in DE1X ceased to be a separate unit in the hands of DC (for example, because it dissolved under Country X law in connection with the transaction), provided P, or another member of the P consolidated group, continued to own a portion of the Country X separate unit.
(i) Facts. P owns 100 percent of DRCZ, a domestic corporation that is included as a member of the P consolidated group. DRCZ conducts a business in the United States. During year 1, DRCZ was managed and controlled in Country Z and therefore was subject to tax as a resident of Country Z and was a dual resident corporation. In year 1, DRCZ incurred a dual consolidated loss of $200x, and P did not make a domestic use election with respect to such loss. As a result, such loss is subject to the domestic use limitation rule of Sec. 1.1503(d)-4(b). At the end of year 1, DRCZ moved its management and control to the United States and, as a result, ceased being a dual resident corporation. At the beginning of year 2, P transferred asset A, a non-depreciable asset, to DRCZ in exchange for common stock in a transaction that qualified for nonrecognition under section 351. At the time of the transfer, P's tax basis in asset A equaled $50x and the fair market value of asset A equaled $100x. The tax basis of asset A in the hands of DRCZ immediately after the transfer equaled $50x pursuant to section 362. Asset A did not constitute replacement property acquired in the ordinary course of business. DRCZ did not generate income or gain during years 2, 3, or 4. On June 30, year 5, DRCZ sold asset A to a third party for $100x, its fair market value at the time of the sale, and recognized $50x of income on such sale. In addition to the $50x income generated on the sale of asset A, DRCZ generated $100x of operating income in year 5. At the end of year 5, the fair market value of all the assets of DRCZ was $400x.
(ii) Result. DRCZ ceased being a dual resident corporation at the end of year 1. Therefore, its year 1 dual consolidated loss cannot be offset by tainted income. Asset A is a tainted asset because it was acquired in a nonrecognition transaction after DRCZ ceased being a dual resident corporation (and was not replacement property acquired in the ordinary course of business). As a result, the $50x of income recognized by DRCZ on the disposition of asset A is tainted income and cannot be offset by the year 1 dual consolidated loss of DRCZ. In addition, absent evidence establishing the actual amount of tainted income, $25x of the $100x year 5 operating income of DRCZ (($100x/$400x) x $100x) also is treated as tainted income and cannot be offset by the year 1 dual consolidated loss of DRCZ under Sec. 1.1503(d)-4(e)(2)(ii). Therefore, $75x of the $150x year 5 income of DRCZ constitutes tainted income and may not be offset by the year 1 dual consolidated loss of DRCZ; however, the remaining $75x of year 5 income of DRCZ may be offset by such dual consolidated loss. The result would be the same if, instead of P transferring asset A to DRCZ, such asset was received from a separate unit or a transparent entity of DRCZ.
(i) Facts. P owns DE1X which, in turn, owns FSX. In year 1, P borrows from a third party and on-lends the proceeds to DE1X. In year 1, P incurs interest expense attributable to the third-party loan. Also in year 1, DE1X incurs interest expense attributable to its loan from P, but such expense is generally disregarded for U.S. tax purposes because DE1X is disregarded as an entity separate from P. The third-party loan and related interest expense are reflected on the books and records of P (and not on the books and records of DE1X). The loan from P to DE1X and related interest expense are reflected on the books and records of DE1X. There are no other items of income, gain, deduction, or loss reflected on the books and records of DE1X in year 1.
(ii) Result. Because the interest expense on P's third-party loan is not reflected on the books and records of DE1X, no portion of such expense is attributable to P's interest in DE1X pursuant to Sec. 1.1503(d)-5(c)(3) for purposes of calculating the year 1 dual consolidated loss, if any, attributable to such interest. In addition, even though P's interest in DE1X is treated as a separate domestic corporation for purposes of determining the amount of income or dual consolidated loss attributable to it pursuant to Sec. 1.1503(d)-5(c)(1)(ii), such treatment does not cause the interest expense incurred on the loan from P to DE1X that is generally disregarded for U.S. tax purposes to be regarded for purposes of calculating the year 1 dual consolidated loss, if any, attributable to P's interest in DE1X. As a result, even though the disregarded interest expense is reflected on the books and records of DE1X, it is not taken into account for purposes of calculating income or a dual consolidated loss. Therefore, there is no dual consolidated loss attributable to P's interest in DE1X in year 1.
(i) Facts. P owns DE1X which, in turn, owns FBX. P's interest in DE1X and its indirect interest in FBX are combined and treated as a single separate unit (Country X separate unit) pursuant to Sec. 1.1503(d)-1(b)(4)(ii). DE1X owns DE3Y. DE3Y owns the stock of FSX. P's Country X separate unit would, without regard to year 1 dividend income (or related section 78 gross-up) received from FSX, have a dual consolidated loss of $75x in year 1. In year 1, FSX distributes $50x to DE3Y that is taxable as a dividend. DE3Y distributes the same amount to DE1X. P computes foreign taxes deemed paid on the dividend under section 902 of $25x and includes that amount in gross income under section 78.
(ii) Result. The $50x dividend is reflected on the books and records of DE3Y and, therefore, is attributable to P's interest in DE3Y pursuant to Sec. 1.1503(d)-5(c)(3)(i). In addition, the $25x section 78 gross-up is attributable to P's interest in DE3Y pursuant to Sec. 1.1503(d)-5(c)(4)(iv). The distribution of $50x from DE3Y to DE1X is generally disregarded for U.S. tax purposes and, therefore, does not give rise to an item that is taken into account for purposes of calculating income or a dual consolidated loss. This is the case even though the item would be reflected on the books and records of DE1X. In addition, pursuant to Sec. 1.1503(d)-5(c)(1)(iii), each separate unit must calculate its own income or dual consolidated loss, and each item of income, gain, deduction, and loss must be taken into account only once. As a result, the dual consolidated loss of $75x attributable to P's Country X separate unit in year 1 is not reduced by the amount of dividend income attributable to P's indirect interest in DE3Y.
(i) Facts. P owns DE1X which, in turn, owns FBX. P's interest in DE1X and its indirect interest in FBX are combined and treated as a single separate unit (Country X separate unit) pursuant to Sec. 1.1503(d)-1(b)(4)(ii). The following items are reflected on the books and records of DE1X in year 1: Sales, depreciation expense, a political contribution, royalty expense paid to P, repairs and maintenance expense paid to a third party, and Country X income tax expense. The amount of sales under U.S. tax principles equals the amount of sales reported for accounting purposes. The depreciation expense is calculated on a straight-line basis over the useful life of the asset for accounting purposes, but is subject to accelerated depreciation for U.S. tax purposes. In addition, the repairs and maintenance expense, which is deducted when paid for accounting purposes, is properly capitalized and amortized over five years for U.S. tax purposes. Finally, P elects to claim as a credit under section 901 the Country X income tax expense that was paid in year 1.
(ii) Result. (A) For purposes of determining the income or dual consolidated loss attributable to P's Country X separate unit, items of income, gain, deduction, and loss must first be attributed to the individual separate units (that is, P's interest in DE1X and its indirect interest in FBX). For purposes of attributing items to P's interest in DE1X, P's items that are reflected on DE1X's books and records, as adjusted to conform to U.S. tax principles, are taken into account. See Sec. 1.1503(d)-5(c)(3)(i). For purposes of attributing items (other than interest expense) to FBX, the principles of section 864(c)(2), (c)(4), and (c)(5) (as set forth in Sec. 1.864-4(c) and Secs. 1.864-5 through 1.864-7) must be applied and, for interest expense, the principles of Sec. 1.882-5, as modified under Sec. 1.1503(d)-5(c)(2)(ii), must be applied; however, for these purposes, pursuant to Sec. 1.1503(d)-5(c)(4)(i)(A), FBX only takes into account items attributable to P's interest in DE1X and the assets, liabilities, and activities of such interest. In addition, to the extent such items are taken into account by FBX, they are not taken into account in determining the items attributable to P's interest in DE1X. Sec. 1.1503(d)-5(c)(4)(i)(B). Because P's interest in DE1X has no assets or liabilities, and conducts no activities, other than through its ownership of FBX, all of the items that are reflected on the books and records of DE1X, as adjusted to conform to U.S. tax principles, are attributable to FBX; no items are attributable to P's interest in DE1X.
(A) For purposes of determining the income or dual consolidated loss attributable to P's Country X separate unit, items of income, gain, deduction, and loss must first be attributed to the individual separate units (that is, P's interest in DE1X and its indirect interest in FBX). For purposes of attributing items to P's interest in DE1X, P's items that are reflected on DE1X's books and records, as adjusted to conform to U.S. tax principles, are taken into account. See Sec. 1.1503(d)-5(c)(3)(i). For purposes of attributing items (other than interest expense) to FBX, the principles of section 864(c)(2), (c)(4), and (c)(5) (as set forth in Sec. 1.864-4(c) and Secs. 1.864-5 through 1.864-7) must be applied and, for interest expense, the principles of Sec. 1.882-5, as modified under Sec. 1.1503(d)-5(c)(2)(ii), must be applied; however, for these purposes, pursuant to Sec. 1.1503(d)-5(c)(4)(i)(A), FBX only takes into account items attributable to P's interest in DE1X and the assets, liabilities, and activities of such interest. In addition, to the extent such items are taken into account by FBX, they are not taken into account in determining the items attributable to P's interest in DE1X. Sec. 1.1503(d)-5(c)(4)(i)(B). Because P's interest in DE1X has no assets or liabilities, and conducts no activities, other than through its ownership of FBX, all of the items that are reflected on the books and records of DE1X, as adjusted to conform to U.S. tax principles, are attributable to FBX; no items are attributable to P's interest in DE1X.
(B) The items reflected on the books and records of DE1X must be adjusted to conform to U.S. tax principles. No adjustment is required to sales because the amount of sales under U.S. tax principles equals the amount of sales for accounting purposes. The amount of straight-line depreciation expense reflected on DE1X's books and records must be adjusted to reflect the amount of depreciation on the asset that is allowable for U.S. tax purposes. The political contribution is not taken into account because it is not deductible for U.S. tax purposes. Similarly, because the royalty expense is paid to P, and therefore is generally disregarded for U.S. tax purposes, it is not taken into account. The repair and maintenance expense that is deducted in year 1 for accounting purposes also must be adjusted to conform to U.S. tax principles. Thus, the repair and maintenance expense will be taken into account in computing the income or dual consolidated loss attributable to P's Country X separate unit over five years (even though no item related to such expense would be reflected on the books and records of DE1X for years 2 through 5). Finally, because P elected to claim as a credit the Country X foreign taxes paid during year 1, no deduction is allowed for such amount pursuant to section 275(a)(4) and, therefore, the Country X tax expense is not taken into account.
(C) Pursuant to Sec. 1.1503(d)-5(c)(4)(ii)(B), the combined Country X separate unit of P calculates its income or dual consolidated loss by taking into account all the items of income, gain, deduction, and loss that were separately attributable to P's interest in DE1X and FBX. However, in this case, there are no items attributable to P's interest in DE1X. Therefore, the items attributable to the Country X separate unit are the items attributable to FBX.
(i) Facts. P owns DE1X. DE1X owns a 50 percent interest in PRSZ, a Country Z entity that is classified as a partnership both for Country Z tax purposes and for U.S. tax purposes. FSX, which is unrelated to P, owns the remaining 50 percent interest in PRSZ. PRSZ carries on operations in Country X that, if carried on by a U.S. person, would constitute a foreign branch as defined in Sec. 1.367(a)-6T(g)(1). Therefore, P's share of the Country X operations carried on by PRSZ constitutes a foreign branch separate unit. PRSZ also owns assets that do not constitute a part of its Country X branch, including all of the interests in TET, a disregarded entity. TET is an entity incorporated under the laws of Country T, a country that does not have an income tax. Under the laws of Country X, an interest holder of TET does not take into account on a current basis the interest holder's share of items of income, gain, deduction, and loss of TET.
(ii) Result. (A) Pursuant to Sec. 1.1503(d)-1(b)(4)(ii), P's interest in DE1X, and P's indirect ownership of a portion of the Country X operations carried on by PRSZ, are combined and treated as a single separate unit (Country X separate unit). Pursuant to Sec. 1.1503(d)-5(c)(4)(ii)(A), for purposes of determining P's items of income, gain, deduction, and loss attributable to the Country X separate unit, the items of P are first attributed to each separate unit that composes the Country X separate unit.
(A) Pursuant to Sec. 1.1503(d)-1(b)(4)(ii), P's interest in DE1X, and P's indirect ownership of a portion of the Country X operations carried on by PRSZ, are combined and treated as a single separate unit (Country X separate unit). Pursuant to Sec. 1.1503(d)-5(c)(4)(ii)(A), for purposes of determining P's items of income, gain, deduction, and loss attributable to the Country X separate unit, the items of P are first attributed to each separate unit that composes the Country X separate unit.
(B) Pursuant to Sec. 1.1503(d)-5(c)(2)(i), the principles of section 864(c)(2), (c)(4), and (c)(5) (as set forth in Sec. 1.864-4(c) and Secs. 1.864-5 through 1.864-7), apply for purposes of determining P's items of income, gain, deduction (other than interest expense), and loss that are attributable to P's indirect interest in the Country X operations carried on by PRSZ. For purposes of determining P's interest expense that is attributable to P's indirect interest in the Country X operations carried on by PRSZ, the principles of Sec. 1.882-5, as modified under Sec. 1.1503(d)-5(c)(2)(ii), shall apply. For purposes of applying these rules, P is treated as a foreign corporation, the Country X operations carried on by PRSZ are treated as a trade or business within the United States, and the assets of P (including its share of the PRSZ assets, other than those of the Country X operations) are treated as assets that are not U.S. assets. In addition, because P carries on its share of the Country X operations through DE1X, a hybrid entity, Sec. 1.1503(d)-5(c)(4)(i)(A) provides that only the items attributable to P's interest in DE1X, and only the assets, liabilities, and activities of P's interest in DE1X, are taken into account for purposes of this determination.
(C) TET is a transparent entity as defined in Sec. 1.1503(d)-1(b)(16) because it is not taxable as an association for Federal tax purposes, is not subject to income tax in a foreign country as a corporation (or otherwise at the entity level) either on its worldwide income or on a residence basis, and is not treated as a pass-through entity under the laws of Country X (the applicable foreign country). TET is not a pass-through entity under the laws of Country X because a Country X holder of an interest in TET does not take into account on a current basis the interest holder's share of items of income, gain, deduction, and loss of TET. For purposes of determining P's items of income, gain, deduction, and loss that are attributable to P's interest in TET, only those items of P that are reflected on the books and records of TET, as adjusted to conform to U.S. tax principles, are taken into account. Sec. 1.1503(d)-5(c)(3)(i). Because the interest in TET is not a separate unit, a loss attributable to such interest is not a dual consolidated loss and is not subject to section 1503(d) and these regulations. Items must nevertheless be attributed to the interests in TET. For example, such attribution is required for purposes of calculating the income or dual consolidated loss attributable to the Country X separate unit, and for purposes of applying the domestic use limitation under Sec. 1.1503(d)-4(b) to a dual consolidated loss attributable to the Country X separate unit.
(D) For purposes of determining P's items of income, gain, deduction, and loss that are attributable to P's interest in DE1X, only those items of P that are reflected on the books and records of DE1X, as adjusted to conform to U.S. tax principles, are taken into account. Sec. 1.1503(d)-5(c)(3)(i). For this purpose, DE1X's distributive share of the items of income, gain, deduction, and loss that are reflected on the books and records of PRSZ, as adjusted to conform to U.S. tax principles, are treated as being reflected on the books and records of DE1X, except to the extent such items are taken into account by the Country X operations of PRSZ. See Sec. 1.1503(d)-5(c)(3)(ii) and (4)(i)(B). Because TET is a transparent entity, the items reflected on its books and records are not treated as being reflected on the books and records of DE1X.
(E) Pursuant to Sec. 1.1503(d)-5(c)(4)(ii)(B), the combined Country X separate unit of P calculates its income or dual consolidated loss by taking into account all the items of income, gain, deduction, and loss that were separately attributable to P's interest in DE1X and the Country X operations of PRSZ owned indirectly by P.
(i) Facts. P owns DE3Y which, in turn, owns DE1X. DE3Y also owns other assets that do not constitute a foreign branch separate unit. DE1X owns FBX. Pursuant to Sec. 1.1503(d)-1(b)(4)(ii), P's indirect interests in DE1X and FBX are combined and treated as one Country X separate unit (Country X separate unit). DE3Y sells its interest in DE1X at the end of year 1 to an unrelated foreign person for cash. The sale results in an ordinary loss of $30x. Items of income, gain, deduction, and loss derived from the assets that gave rise to the $30x loss would be attributable to the Country X separate unit under Sec. 1.1503(d)-5(c) through (e). Without regard to the sale of DE1X, no items of income, gain, deduction, and loss are attributable to P's Country X separate unit in year 1.
(ii) Result. Pursuant to Sec. 1.1503(d)-5(c)(4)(iii)(A), the $30x ordinary loss recognized on the sale is attributable to the Country X separate unit, and not P's interest in DE3Y. This is the case because the Country X separate unit is treated as owning the assets that gave rise to the loss under Sec. 1.1503(d)-5(f). Thus, the loss attributable to the sale creates a year 1 dual consolidated loss attributable to the Country X separate unit. In addition, pursuant to Sec. 1.1503(d)-6(d)(2), P cannot make a domestic use election with respect to the dual consolidated loss because the sale of the interest in DE1X is a triggering event described in Sec. 1.1503(d)-6(e)(1)(iv) and (v). Further, although the year 1 dual consolidated loss would otherwise be subject to the domestic use limitation rule of Sec. 1.1503(d)-4(b), it is eliminated pursuant to Sec. 1.1503(d)-4(d)(1)(ii). Finally, if there were a dual consolidated loss attributable to P's interest in DE3Y, the sale of the interest in DE1X would not be taken into account for purposes of determining whether there is an asset triggering event with respect to such dual consolidated loss under Sec. 1.1503(d)-6(e)(1)(iv).
(i) Facts. P owns 75 percent of HPSX, a Country X entity subject to Country X tax on its worldwide income. FSX owns the remaining 25 percent of HPSX. HPSX is classified as a partnership for Federal tax purposes. HPSX carries on operations in Country Y that, if carried on by a U.S. person, would constitute a foreign branch within the meaning of Sec. 1.367(a)-6T(g)(1). HPSX also owns assets that do not constitute a part of its Country Y operations and would not themselves constitute a foreign branch within the meaning of Sec. 1.367(a)-6T(g)(1) if owned by a U.S. person. Neither HPSX nor the Country Y operations has liabilities. P's indirect interest in the Country Y operations carried on by HPSX, and P's interest in HPSX, are each separate units. P sells its interest in HPSX and recognizes a gain of $150x on such sale. Immediately prior to P's sale of its interest in HPSX, P's portion of the assets of the Country Y operations (that is, assets the income, gain, deduction and loss from which would be attributable to P's Country Y foreign branch separate unit) had a built-in gain of $200x, and P's portion of HPSX's other assets (that is, assets the income, gain, deduction and loss from which would be attributable to P's interest in HPSX) had a built-in gain of $100x.
(ii) Result. Pursuant to Sec. 1.1503(d)-5(c)(4)(iii)(B), $100x of the total $150x of gain recognized ($200x/$300x x $150x) is attributable to P's indirect interest in its share of the Country Y operations carried on by HPSX. Similarly, $50x of such gain ($100x/$300x x $150x) is attributable to P's interest in HPSX.
(i) Facts. (A) P owns DE1X which, in turn, owns FBX. P's interest in DE1X and its indirect interest in FBX are combined and treated as a single separate unit (Country X separate unit) pursuant to Sec. 1.1503(d)-1(b)(4)(ii). In years 1 and 2, the items of income, gain, deduction, and loss that are attributable to P's Country X separate unit pursuant to Sec. 1.1503(d)-5 are as follows: ------------------------------------------------------------------------
(A) P owns DE1X which, in turn, owns FBX. P's interest in DE1X and its indirect interest in FBX are combined and treated as a single separate unit (Country X separate unit) pursuant to Sec. 1.1503(d)-1(b)(4)(ii). In years 1 and 2, the items of income, gain, deduction, and loss that are attributable to P's Country X separate unit pursuant to Sec. 1.1503(d)-5 are as follows: ------------------------------------------------------------------------
Item Year 1 Year 2------------------------------------------------------------------------Sales income.......................................... $100x $160xSalary expense........................................ ($75x) ($75x)Research and experimental expense..................... ($50x) ($50x)Interest expense...................................... ($25x) ($25x)
-----------------Income/(dual consolidated loss)....................... ($50x) $10x------------------------------------------------------------------------
(B) P does not make a domestic use election with respect to the year 1 dual consolidated loss attributable to its Country X separate unit. Pursuant to Sec. 1.1503(d)-4(b) and (c)(2), the year 1 dual consolidated loss of $50x is treated as a loss incurred by a separate domestic corporation and is subject to the limitations under Sec. 1.1503(d)-4(c)(3). The P consolidated group has $100x of consolidated taxable income in year 2.
(ii) Result. (A) P must compute its taxable income for year 1 without taking into account the $50x dual consolidated loss, pursuant to Sec. 1.1503(d)-4(c)(2). Such amount consists of a pro rata portion of the expenses that were taken into account in calculating the year 1 dual consolidated loss. Thus, the items of the dual consolidated loss that are not taken into account by P in computing its taxable income are as follows: $25x of salary expense ($75x/$150x x $50x); $16.67x of research and experimental expense ($50x/$150x x $50x); and $8.33x of interest expense ($25x/$150x x $50x). The remaining amounts of each of these items, together with the $100x of sales income, are taken into account by P in computing its taxable income for year 1 as follows: $50x of salary expense ($75x - $25x); $33.33x of research and experimental expense ($50x - $16.67x); and $16.67x of interest expense ($25x - $8.33x).
(A) P must compute its taxable income for year 1 without taking into account the $50x dual consolidated loss, pursuant to Sec. 1.1503(d)-4(c)(2). Such amount consists of a pro rata portion of the expenses that were taken into account in calculating the year 1 dual consolidated loss. Thus, the items of the dual consolidated loss that are not taken into account by P in computing its taxable income are as follows: $25x of salary expense ($75x/$150x x $50x); $16.67x of research and experimental expense ($50x/$150x x $50x); and $8.33x of interest expense ($25x/$150x x $50x). The remaining amounts of each of these items, together with the $100x of sales income, are taken into account by P in computing its taxable income for year 1 as follows: $50x of salary expense ($75x - $25x); $33.33x of research and experimental expense ($50x - $16.67x); and $16.67x of interest expense ($25x - $8.33x).
(B) Subject to the limitations provided under Sec. 1.1503(d)-4(c), the year 1 $50x dual consolidated loss is carried forward and is available to offset the $10x of income attributable to the Country X separate unit in year 2. Pursuant to Sec. 1.1503(d)-4(c)(4), a pro rata portion of each item of deduction or loss included in such dual consolidated loss is considered to be used to offset the $10x of income, as follows: $5x of salary expense ($25x / $50x x $10x); $3.33x of research and experimental expense ($16.67x/$50x x $10x); and $1.67x of interest expense ($8.33x / $50x x $10x). The remaining amount of each item shall continue to be subject to the limitations under Sec. 1.1503(d)-4(c).
(i) Facts. P owns DE1X which, in turn, owns FSX. In year 1, the sole item of income, gain, deduction, and loss attributable to P's interest in DE1X, as provided under Sec. 1.1503(d)-5, is $100x of interest expense paid on a loan to an unrelated lender. For Country X tax purposes, the $100x interest expense attributable to P's interest in DE1X in year 1 is treated as a repayment of principal and therefore cannot be deducted (at any time) or capitalized.
(ii) Result. The $100x of interest expense attributable to P's interest in DE1X constitutes a dual consolidated loss. However, because the sole item constituting the dual consolidated loss cannot be deducted or capitalized (at any time) for Country X tax purposes, P can demonstrate that there can be no foreign use of the dual consolidated loss at any time. As a result, pursuant to Sec. 1.1503(d)-6(c)(1), if P prepares a statement described in Sec. 1.1503(d)-6(c)(2) and attaches it to its timely filed tax return, the year 1 dual consolidated loss attributable to P's interest in DE1X will not be subject to the domestic use limitation rule of Sec. 1.1503(d)-4(b).
(i) Facts. P owns DE1X which, in turn, owns FBX. P's interest in DE1X and its indirect interest in FBX are combined and treated as a single separate unit (Country X separate unit) pursuant to Sec. 1.1503(d)-1(b)(4)(ii). In year 1, the sole items of income, gain, deduction, and loss attributable to P's Country X separate unit, as provided under Sec. 1.1503(d)-5, are $75x of sales income and $100x of depreciation expense. For Country X tax purposes, DE1X also generates $75x of sales income in year 1, but the $100x of depreciation expense is not deductible until year 2.
(ii) Result. The year 1 $25x net loss attributable to P's interest in the Country X separate unit constitutes a dual consolidated loss. In addition, even though DE1X has positive income in year 1 for Country X tax purposes, P cannot demonstrate that there is no possibility of foreign use with respect to the Country X separate unit's dual consolidated loss as provided under Sec. 1.1503(d)-6(c)(1)(i). P cannot make such a demonstration because the depreciation expense, an item composing the year 1 dual consolidated loss, is deductible (in a later year) for Country X tax purposes and, therefore, may be available to offset or reduce income for Country X purposes that would constitute a foreign use. For example, if DE1X elected to be classified as a corporation pursuant to Sec. 301.7701-3(c) of this chapter effective as of the end of year 1, and the deferred depreciation expense were available for Country X tax purposes to offset year 2 income of DE1X, an entity treated as a foreign corporation in year 2 for U.S. tax purposes, there would be a foreign use.
(iii) Alternative Facts. (A) The facts are the same as in paragraph (i) of this Example 31, except as follows. In year 1, the sole items of income, gain, deduction, and loss attributable to P's Country X separate unit, as provided in Sec. 1.1503(d)-5, are $75x of sales income, $100x of interest expense, and $25x of depreciation expense. For Country X tax purposes, DE1X generates $75x of sales income in year 1; the $100x interest expense is treated as a repayment of principal and therefore cannot be deducted or capitalized (at any time); and the $25x of depreciation expense is not deductible in year 1, but is deductible in year 2.
(A) The facts are the same as in paragraph (i) of this Example 31, except as follows. In year 1, the sole items of income, gain, deduction, and loss attributable to P's Country X separate unit, as provided in Sec. 1.1503(d)-5, are $75x of sales income, $100x of interest expense, and $25x of depreciation expense. For Country X tax purposes, DE1X generates $75x of sales income in year 1; the $100x interest expense is treated as a repayment of principal and therefore cannot be deducted or capitalized (at any time); and the $25x of depreciation expense is not deductible in year 1, but is deductible in year 2.
(B) In year 1, the $50x net loss attributable to P's Country X separate unit constitutes a dual consolidated loss. Even though the $100x interest expense, a nondeductible and noncapital item for Country X tax purposes, exceeds the $50x year 1 dual consolidated loss attributable to P's Country X separate unit, P cannot demonstrate that there is no possibility of foreign use of the dual consolidated loss as provided under Sec. 1.1503(d)-6(c)(1)(i). P cannot make such a demonstration because the $25x depreciation expense, an item of deduction or loss composing the year 1 dual consolidated loss, is deductible under Country X law (in year 2) and, therefore, may be available to offset or reduce income for Country X tax purposes that would constitute a foreign use.
(i) Facts. P owns DRCX, a member of the P consolidated group. In year 1, DRCX incurs a dual consolidated loss of $100x. P makes a domestic use election with respect to DRCX's year 1 dual consolidated loss and such loss therefore is included in the computation of the P group's consolidated taxable income. DRCX has no income or loss in year 2 through year 5. In year 5, P sells the stock of DRCX to FSX. At the time of the sale of the stock of DRCX, all of the losses and deductions that were included in the computation of the year 1 dual consolidated loss of DRCX had expired for Country X tax purposes because the laws of Country X only provide for a three-year carryover period for such items.
(ii) Result. The sale of DRCX to FSX generally would be a triggering event under Sec. 1.1503(d)-6(e)(1)(ii), which would require DRCX to recapture the year 1 dual consolidated loss (and pay an applicable interest charge) on the P consolidated group's tax return for the year that includes the date on which DRCX ceases to be a member of the P consolidated group. However, upon adequate documentation that the losses and deductions have expired for Country X tax purposes, P can rebut the presumption that a triggering event has occurred pursuant to Sec. 1.1503(d)-6(e)(2)(i). If the triggering event presumption is rebutted, the domestic use agreement filed by the P consolidated group with respect to the year 1 dual consolidated loss of DRCX is terminated and has no further effect pursuant to Sec. 1.1503(d)-6(j)(1)(i). If the presumptive triggering event is not rebutted, the domestic use agreement would terminate and have no further effect pursuant to Sec. 1.1503(d)-6(j)(1)(iii) because the dual consolidated loss would be recaptured.
(i) Facts. (A) P owns DE1X. DE1X's sole asset is A, which it acquired at the beginning of year 1 for $100x. DE1X does not have any liabilities. For U.S. tax purposes, DE1X's tax basis in A at the beginning of year 1 is $100x and DE1X's sole item of income, gain, deduction, and loss for year 1 is a $20x depreciation deduction attributable to A. As a result, the $20x depreciation deduction constitutes a dual consolidated loss attributable to P's interest in DE1X. P makes a domestic use election with respect to the year 1 dual consolidated loss.
(A) P owns DE1X. DE1X's sole asset is A, which it acquired at the beginning of year 1 for $100x. DE1X does not have any liabilities. For U.S. tax purposes, DE1X's tax basis in A at the beginning of year 1 is $100x and DE1X's sole item of income, gain, deduction, and loss for year 1 is a $20x depreciation deduction attributable to A. As a result, the $20x depreciation deduction constitutes a dual consolidated loss attributable to P's interest in DE1X. P makes a domestic use election with respect to the year 1 dual consolidated loss.
(B) For Country X tax purposes, DE1X has a $100x tax basis in A at the beginning of year 1, but A is not a depreciable asset. As a result, DE1X does not have any items of income, gain, deduction, and loss in year 1 for Country X tax purposes.
(C) During year 2, P sells its interest in DE1X to FSX for $80x. P's disposition of its interest in DE1X constitutes a presumptive triggering event under Sec. 1.1503(d)-6(e)(1)(iv) and (v) requiring the recapture of the year 1 $20x dual consolidated loss (plus the applicable interest charge). For Country X tax purposes, DE1X retains its tax basis of $100x in A following the sale.
(ii) Result. The year 1 dual consolidated loss is a result of the $20x depreciation deduction attributable to A. Although no item of deduction or loss was recognized by DE1X at the time of the sale for Country X tax purposes, the deduction composing the dual consolidated loss was retained by DE1X after the sale in the form of tax basis in A. As a result, a portion of the dual consolidated loss may be available to offset income for Country X tax purposes in a manner that would constitute a foreign use. For example, if DE1X were to dispose of A, the amount of gain recognized by DE1X would be reduced (or an amount of loss recognized by DE1X would be increased) and, therefore, an item composing the dual consolidated loss would be available, under U.S. tax principles, to reduce income of a foreign corporation (and an owner of an interest in a hybrid entity that is not a separate unit). Thus, P cannot demonstrate pursuant to Sec. 1.1503(d)-6(e)(2)(i) that there can be no foreign use of the year 1 dual consolidated loss following the triggering event, and must recapture the year 1 dual consolidated loss. Pursuant to Sec. 1.1503(d)-6(j)(1)(iii), the domestic use agreement filed by the P consolidated group with respect to the year 1 dual consolidated loss is terminated and has no further effect.
(iii) Alternative Facts. The facts are the same as paragraph (i) of this Example 33, except that instead of P selling its interest in DE1X to FSX, DE1X sells asset A to FSX for $80x and, for Country X tax purposes, FSX's tax basis in A immediately after the sale is $80x. P's disposition of Asset A constitutes a presumptive triggering event under Sec. 1.1503(d)-6(e)(1)(iv) requiring the recapture of the year 1 $20x dual consolidated loss (plus the applicable interest charge). For Country X tax purposes, FSX's tax basis in A was not determined, in whole or in part, by reference to the basis of A in the hands of DE1X. As a result, the deduction composing the dual consolidated loss will not give rise to an item of deduction or loss in the form of tax basis for Country X tax purposes (for example, when FSX disposes of A). Therefore, P may be able to demonstrate (for example, by obtaining the opinion of a Country X tax advisor) pursuant to Sec. 1.1503(d)-6(e)(2)(i) that there can be no foreign use of the year 1 dual consolidated loss and, thus, would not be required to recapture the year 1 dual consolidated loss.
(i) Facts. P owns DRCX, a member of the P consolidated group. In year 1, DRCX incurs a dual consolidated loss and P makes a domestic use election with respect to such loss. No member of the P consolidated group incurs a dual consolidated loss in year 2. At the end of year 2, T, the parent of the T consolidated group, acquires all the stock of P, and all the members of the P group, including DRCX, become members of a consolidated group of which T is the common parent.
(ii) Result. (A) Under Sec. 1.1503(d)-6(f)(2)(ii)(B), the acquisition by T of the P consolidated group is not an event described in Sec. 1.1503(d)-6(e)(1)(ii) requiring the recapture of the year 1 dual consolidated loss of DRCX (and the payment of an interest charge), provided that the T consolidated group files a new domestic use agreement described in Sec. 1.1503(d)-6(f)(2)(iii)(A). If a new domestic use agreement is filed, then pursuant to Sec. 1.1503(d)-6(j)(1)(ii), the domestic use agreement filed by the P consolidated group with respect to the year 1 dual consolidated loss of DRCX is terminated and has no further effect.
(A) Under Sec. 1.1503(d)-6(f)(2)(ii)(B), the acquisition by T of the P consolidated group is not an event described in Sec. 1.1503(d)-6(e)(1)(ii) requiring the recapture of the year 1 dual consolidated loss of DRCX (and the payment of an interest charge), provided that the T consolidated group files a new domestic use agreement described in Sec. 1.1503(d)-6(f)(2)(iii)(A). If a new domestic use agreement is filed, then pursuant to Sec. 1.1503(d)-6(j)(1)(ii), the domestic use agreement filed by the P consolidated group with respect to the year 1 dual consolidated loss of DRCX is terminated and has no further effect.
(B) Assume that T files a new domestic use agreement and a triggering event occurs at the end of year 3. As a result, the T consolidated group must recapture the dual consolidated loss that DRCX incurred in year 1 (and pay an interest charge), as provided in Sec. 1.1503(d)-6(h). Each member of the T consolidated group, including DRCX and any former members of the P consolidated group, is severally liable for the additional tax (and the interest charge) due upon the recapture of the dual consolidated loss of DRCX. In addition, pursuant to Sec. 1.1503(d)-6(j)(1)(iii), the new domestic use agreement filed by the T group with respect to the year 1 dual consolidated loss of DRCX is terminated and has no further effect.
(i) Facts. P owns DE1X. In year 1, there is a $100x dual consolidated loss attributable to P's interest in DE1X. P files a domestic use agreement under Sec. 1.1503(d)-6(d) with respect to such loss. During year 2, P sells 33 percent of its interest in DE1X to T, an unrelated domestic corporation.
(ii) Result. Pursuant to Rev. Rul. 99-5, the transaction is treated as if P sold 33 percent of its interest in each of DE1X's assets to T and then immediately thereafter P and T transferred their interests in the assets of DE1X to a partnership in exchange for an ownership interest therein. Upon the transfer of 33 percent of P's interest to T, a domestic corporation, no foreign use occurs and, therefore, there is no foreign use triggering event. However, P's deemed transfer of 67 percent of its interest in the assets of DE1X to a partnership is nominally a triggering event under Sec. 1.1503(d)-6(e)(1)(iv). Because the initial transfer of 33 percent of DE1X's interest was to a domestic corporation and there is only a triggering event because of the deemed transfer under Rev. Rul. 99-5, the deemed asset transfer is not treated as resulting in a triggering event pursuant to Sec. 1.1503(d)-6(f)(4).
(iii) Alternative Facts. The facts are the same as in paragraph (i) of this Example 35, except that P sells 60 percent (rather than 33 percent) of its interest in DE1X to T. The sale is a triggering event under Sec. 1.1503(d)-6(e)(1)(iv) and (v) without regard to the occurrence of a deemed transaction. Therefore, Sec. 1.1503(d)-6(f)(4) does not apply.
(i) Facts. P owns DE1X which, in turn, owns FBX. P's interest in DE1X and its indirect interest in FBX are combined and treated as a single separate unit (Country X separate unit) pursuant to Sec. 1.1503(d)-1(b)(4)(ii). In year 1, there is a $100x dual consolidated loss attributable to P's Country X separate unit and P makes a domestic use election with respect to such loss. No member of the P consolidated group incurs a dual consolidated loss in year 2. At the end of year 2, T, the parent of the T consolidated group, acquires all of P's interest in DE1X for cash.
(ii) Result. (A) Under Sec. 1.1503(d)-6(f)(2)(i)(B), the acquisition by T of the interest in DE1X is not an event described in Sec. 1.1503(d)-6(e)(1)(iv) or (v) requiring the recapture of the year 1 dual consolidated loss attributable to the Country X separate unit (and the payment of an interest charge), provided: (1) the T consolidated group files a new domestic use agreement described in Sec. 1.1503(d)-6(f)(2)(iii)(A) with respect to the year 1 dual consolidated loss of the Country X separate unit; and (2) the P consolidated group files a statement described in Sec. 1.1503(d)-6(f)(2)(iii)(B) with respect to the year 1 dual consolidated loss. If these requirements are satisfied, then pursuant to Sec. 1.1503(d)-6(j)(1)(ii) the domestic use agreement filed by the P consolidated group with respect to the year 1 dual consolidated loss is terminated and has no further effect (if these requirements are not satisfied such that the P consolidated group recaptures the dual consolidated loss, the domestic use agreement would terminate pursuant to Sec. 1.1503(d)-6(j)(1)(iii)).
(A) Under Sec. 1.1503(d)-6(f)(2)(i)(B), the acquisition by T of the interest in DE1X is not an event described in Sec. 1.1503(d)-6(e)(1)(iv) or (v) requiring the recapture of the year 1 dual consolidated loss attributable to the Country X separate unit (and the payment of an interest charge), provided: (1) the T consolidated group files a new domestic use agreement described in Sec. 1.1503(d)-6(f)(2)(iii)(A) with respect to the year 1 dual consolidated loss of the Country X separate unit; and (2) the P consolidated group files a statement described in Sec. 1.1503(d)-6(f)(2)(iii)(B) with respect to the year 1 dual consolidated loss. If these requirements are satisfied, then pursuant to Sec. 1.1503(d)-6(j)(1)(ii) the domestic use agreement filed by the P consolidated group with respect to the year 1 dual consolidated loss is terminated and has no further effect (if these requirements are not satisfied such that the P consolidated group recaptures the dual consolidated loss, the domestic use agreement would terminate pursuant to Sec. 1.1503(d)-6(j)(1)(iii)).
(B) Assume a triggering event occurs at the end of year 3 that requires recapture by the T consolidated group of the year 1 dual consolidated loss, as well as the payment of an interest charge, as provided in Sec. 1.1503(d)-6(h). T continues to own the Country X separate unit after the triggering event. In that case, each member of the T consolidated group is severally liable for the additional tax (and the interest charge) due upon the recapture of the year 1 dual consolidated loss. The T consolidated group must prepare a statement that computes the recapture tax amount as provided under Sec. 1.1503(d)-6(h)(3)(iii). Pursuant to Sec. 1.1503(d)-6(h)(3)(iv)(A), the recapture tax amount is assessed as an income tax liability of the T consolidated group and is considered as having been properly assessed as an income tax liability of the P consolidated group. If the T consolidated group does not pay in full the income tax liability attributable to the recapture tax amount, the unpaid balance of such recapture tax amount may be collected from the P consolidated group in accordance with the provisions of Sec. 1.1503(d)-6(h)(3)(iv)(B). Pursuant to Sec. 1.1503(d)-6(j)(1)(iii), the new domestic use agreement filed by the T consolidated group is terminated and has no further effect. Finally, pursuant to Sec. 1.1503(d)-6(h)(6)(iii), T is treated as if it incurred the dual consolidated loss that is recaptured for purposes of applying Sec. 1.1503(d)-6(h)(6)(i). Thus, T has a reconstituted net operating loss equal to the amount of the year 1 dual consolidated loss that was recaptured, and such loss is attributable to the Country X separate unit (and subject to the rules and limitations under Sec. 1.1503(d)-6(h)(6)(i)). Because T is treated as if it incurred the year 1 dual consolidated loss, P shall not be treated as having a net operating loss under Sec. 1.1503(d)-6(h)(6)(i).
(i) Facts. P owns DE1X which, in turn, owns FBX. P's interest in DE1X and its indirect interest in FBX are combined and treated as a single separate unit (Country X separate unit) pursuant to Sec. 1.1503(d)-1(b)(4)(ii). In year 1, there is a $100x dual consolidated loss attributable to P's Country X separate unit and P makes a domestic use election with respect to such loss. T, a domestic corporation unrelated to P, owns 95 percent of PRS, a partnership. FSX owns the remaining 5 percent of PRS. At the beginning of year 3, PRS purchases 100 percent of the interest in DE1X from P for cash. For Country X tax purposes, the $100x loss incurred by DE1X in year 1 carries forward and is available to offset income of DE1X in subsequent years.
(ii) Result. P's sale of its interest in DE1X is a triggering event under Sec. 1.1503(d)-6(e)(1)(iv) and (v). However, if P and T comply with the requirements under Sec. 1.1503(d)-6(f)(2)(iii), the sale would qualify for the multiple-party event exception under Sec. 1.1503(d)-6(f)(2)(i). In addition, because the $100x loss of DE1X carries forward to subsequent years for Country X purposes and is available to offset income of DE1X, there would be a foreign use of the dual consolidated loss immediately after the sale pursuant to Sec. 1.1503(d)-3(a)(1). This is the case because the dual consolidated loss would be available to offset or reduce income that is considered, under U.S. tax principles, to be an item of FSX, a foreign corporation (it would also be a foreign use because FSX is an indirect owner of an interest in a hybrid entity that is not a separate unit). However, there is no foreign use in this case as a result of FSX's 5 percent interest in DE1X pursuant to Sec. 1.1503(d)-3(c)(8).
(i) Facts. (A) P owns FBX. In year 1, the items of income, gain, deduction, and loss that are attributable to FBX for purposes of determining whether it has a dual consolidated loss are as follows: Sales income................................................... $100xSalary expense................................................. ($75x)Interest expense............................................... ($50x)
(A) P owns FBX. In year 1, the items of income, gain, deduction, and loss that are attributable to FBX for purposes of determining whether it has a dual consolidated loss are as follows: Sales income................................................... $100xSalary expense................................................. ($75x)Interest expense............................................... ($50x)
--------Dual consolidated loss......................................... ($25x)
(B) P makes a domestic use election with respect to the year 1 dual consolidated loss attributable to FBX and, thus, the $25x dual consolidated loss is used to offset the P group's consolidated taxable income.
(C) Pursuant to Sec. 1.861-8, the $75x of salary expense incurred by FBX is allocated and apportioned entirely to foreign source general limitation income. Pursuant to Sec. 1.861-9T, $25x of the $50x interest expense attributable to FBX is allocated and apportioned to domestic source income, $15x of such interest expense is allocated and apportioned to foreign source general limitation income, and the remaining $10x of such interest expense is allocated and apportioned to foreign source passive income.
(D) During year 2, $5x of income is attributable to FBX under the rules of Sec. 1.1503(d)-5, and the P consolidated group has $100x of consolidated taxable income. At the end of year 2, FBX undergoes a triggering event described in Sec. 1.1503(d)-6(e)(1), and P continues to own FBX following the triggering event. Pursuant to Sec. 1.1503(d)-6(h)(2)(i), P is able to demonstrate to the satisfaction of the Commissioner that the $25x dual consolidated loss attributable to FBX in year 1 would have offset the $5x of income attributable to FBX in year 2, if no domestic use election were made with respect to the year 1 loss such that it was subject to the limitations of Sec. 1.1503(d)-4(b) and (c).
(ii) Result. P must recapture and report as ordinary income $20x ($25x - $5x) of FBX's year 1 dual consolidated loss, plus applicable interest. The $20x recapture income is attributable to FBX pursuant to Sec. 1.1503(d)-5(c)(4)(vi). Pursuant to Sec. 1.1503(d)-6(h)(5), the recapture income is treated as ordinary income whose source and character (including section 904 separate limitation character) is determined by reference to the manner in which the recaptured items of expense or loss taken into account in calculating the dual consolidated loss were allocated and apportioned. Further, pursuant to Sec. 1.1503(d)-6(h)(5), the pro rata computation described in Sec. 1.1503(d)-4(c)(4) shall apply. Thus, the character and source of the recapture income is determined in the same proportion as each item of deduction or loss that contributed to the dual consolidated loss being recaptured. Accordingly, P's $20x of recapture income is characterized and sourced as follows: $4x of domestic source income (($25x/$125x) x $20x); $14.4x of foreign source general limitation income (($75x + $15x)/$125x) x $20x); and $1.6x of foreign source passive income (($10x/$125x) x $20x). Pursuant to Sec. 1.1503(d)-6(h)(6)(i), commencing in year 3, the $20x recapture amount is reconstituted and treated as a net operating loss incurred by FBX in a separate return limitation year, subject to the limitation under Sec. 1.1503(d)-4(b) (and therefore subject to the restrictions of Sec. 1.1503(d)-4(c)). Pursuant to Sec. 1.1503(d)-6(j)(1)(iii), the domestic use agreement filed by the P consolidated group with respect to the year 1 dual consolidated loss of FBX is terminated and has no further effect.
(i) Facts. P owns DE1X which, in turn, owns FBX. P's interest in DE1X and its indirect interest in FBX are combined and treated as a single separate unit (Country X separate unit) pursuant to Sec. 1.1503(d)-1(b)(4)(ii). In year 1, a dual consolidated loss of $100x is attributable to P's Country X separate unit. P makes a domestic use election with respect to such loss and uses the loss to offset the P group's consolidated taxable income. In year 2, there is $100x of income attributable to P's Country X separate unit and the P consolidated group has $200x of consolidated taxable income. At the end of year 2, the Country X separate unit undergoes a triggering event within the meaning of Sec. 1.1503(d)-6(e)(1). P demonstrates, to the satisfaction of the Commissioner, that if no domestic use election were made with respect to the year 1 dual consolidated loss such that it was subject to the limitations of Sec. 1.1503(d)-4(b) and (c), the year 1 $100x dual consolidated loss would have been offset by the $100x of year 2 income.
(ii) Result. There is no recapture of the year 1 dual consolidated loss attributable to P's Country X separate unit because it is reduced to zero under Sec. 1.1503(d)-6(h)(2)(i). However, P is liable for one year of interest charge under Sec. 1.1503(d)-6(h)(1)(ii), even though P's recapture amount is zero. This is the case because the P consolidated group had the benefit of the dual consolidated loss in year 1, and the income that offset the recapture income was not recognized until year 2. Pursuant to Sec. 1.1503(d)-6(j)(1)(iii), the domestic use agreement filed by the P consolidated group with respect to the year 1 dual consolidated loss is terminated and has no further effect.
(i) Facts. S owns DE1X which, in turn, owns FBX. S's interest in DE1X and its indirect interest in FBX are combined and treated as a single separate unit (Country X separate unit) pursuant to Sec. 1.1503(d)-1(b)(4)(ii). In year 1, there is a $100x dual consolidated loss attributable to S's Country X separate unit, and P earns $100x. P makes a domestic use election with respect to the Country X separate unit's year 1 dual consolidated loss. Therefore, the consolidated group is permitted to offset P's $100x of income with the Country X separate unit's $100x dual consolidated loss. In year 2, $30x of income is attributable to the Country X separate unit under the rules of Sec. 1.1503(d)-5 and such income is offset by a $30x net operating loss incurred by P in such year. In year 3, $25x of income is attributable to the Country X separate unit under the rules of Sec. 1.1503(d)-5, and P earns $15x of income. In addition, at the end of year 3 there is a foreign use of the year 1 dual consolidated loss that constitutes a triggering event. S continues to own the Country X separate unit after the triggering event.
(ii) Result. (A) Under the presumptive rule of Sec. 1.1503(d)-6(h)(1)(i), S must recapture $100x (plus applicable interest). However, under Sec. 1.1503(d)-6(h)(2)(i), S may be able to demonstrate that a lesser amount is subject to recapture. The lesser amount is the amount of the $100x dual consolidated loss that would have remained subject to Sec. 1.1503(d)-4(c) at the time of the foreign use triggering event if a domestic use election had not been made for such loss.
(A) Under the presumptive rule of Sec. 1.1503(d)-6(h)(1)(i), S must recapture $100x (plus applicable interest). However, under Sec. 1.1503(d)-6(h)(2)(i), S may be able to demonstrate that a lesser amount is subject to recapture. The lesser amount is the amount of the $100x dual consolidated loss that would have remained subject to Sec. 1.1503(d)-4(c) at the time of the foreign use triggering event if a domestic use election had not been made for such loss.
(B) Although the combined separate unit earned $30x of income in year 2, there was no consolidated taxable income in such year. As a result, as of the end of year 2 the $100x dual consolidated loss would continue to be subject to Sec. 1.1503(d)-4(c) if a domestic use election had not been made for such loss. However, the $30x earned in year 2 can be carried forward to subsequent taxable years and may reduce the recapture income to the extent of consolidated taxable income generated in subsequent years. In year 3, $25x of income was attributable to the Country X separate unit and P earns $15x of income. Thus, the P consolidated group has $40x of consolidated taxable income in year 3. As a result, the $100x of recapture income can be reduced by $40x. This is the case because if a domestic use election had not been made for the $100x year 1 dual consolidated loss such that it was subject to the limitations of Sec. 1.1503(d)-4(b) and (c), only $60x of the loss would have remained subject to such limitations at the time of the foreign use triggering event. Accordingly, if S can adequately document the lesser amount, the amount of recapture income is $60x ($100x - $40x). The $60x recapture income is attributable to the Country X separate unit pursuant to Sec. 1.1503(d)-5(c)(4)(vi).
(C) Pursuant to Sec. 1.1503(d)-6(h)(6)(i), commencing in year 4, the $60x recapture amount is reconstituted and treated as a net operating loss incurred by the Country X separate unit of S in a separate return limitation year, subject to the limitation under Sec. 1.1503(d)-4(b) (and therefore subject to the restrictions of Sec. 1.1503(d)-4(c)). The loss is only available for carryover to taxable years after year 3 (and is not available for carryback). The carryover period of the loss, for purposes of section 172(b), will start from year 1, when the dual consolidated loss that was subject to recapture was incurred. In addition, such reconstituted net operating loss is not eligible for the exceptions contained in Sec. 1.1503(d)-6(b) through (d). Pursuant to Sec. 1.1503(d)-6(j)(1)(iii), the domestic use agreement filed by the P consolidated group with respect to the year 1 dual consolidated loss of the Country X separate unit is terminated and has no further effect.
(iii) Alternative Facts. The facts are the same as in paragraph (i) of this Example 40, except that the triggering event that occurs at the end of year 3 is a sale by S of its entire interest in DE1X to B, an unrelated domestic corporation. The sale does not qualify as a transaction described in section 381. The results are the same as in paragraph (ii) of this Example 40, except that pursuant to Sec. 1.1503(d)-6(h)(6)(ii) the $60x net operating loss is not reconstituted (with respect to either S or B). The loss is not reconstituted with respect to S because the Country X separate unit ceases to be a separate unit of S (or any other member of the consolidated group that includes S) and therefore would have been eliminated pursuant to Sec. 1.1503(d)-4(d)(1)(ii) if no domestic use election had been made with respect to such loss. The loss is not reconstituted with respect to B because B was not the domestic owner of the combined separate unit when the dual consolidated loss that is recaptured was incurred, and B did not acquire the Country X separate unit in a section 381 transaction. [T.D. 9315, 72 FR 12914, Mar. 19, 2007; 72 FR 20424, Apr. 25, 2007] Sec. 1.1503(d)-8 Effective dates.
(a) General rule. Except as provided in paragraph (b) of this section, this paragraph (a) provides the dates of applicability of Secs. 1.1503(d)-1 through 1.1503(d)-7. Sections 1.1503(d)-1 through 1.1503(d)-7 shall apply to dual consolidated losses incurred in taxable years beginning on or after April 18, 2007. However, a taxpayer may apply Secs. 1.1503(d)-1 through 1.1503(d)-7, in their entirety, to dual consolidated losses incurred in taxable years beginning on or after January 1, 2007, by filing its return and attaching to such return the domestic use agreements, certifications, or other information in accordance with these regulations. For purposes of this section, the term application date means either April 18, 2007, or, if the taxpayer applies these regulations pursuant to the preceding sentence, January 1, 2007. Section 1.1503-2 applies for dual consolidated losses incurred in taxable years beginning on or after October 1, 1992, and before the application date.
(b) Special rules--(1) Reduction of term of agreements filed under Secs. 1.1503-2A(c)(3), 1.1503-2A(d)(3), 1.1503-2(g)(2)(i), or 1.1503-2T(g)(i). If an agreement is filed in accordance with Secs. 1.1503-2A(c)(3), 1.1503-2A(d)(3), 1.1503-2(g)(2)(i), or 1.1503-2T(g)(2)(i) with respect to a dual consolidated loss incurred in a taxable year beginning prior to the application date and an event requiring recapture with respect to the dual consolidated loss subject to the agreement has not occurred as of the application date, then such agreement will be considered by the Internal Revenue Service to apply only for any taxable year up to and including the fifth taxable year following the year in which the dual consolidated loss that is the subject of the agreement was incurred and thereafter will have no effect.
(1) Reduction of term of agreements filed under Secs. 1.1503-2A(c)(3), 1.1503-2A(d)(3), 1.1503-2(g)(2)(i), or 1.1503-2T(g)(i). If an agreement is filed in accordance with Secs. 1.1503-2A(c)(3), 1.1503-2A(d)(3), 1.1503-2(g)(2)(i), or 1.1503-2T(g)(2)(i) with respect to a dual consolidated loss incurred in a taxable year beginning prior to the application date and an event requiring recapture with respect to the dual consolidated loss subject to the agreement has not occurred as of the application date, then such agreement will be considered by the Internal Revenue Service to apply only for any taxable year up to and including the fifth taxable year following the year in which the dual consolidated loss that is the subject of the agreement was incurred and thereafter will have no effect.
(2) Reduction of term of agreements filed under Secs. 1.1503-2(g)(2)(iv)(B)(2)(i) (1992), 1.1503-2(g)(2)(iv)(B)(3)(i), or Rev. Proc. 2000-42. Taxpayers subject to the terms of a closing agreement entered into with the Internal Revenue Service pursuant to Secs. 1.1503-2(g)(2)(iv)(B)(2)(i) (1992), 1.1503-2(g)(2)(iv)(B)(3)(i), or Rev. Proc. 2000-42 (2000-2 CB 394), see Sec. 601.601(d)(2)(ii)(b) of this chapter, will be deemed to have satisfied the closing agreement's fifteen-year certification period requirement if the five-year certification period specified in Sec. 1.1503(d)-1(b)(20) has elapsed, provided such closing agreement is still in effect as of the application date, and provided the dual consolidated losses have not been recaptured. For example, if a calendar year taxpayer that has a January 1, 2007, application date entered into a closing agreement with respect to a dual consolidated loss incurred in 2003 and, as of January 1, 2007, the closing agreement is still in effect and the dual consolidated loss subject to the closing agreement has not been recaptured, then the closing agreement's fifteen-year certification period will be deemed satisfied when the five-year certification period described in Sec. 1.1503(d)-1(b)(20) has elapsed. Thus, the dual consolidated loss will be subject to the recapture and certification provisions of the closing agreement in such a case only through December 31, 2008. Alternatively, if a calendar year taxpayer that has a January 1, 2007, application date entered into a closing agreement with respect to a dual consolidated loss incurred in 2000 and, as of January 1, 2007, the closing agreement is still in effect and the dual consolidated loss subject to the closing agreement has not been recaptured, then the certification period is deemed to be satisfied.
(3) Relief for untimely filings. Paragraphs (b)(3)(i) through (iii) of this section set forth the effective dates for rules that provide relief for the failure to make timely filings of an election, agreement, statement, rebuttal, computation, closing agreement, or other information, pursuant to section 1503(d) and these regulations.
(i) General rule. Except as provided in paragraphs (b)(3)(ii) and (iii) of this section, the reasonable cause relief standard of Sec. 1.1503(d)-1(c) applies for all untimely filings with respect to dual consolidated losses, including with respect to dual consolidated losses incurred in taxable years beginning before the application date.
(ii) Closing agreements. Solely with respect to closing agreements described in Sec. 1.1503-2(g)(2)(iv)(B)(3)(i) and Rev. Proc. 2000-42, taxpayers must request relief for untimely requests through the process provided under Secs. 301.9100-1 through 301.9100-3 of this chapter. See paragraph (b)(4) of this section for rules that permit the multiple-party event exception, rather than closing agreements, for certain triggering events.
(iii) Pending requests for relief. Taxpayers that have letter ruling requests under Secs. 301.9100-1 through 301.9100-3 of this chapter pending as of March 19, 2007 (other than requests under paragraph (b)(3)(ii) of this section) are not required to use the reasonable cause procedure under Sec. 1.1503(d)-1(c); however, if such taxpayers have not yet received a determination of their request, they may withdraw their request consistent with the procedures contained in Rev. Proc. 2007-1 (2007-1 IRB 1), see Sec. 601.601(d)(2)(ii)(b) of this chapter, (or any succeeding document) and use the reasonable cause procedure set forth in Sec. 1.1503(d)-1(c). In that event, the Internal Revenue Service will refund the taxpayer's user fee.
(4) Multiple-party event exception to triggering events. This paragraph (b)(4) applies to events described in Sec. 1.1503-2(g)(2)(iv)(B)(1)(i) through (iii) that occur after April 18, 2007 and that are with respect to dual consolidated losses that were incurred in taxable years beginning on or after October 1, 1992, and before the application date. The events described in the previous sentence are not eligible for the exception described in Sec. 1.1503-2(g)(2)(iv)(B)(1), but instead are eligible for the multiple-party event exception described in Sec. 1.1503(d)-6(f)(2)(i), as modified by this paragraph (b)(4). Thus, such events are not eligible for a closing agreement described in Sec. 1.1503-2(g)(2)(iv)(B)(3)(i) and Rev. Proc. 2000-42. For purposes of applying Sec. 1.1503(d)-6(f)(2)(i) to transactions covered by this paragraph, agreements described in Sec. 1.1503-2(g)(2)(i) (rather than domestic use agreements) shall be filed, and subsequent triggering events and exceptions thereto have the meaning provided in Sec. 1.1503-2(g)(2)(iii)(A) and (iv) (other than the exception provided under Sec. 1.1503-2(g)(2)(iv)(B)(1)). For example, if a calendar year taxpayer that has a January 1, 2007, application date filed an election under Sec. 1.1503-2(g)(2)(i) with respect to a dual consolidated loss that was incurred in 2004, and a triggering event described in Sec. 1.1503-2(g)(2)(iv)(B)(1)(ii) occurs with respect to such dual consolidated loss after April 18, 2007, then the event is eligible for the multiple-party event exception under Sec. 1.1503(d)-6(f)(2)(i) (and not the exception under Sec. 1.1503-2(g)(2)(iv)(B)(1)). However, in order to comply with Sec. 1.1503(d)-6(f)(2)(iii)(A), the subsequent elector must file a new agreement described in Sec. 1.1503-2(g)(2)(i) (rather than a new domestic use agreement). In addition, for purposes of determining whether there is a subsequent triggering event, and exceptions thereto, pursuant to such new agreement, Sec. 1.1503-2(g)(2)(iii)(A) and (iv) (other than the exception provided under Sec. 1.1503-2(g)(2)(iv)(B)(1)) shall apply. Notwithstanding the general application of this paragraph (b)(4) to events described in Sec. 1.1503-2(g)(2)(iv)(B)(1)(i) through (iii) that occur after April 18, 2007, a taxpayer may choose to apply this paragraph (b)(4) to events described in Sec. 1.1503-2(g)(2)(iv)(B)(1)(i) through (iii) that occur after March 19, 2007 and on or before April 18, 2007.
(5) Basis adjustment rules. Taxpayers may apply the basis adjustment rules of Sec. 1.1503(d)-5(g) for all open years in which such basis is relevant, even if the basis adjustment is attributable to a dual consolidated loss incurred (or recaptured) in a closed taxable year. Taxpayers applying the provisions of Sec. 1.1503(d)-5(g), however, must do so consistently for all open years. [T.D. 9315, 72 FR 12914, Mar. 19, 2007; 72 FR 20424, Apr. 25, 2007]