[Federal Register Volume 67, Number 148 (Thursday, August 1, 2002)]
[Proposed Rules]
[Pages 49892-49895]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-19237]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-106879-00]
RIN 1545-AY27


Dual Consolidated Loss Recapture Events

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rule making and notice of public hearing.

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SUMMARY: This document contains proposed regulations under section 
1503(d) regarding the events that require the recapture of dual 
consolidated losses. These regulations are issued to facilitate 
compliance by taxpayers with the dual consolidated loss provisions. The 
proposed regulations generally provide that certain events will not 
trigger recapture of a dual consolidated loss or payment of the 
associated interest charge. The proposed regulations provide for the 
reporting of certain information in such cases. This document also 
proposes conforming changes to the current regulations and provides 
notice of a public hearing on these proposed regulations.

DATES: Written and electronic comments must be received by October 30, 
2002. Requests to speak (with outlines of oral comments to be 
discussed) at the public hearing scheduled for, December 3, 2002, at 10 
a.m. must be received by, November 12, 2002.

ADDRESSES: Send submissions to CC:IT:A:RU (REG-106879-00), room 5226, 
Internal Revenue Service, POB 7604, Ben Franklin Station, Washington, 
DC 20044. Submissions may be hand delivered between the hours of 8 a.m. 
and 5 p.m. to CC:ITA:RU (REG-108679-00), Courier's Desk, Internal 
Revenue Service, 1111 Constitution Avenue, NW., Washington, DC. 
Alternatively, taxpayers may submit comments electronically directly to 
the IRS Internet site at www.irs.gov/regs. The public hearing will be 
held in room 4718, Internal Revenue Building, 1111 Constitution Avenue, 
NW., Washington, DC.

FOR FURTHER INFORMATION CONTACT: Concerning the regulations, Kenneth D. 
Allison or Kathryn T. Holman, (202) 622-3860 (not a toll-free number); 
concerning submissions and the hearing, Sonya M. Cruse, (202) 622-7180 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in this notice of proposed 
rulemaking has been submitted to the Office of Management and Budget 
for review in accordance with the Paperwork Reduction Act of 1995 (44 
U.S.C. 3507(d)). Comments on the collection of information should be 
sent to the Office of Management and Budget, Attn: Desk Officer for the 
Department of the Treasury, Office of Information and Regulatory 
Affairs, Washington, DC 20503, with copies to the Internal Revenue 
Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:FP:S Washington, 
DC 20224. Comments on the collection of information should be received 
by September 30, 2002. Comments are specifically requested concerning:
    Whether the proposed collection of information is necessary for the 
proper performance of the functions of the Internal Revenue Service, 
including whether the information will have practical utility;
    The accuracy of the estimated burden associated with the proposed 
collection of information (see below);
    How the quality, utility, and clarity of the information to be 
collected may be enhanced;
    How the burden of complying with the proposed collection of 
information may be minimized, including through the application of 
automated collection techniques or other forms of information 
technology; and
    Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of service to provide information.
    The collection of information in this proposed regulation is in 
Secs. 1.1503-2(g)(2)(iv)(A)(4) and (5). This information is required to 
ensure the proper performance of the function of the IRS because it 
notifies the IRS that a future triggering event may require the 
recapture of specified dual consolidated losses by the new consolidated 
group. This information will be used to identify the acquisition of an 
unaffiliated dual resident corporation, an unaffiliated domestic owner 
of a dual resident corporation, or a consolidated group that includes a 
dual resident corporation or a domestic owner. The identification of 
such an acquisition pursuant to these regulations may allow taxpayers 
to avoid or defer recapture of a dual consolidated loss and the payment 
of an interest charge. The collection of information is mandatory. The 
likely respondents will be corporations acquiring overseas business 
operations.
    Estimated total annual reporting and/or recordkeeping burden: 60 
hours.
    Estimated average annual burden hours per respondent and/or 
recordkeeper: 2 hours.
    Estimated number of respondents and/or recordkeepers: 30.
    Estimated annual frequency of responses: On occasion.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a valid 
control number assigned by the Office of Management and Budget.

[[Page 49893]]

    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. Generally, tax returns and 
tax return information are confidential, as required by 26 U.S.C. 6103.

Background

    On September 8, 1989, proposed and temporary regulations 
implementing section 1503(d) were published in the Federal Register at 
54 FR 37314. Written comments were received in response to the proposed 
regulations, and a public hearing was held on March 2, 1990. After 
consideration of all the comments, the proposed regulations were 
amended and adopted as final regulations by, TD 8434 on, September 9, 
1992, and published in the Federal Register at 57 FR 41079.

Explanation of Provisions

    Section 1503(d) generally provides that a ``dual consolidated 
loss'' of a domestic corporation cannot offset the taxable income of 
any other member of the corporation's consolidated group. The statute, 
however, authorizes the issuance of regulations permitting the use of a 
dual consolidated loss to offset the income of a domestic affiliate if 
the loss does not offset the income of a foreign corporation under 
foreign law.
    Section 1.1503-2(g)(2) of the final regulations permits a taxpayer 
to elect to use a dual consolidated loss of a dual resident corporation 
or separate unit to offset the income of a domestic affiliate by 
entering into an agreement under which the taxpayer certifies that the 
dual consolidated loss has not been, and will not be, used to offset 
the income of another person under the laws of a foreign country. 
Section 1.1503-2(g)(2)(iii) of the final regulations provides that, in 
the year of a so-called ``triggering event,'' the taxpayer must 
recapture and report as gross income the amount of a dual consolidated 
loss subject to this agreement, as well as pay an interest charge.
    Two such triggering events are (1) an unaffiliated dual resident 
corporation that filed the agreement or an unaffiliated domestic owner 
of a separate unit that filed the agreement becomes a member of a 
consolidated group, consisting of itself and a formerly unaffiliated 
domestic corporation or an existing consolidated group; and (2) a 
consolidated group that filed the agreement and that includes a dual 
resident corporation or domestic owner of a separate unit is acquired 
by an unaffiliated domestic corporation or a consolidated group, 
resulting in a new consolidated group. Section 1.1503-2(g)(2)(iv)(B) of 
the final regulations, however, provides that these events are not 
considered to be triggering events under certain conditions.
    One such condition is that the parties to the transaction enter 
into a closing agreement with the IRS, as provided in section 7121 of 
the Code. Thus, in the first case described above, the unaffiliated 
dual resident corporation or unaffiliated domestic owner that filed the 
agreement and the unaffiliated domestic corporation or consolidated 
group must enter into a closing agreement; or, in the second case 
described above, the acquired consolidated group and the acquiring 
unaffiliated domestic corporation or consolidated group must enter into 
a closing agreement. The closing agreement must provide that the 
unaffiliated dual resident corporation, unaffiliated domestic owner, or 
consolidated group and the unaffiliated domestic corporation or 
existing consolidated group will be jointly and severally liable for 
the total amount of the recapture of the dual consolidated loss and the 
interest charge if there is a subsequent triggering event.
    The IRS and Treasury believe that this requirement, that the 
parties to the transaction enter into a closing agreement with the IRS, 
imposes an unnecessary administrative burden in cases where liability 
for the dual consolidated loss recapture amount and interest charge 
would be imposed by Sec. 1.1502-6. Section 1.1502-6 generally provides 
that the common parent corporation and each member of a consolidated 
group are severally liable for the tax computed on their consolidated 
U.S. income tax return for the taxable year. In certain circumstances, 
the several liability imposed by Sec. 1.1502-6 provides for liability 
comparable to that provided by a closing agreement under Sec. 1.1503-
2(g)(2)(iv)(B)(2) and section 7121 of the Code.
    Accordingly, the proposed regulations amend the final regulations 
by providing that a triggering event generally does not occur when an 
unaffiliated dual resident corporation or unaffiliated domestic owner 
becomes a member of a consolidated group. Under Sec. 1.1502-6, the dual 
resident corporation or domestic owner, as well as the other members of 
the consolidated group of which it becomes a member, are liable for the 
recapture amount and the interest charge in the event of a subsequent 
triggering event. The proposed regulations would remove Sec. 1.1503-
2(g)(2)(iv)(B)(1)(ii) of the final regulations, which addresses this 
particular set of circumstances only.
    The proposed regulations similarly would amend the final 
regulations by providing that a triggering event generally does not 
occur when a dual resident corporation or domestic owner that is a 
member of a consolidated group that filed an agreement under 
Sec. 1.1503-2(g)(2) becomes a member of another consolidated group in 
an acquisition, so long as each member of the acquired group that is an 
includible corporation under Sec. 1504(b) is included immediately after 
the acquisition in a consolidated U.S. income tax return filed by the 
acquiring group. Under Sec. 1.1502-6, each member of the new 
consolidated group, including each member of the former group that 
included the dual resident corporation or domestic owner, is liable for 
the recapture amount and the interest charge upon the occurrence of a 
subsequent triggering event.
    In both cases described in the proposed regulations, a statement 
must be attached to the first consolidated return of the new 
consolidated group that includes the dual resident corporation or 
domestic owner. The statement must reference these proposed regulations 
and must set forth the information required in Sec. 1.1503-
2(g)(2)(i)(B), the amount of each dual consolidated loss, and the year 
incurred. The proposed regulations further require the continued 
reporting of certain information, when applicable, by the new 
consolidated group on its subsequently filed consolidated U.S. income 
tax returns, as provided in Sec. 1.1503-2(g)(2)(vi).

Proposed Effective Date

    These regulations amending the dual consolidated loss rules under 
Sec. 1.1503-2 are proposed to apply to transactions otherwise 
constituting triggering events occurring on or after [DATE THE FINAL 
REGULATIONS ARE PUBLISHED IN THE FEDERAL REGISTER].

Special Analyses

    It has been determined that this notice of proposed rule making is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It is hereby 
certified that these regulations do not have a significant economic 
impact on a substantial number of small entities. This certification is 
based on the fact that these regulations will primarily affect 
affiliated groups of corporations that also have a foreign affiliate, 
which tend to be larger businesses. Moreover, the number of taxpayers 
affected and the average burden are minimal. It also has been

[[Page 49894]]

determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations, and because 
these regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Therefore, a Regulatory Flexibility Analysis is not required. 
Pursuant to section 7805(f) of the Code, these regulations will be 
submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on their impact on small business.

Comments and Public Hearing

    A public hearing has been scheduled for, December 3, 2002, at 10 
a.m., room 4718, in the Internal Revenue Building, 1111 Constitution 
Avenue, NW., Washington, DC. Because of access restrictions, visitors 
must enter at the main entrance, located at 1111 Constitution Avenue, 
NW. All visitors must present photo identification to enter the 
building. Because of access restrictions, visitors will not be admitted 
beyond the immediate entrance more than 30 minutes before the hearing 
starts. For information about having your name placed on the building 
access list to attend hearing, see the FOR FURTHER INFORMATION CONTACT 
portion of this preamble.
    The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who 
wish to present oral comments must submit written or electronic 
comments and an outline of the topic to be discussed and time to be 
devoted to each topic (preferably a signed original and eight (8) 
copies) by, November 12, 2002. A period of 10 minutes will be allotted 
to each person for making comments. An agenda showing the scheduling of 
the speakers will be prepared after the deadline for receiving outlines 
has passed. Copies of the agenda will be available free of charge at 
the hearing.

Drafting Information

    The principal authors of these regulations are Kenneth D. Allison 
and Kathryn T. Holman of the Office of Associate Chief Counsel 
(International). However, other personnel from the IRS and Treasury 
Department participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

    1. The authority citation for part 1 is amended by adding an entry 
in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Sec. 1.1503-2 also issued under 26 U.S.C. 1502 * * *

    2. In Sec. 1.1503-2, paragraphs (g)(2)(iv)(A)(4), (5) and (D) are 
added; paragraph (g)(2)(iv)(B)(1)(ii) is removed and paragraphs 
(g)(2)(iv)(B)(1)(iii) and (iv) are redesignated as paragraphs 
(g)(2)(iv)(B)(1)(ii) and (iii), respectively; and a sentence is added 
to paragraph (h)(1) to read as follows:


Sec. 1.1503-2  Dual consolidated loss.

* * * * *
    (g) * * *
    (2) * * *
    (iv) * * *
    (A) Acquisition by a member of the consolidated group.
* * * * *
    (4) An unaffiliated dual resident corporation or unaffiliated 
domestic owner that filed an agreement under paragraph (g)(2)(i) of 
this section becomes a member of a consolidated group. A statement 
referencing this paragraph (g)(2)(iv)(A)(4) must be attached to the 
timely filed (including extensions) consolidated income tax return of 
the consolidated group, setting forth the information required in 
paragraph (g)(2)(i)(B) of this section, the amount of each dual 
consolidated loss, and the year incurred. The consolidated group also 
must continue to comply in subsequent years with the reporting 
requirements in paragraph (g)(2)(vi) of this section for each dual 
consolidated loss.
    (5) A dual resident corporation, or domestic owner, that is a 
member of a consolidated group that filed an agreement under paragraph 
(g)(2)(i) of this section (the acquired group) becomes a member of 
another consolidated group (the acquiring group), provided that each 
member of the acquired group that is an includible corporation (within 
the meaning of section 1504(b)) in the new consolidated group must be 
included immediately after the acquisition in a consolidated income tax 
return filed by the acquiring group. A statement referencing this 
paragraph (g)(2)(iv)(A)(5) must be attached to the timely filed 
(including extensions) consolidated income tax return of the acquiring 
group, setting forth the information required in paragraph (g)(2)(i)(B) 
of this section, the amount of each dual consolidated loss, and the 
year incurred. The acquiring group also must continue to comply in 
subsequent years with the reporting requirements in paragraph 
(g)(2)(vi) of this section for each dual consolidated loss.
* * * * *
    (D) Example. The following example illustrates the operation of 
paragraph (g)(2)(iv)(A)(5) of this section.

    Example. (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 
complies with paragraph (g)(2)(i) of this section and its associated 
requirements with respect to the Year 1 dual consolidated loss. The 
C Group does not incur a dual consolidated loss in Year 2. On 
December 31, Year 2, stock constituting section 1504(a)(2) ownership 
of C is acquired by D, an unaffiliated domestic corporation. 
Immediately after and as a result of the acquisition, the C Group 
ceases to exist, and all the C Group members, including DRC, become 
includible 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)(A)(5) 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 statement described in paragraph 
(g)(2)(iv)(A)(5) of this section and continues to comply with the 
reporting requirements of paragraph (g)(2)(vi) of this section.
    (iii) Subsequent event. A triggering event occurs on December 
31, Year 3, that requires recapture by DRC of the dual consolidated 
loss it incurred for Year 1 and any dual consolidated loss incurred 
in Year 3, 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 under Sec. 1.1502-6 for the additional tax (and the 
interest charge) due upon the recapture of the dual consolidated 
loss of DRC.
* * * * *
    (h) * * *
    (1) * * * Paragraphs (g)(2)(iv)(A)(4) and (5) of this section, and 
paragraphs (g)(2)(iv)(B)(1)(ii) and (iii) of this section, shall apply 
with respect to transactions otherwise constituting triggering events 
occurring on or after [DATE THE FINAL REGULATIONS ARE PUBLISHED IN THE 
FEDERAL REGISTER].
* * * * *

Robert E. Wenzel,
Deputy Commissioner of Internal Revenue.
[FR Doc. 02-19237 Filed 7-31-02; 8:45 am]
BILLING CODE 4830-01-P