\[4830-01-p\]

DEPARTMENT OF THE TREASURY

Internal Revenue Service (IRS)

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.

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]{.underline}: 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 respect to the loss.

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 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 §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
§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 §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]{.underline}

Income taxes, Reporting and recordkeeping requirements.

[26 CFR Part 602]{.underline}

Reporting and recordkeeping requirements

**Adoption of Amendments to the Regulations**

Accordingly, 26 CFR parts1 and 602 are amended as follows:

PART 1\--INCOME TAXES

Paragraph 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 \* \* \*

Par. 2. In §1.1503-2 paragraphs (g)(2) and (h)(1) are amended as
follows:

1\. Paragraphs (g)(2)(iv)(B)([1]{.underline}), introductory text, and
(g)(2)(iv)(B)([1]{.underline})([i]{.underline}) are revised.

2\. Paragraph (g)(2)(iv)(B)([1]{.underline})([ii]{.underline}) is
removed.

3\. Paragraphs (g)(2)(iv)(B)([1]{.underline})([iii]{.underline}) and
([iv]{.underline}) are redesignated as paragraphs
(g)(2)(iv)(B)([1]{.underline})([ii]{.underline}) and
([iii]{.underline}), respectively.

4\. Paragraph (g)(2)(iv)(B)([2]{.underline}) and
(g)(2)(iv)(B)([2]{.underline})([iii]{.underline}) are revised and
redesignated as paragraph (g)(2)(iv)(B)([3]{.underline}) and
(g)(2)(iv)(B)([3]{.underline})([iii]{.underline}) respectively.

5\. Newly designated paragraph
(g)(2)(4)(B)([3]{.underline})([iii]{.underline}) is revised.

6\. New paragraph (g)(2)(iv)(B)([2]{.underline}) is added.

7\. Paragraph (g)(2)(iv)(D) is added.

8\. Paragraph (h)(1) is amended by adding a sentence at the end of the
paragraph.

The revisions and additions read as follows:

[§1.1503-2 Dual consolidated loss]{.underline}.

\* \* \* \* \*

\(g\) \* \* \*

\(2\) \* \* \*

\(iv\) \* \* \*

(B)\* \* \*([1]{.underline}) If all the requirements of paragraph
(g)(2)(iv)(B)([3]{.underline}) 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]{.underline}) 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]{.underline})([ii]{.underline}) of this
section);

\* \* \* \* \*

(*[2]{.underline}*) If the requirements of paragraph
(g)(2)(iv)(B)([3]{.underline})([iii]{.underline}) 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]{.underline}) An unaffiliated dual resident corporation or
unaffiliated domestic owner becomes a member of a consolidated group;

([ii]{.underline}) A consolidated group that filed an agreement under
this paragraph (g)(2) ceases to exist as a result of a transaction
described in §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]{.underline}) If the following requirements (as applicable) are
satisfied, the events listed in paragraphs
(g)(2)(iv)(B)([1]{.underline}) and ([2]{.underline}) 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]{.underline})
or ([2]{.underline}) 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]{.underline})([iii]{.underline}).

\* \* \* \* \*

\(D\) Example. The following example illustrates the application of
paragraph (g)(2)(iv)(B)([2]{.underline})([ii]{.underline}) of this
section:

[Example]{.underline}. (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 §
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]{.underline})([ii]{.underline}) 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]{.underline})([iii]{.underline}) 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]{.underline}) 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

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

Authority: 26 U.S.C. 7805.

Par. 4. In §602.101, paragraph (b) is amended by adding an entry in
numerical order to the table to read as follows:

[§602.601 OMB Control numbers]{.underline}.

\* \* \* \* \*

\(b\) \* \* \*

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CFR part or section where Current OMB

[identified and described control No.]{.underline}

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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