[Federal Register Volume 68, Number 146 (Wednesday, July 30, 2003)]
[Rules and Regulations]
[Pages 44616-44618]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-19366]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Parts 1 and 602

[TD 9084]
RIN 1545-AY27


Dual Consolidated Loss Recapture Events

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final 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 regulations 
generally provide that certain events will not trigger recapture of a 
dual consolidated loss or payment of the associated interest charge. 
The regulations provide for the filing of certain agreements in such 
cases. This document also makes clarifying and conforming changes to 
the current regulations.

DATES: Effective Dates: These regulations are effective January 1, 
2002.

FOR FURTHER INFORMATION CONTACT: Kenneth D. Allison or Kathryn T. 
Holman, (202) 622-3860 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collection of information contained in these final regulations 
has been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3507(d)) under control number 1545-1583. Responses to this collection 
of information are required to obtain the benefit of avoiding entering 
into a closing agreement with the IRS.
    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.
    The estimated annual burden per recordkeeper varies from 1 to 3 
hours, depending on individual circumstances, with an estimated average 
of 2 hours.
    Comments concerning the accuracy of this burden estimate and 
suggestions for reducing this burden should be sent to the Internal 
Revenue Service, Attn: IRS Reports Clearance Officer, W:CAR:MP:T:T:SP, 
Washington, DC 20224, and 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.
    Books or records relating to a collection of information must be 
retained as long as their contents might 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

    Final regulations implementing section 1503(d) were adopted by TD 
8434 (1992-C.B. 240), on September 9, 1992, and published in the 
Federal Register at 57 FR 41079 (REG-106879-00). On August 1, 2002, 
proposed regulations amending the final regulations, to reduce 
administrative burdens in certain cases, were published in the Federal 
Register at 67 FR 49892. Three written comments were received. No 
public hearing was requested or held. After consideration of the 
comments, these final regulations are adopted by this Treasury 
decision. The changes and clarifications made in the final regulations 
in response to the comments received are discussed below.

Explanation of Provisions and Summary of Comments

    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)(i) currently 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 filing an 
agreement ((g)(2)(i) 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) provides that, in the year of a 
``triggering event,'' the taxpayer must recapture and report as gross 
income the amount of a dual consolidated loss that is subject to the 
(g)(2)(i) agreement and must pay the interest charge required by 
paragraph (g)(2)(vii). Section 1.1503-2(g)(2)(iv)(B), however, provides 
that specified acquisitions are not considered to be triggering events 
if certain conditions are satisfied. In particular, the parties to the 
acquisition must enter into a closing agreement with the IRS under 
section 7121, and the acquiring corporation or consolidated group must 
file a new (g)(2)(i) agreement with
    The proposed regulations provided that a triggering event generally 
does not occur in two types of acquisitions, without any requirement to 
enter into a closing agreement or file a new (g)(2)(i) agreement: (1) 
When an unaffiliated dual resident corporation or unaffiliated domestic 
owner that filed a (g)(2)(i) agreement becomes a member of a 
consolidated group; and (2) when a dual resident corporation, or 
domestic owner, that is a member of a consolidated group that filed a 
(g)(2)(i) agreement (the acquired group) becomes a member of another 
consolidated group (the acquiring group) in an acquisition, so long as 
each member of the acquired group that is an includible corporation 
under section 1504(b) is included immediately after the acquisition in 
a consolidated U.S. income tax return filed by the acquiring group. 
Instead, in

[[Page 44617]]

such cases, the proposed regulations required the filing of an 
information statement, whereby taxpayers would provide the IRS with 
most of the information that otherwise would have been provided in a 
new (g)(2)(i) agreement.
    The proposed regulations were intended to relieve the burden of 
entering into a closing agreement in circumstances where the several 
liability imposed by Sec.  1.1502-6, in combination with the original 
(g)(2)(i) agreement, would provide for liability by the acquiring group 
sufficiently comparable to that provided by a closing agreement. A 
commentator, who raised questions regarding comparable liability under 
Sec.  1.1502-6 in such cases, in particular with respect to the 
interest charge, recommended that the regulations should retain the 
existing requirement for the acquiring corporation or consolidated 
group to enter into a new (g)(2)(i) agreement with respect to the dual 
consolidated loss. Although the IRS and Treasury believe that Sec.  
1.1502-6 provides an independent assurance of several liability, the 
recommendation to retain the existing requirement for a new (g)(2)(i) 
agreement has been adopted in these final regulations. The IRS and 
Treasury have concluded that the intended reduction in administrative 
burden can be accomplished through the elimination of the requirement 
to enter into a closing agreement in the cases specified in the 
proposed regulations. Moreover, with the retention of the requirement 
to file a new (g)(2)(i) agreement, the requirement in the proposed 
regulations to file a separate information statement containing 
essentially the same information has been eliminated. Additional 
changes have been made to clarify the nature of the new (g)(2)(i) 
agreement.
    The commentators also suggested that any affiliated dual resident 
corporation or affiliated domestic owner should be permitted to join 
the acquiring group without causing a triggering event, regardless of 
whether all members of the consolidated group that filed the original 
(g)(2)(i) agreement also join the acquiring group, provided that the 
acquiring group files a new (g)(2)(i) agreement. This suggestion has 
not been adopted in these final regulations. The final regulations 
contain a modified description of the types of transactions for which a 
closing agreement no longer is required, to make clear that all members 
of an acquired group (or their successors-in-interest) must be members 
of the acquiring group immediately after the acquisition (i.e., that no 
member of the acquired group, or its successor-in-interest, is excluded 
from the acquiring group due to any applicable restriction such as 
section 1504(a)(3) or section 1504(c)). However, the IRS and Treasury 
are continuing to consider this suggestion as well as other 
alternatives for further reducing the administrative and compliance 
burdens under the section 1503(d) regulations, and invite additional 
comments in this regard.
    In order to accomplish the intended reduction in administrative 
burdens promptly, the final regulations are applicable with respect to 
transactions otherwise constituting triggering events occurring on or 
after January 1, 2002.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. 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. Therefore, a Regulatory 
Flexibility Analysis is not required. Pursuant to section 7805(f) of 
the Internal Revenue Code, the proposed regulations preceding these 
regulations were submitted to the Chief Counsel for Advocacy of the 
Small Business Administration for comment on their impact on small 
business.

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

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

0
Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

0
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 * * *
    Section 1.1503-2 also issued under 26 U.S.C. 1502 * * *


0
Par. 2. In Sec.  1.1503-2 paragraphs (g)(2) and (h)(1) are amended as 
follows:
0
1. Paragraphs (g)(2)(iv)(B)(1) introductory text, and 
(g)(2)(iv)(B)(1)(i) are revised.
0
2. Paragraph (g)(2)(iv)(B)(1)(ii) is removed.
0
3. Paragraphs (g)(2)(iv)(B)(1)(iii) and (iv) are redesignated as 
paragraphs (g)(2)(iv)(B)(1)(ii) and (iii), respectively.
0
4. Paragraph (g)(2)(iv)(B)(2) and (g)(2)(iv)(B)(2)(iii) are revised and 
redesignated as paragraph (g)(2)(iv)(B)(3) and (g)(2)(iv)(B)(3)(iii) 
respectively.
0
5. Newly designated paragraph (g)(2)(4)(B)(3)(iii) is revised.
0
6. New paragraph (g)(2)(iv)(B)(2) is added.
0
7. Paragraph (g)(2)(iv)(D) is added.
0
8. Paragraph (h)(1) is amended by adding a sentence at the end of the 
paragraph.
    The revisions and additions read as follows:


Sec.  1.1503-2  Dual consolidated loss.

* * * * *
    (g) * * *
    (2) * * *
    (iv) * * *
    (B) * * * (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);
* * * * *
    (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

[[Page 44618]]

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.
* * * * *
    (iii) The unaffiliated domestic corporation or new consolidated 
group must file, with its timely filed 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).
* * * * *

    (D) Example. The following example illustrates the application of 
paragraph (g)(2)(iv)(B)(2)(ii) 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 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.
* * * * *
    (h) * * *
    (1) * * * 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.
* * * * *

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

0
3. The authority citation for part 602 continues to read as follows:

    Authority: 26 U.S.C. 7805.

0
4. In Sec.  602.101, paragraph (b) is amended by adding an entry for 
1.1503-2 to read as follows:


Sec.  602.601  OMB Control numbers.

* * * * *
    (b) * * *

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                                                             Current OMB
     CFR part or section where identified and described      control No.
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                                * * * * *
1.1503-2...................................................    1545-1583
 
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Robert E. Wenzel,
Deputy Commissioner for Services and Enforcement.
    Approved: July 17, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
[FR Doc. 03-19366 Filed 7-29-03; 8:45 am]
BILLING CODE 4830-01-P