12902 Federal Register / Vol. 72, No. 52 / Monday, March 19, 2007 / Rules and Regulations 

DEPARTMENT OF THE TREASURY 

Internal Revenue Service 

26 CFR Parts 1 and 602 

[TD 9315] 

RIN 1545–BD10 

Dual Consolidated Loss Regulations 

AGENCY: Internal Revenue Service (IRS), 

Treasury. 

ACTION: Final regulations. 

SUMMARY: This document contains final 

regulations under section 1503(d) of the 

Internal Revenue Code (Code) regarding 

dual consolidated losses. Section 

1503(d) generally provides that a dual 

consolidated loss of a dual resident 

corporation cannot reduce the taxable 

income of any other member of the 

affiliated group unless, to the extent 

provided in regulations, the loss does 

not offset the income of any foreign 

corporation. Similar rules apply to 

losses of separate units of domestic 

corporations. These final regulations 

address various dual consolidated loss 

issues, including exceptions to the 

general prohibition against using a dual 

consolidated loss to reduce the taxable 

income of any other member of the 

affiliated group. 

DATES: Effective Date: These regulations 

are effective on March 19, 2007. 

Applicability Dates: For dates of 

applicability see § 1.1503(d)–8. 

FOR FURTHER INFORMATION CONTACT: 

Jeffrey P. Cowan, (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– 

1946. 

The collections of information in 

these final regulations are in 

§§ 1.1503(d)–1(c), 1.1503(d)–3(e), 

1.1503(d)–4(e), 1.1503(d)–6(c), 

1.1503(d)–6(d), 1.1503(d)–6(e), 

1.1503(d)–6(f), 1.1503(d)–6(g), 

1.1503(d)–6(h), and 1.1503(d)–6(j). This 

information is required for various 

reasons. The information under 

§ 1.1503(d)–1(c) notifies the IRS when a 

taxpayer asserts that it had reasonable 

cause for failing to comply with certain 

filing requirements under the 

regulations. The information under 

§ 1.1503(d)–4(e) indicates when the 

taxpayer attempts to rebut the amount of 

presumed tainted income. The 

information under the other provisions 

provides the IRS with various 

information regarding domestic use 

elections, exceptions to the domestic 

use limitation, triggering events, new 

domestic use agreements, original 

elector statements, annual certifications, 

and terminations of existing domestic 

use elections. 

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. 

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 

Congress enacted section 1503(d), as 

part of the Tax Reform Act of 1986, to 

prevent a dual resident corporation from 

using a single economic loss once to 

offset income that was subject to U.S. 

tax, but not foreign tax, and a second 

time to offset income subject to foreign 

tax, but not U.S. tax (double dip). In 

1988, Congress extended the application 

of section 1503(d), by adding section 

1503(d)(3) and (4), to apply the 

provisions to separate units of domestic 

corporations and to grant the Secretary 

authority to promulgate regulations to 

prevent the avoidance of section 1503(d) 

through the contribution of assets to a 

corporation with a dual consolidated 

loss after the loss was sustained. The 

IRS and Treasury Department issued 

temporary regulations under section 

1503(d) in 1989 (TD 8261, 1989–2 CB 

220) and final regulations in 1992 (TD 

8434, 1992–2 CB 240), see 

§ 601.601(d)(2)(ii)(b). These final 

regulations were updated and amended 

over the next 11 years (current 

regulations). 

On May 24, 2005, the IRS and 

Treasury Department published in the 

Federal Register a notice of proposed 

rulemaking (REG–102144–04; 70 FR 

29868). The proposed regulations 

addressed the following fundamental 

concerns arising under the current 

regulations: (1) The potential over- and 

under-application of the current 

regulations; (2) various issues arising in 

the application of the current 

regulations, particularly in light of the 

adoption of the entity classification 

regulations under §§ 301.7701–1 

through 301.7701–3 (check-the-box 

regulations); and (3) the administrative 

burden of the current regulations. The 

public hearing with respect to the 2005 

proposed regulations was cancelled 

because no request to speak was 

received. However, the IRS and 

Treasury Department received a number 

of written comments which are 

discussed in this preamble. 

Summary of Comments and 

Explanation of Provisions 

A. Application of Section 1503(d) to 

Regulated Investment Companies and 

Real Estate Investment Trusts 

Under the current regulations, a dual 

resident corporation is a domestic 

corporation that is subject to an income 

tax of a foreign country on its 

worldwide income or on a residence 

basis. As a result, unless specifically 

exempted, certain entities that are 

domestic corporations, but not generally 

taxed at the entity level, may be subject 

to the current regulations. The current 

regulations provide that an S 

corporation, which is a domestic 

corporation, is not treated as a dual 

resident corporation. The proposed 

regulations, and these final regulations, 

provide that an S corporation is not 

treated as a domestic corporation and 

thus cannot be a dual resident 

corporation or own a separate unit. 

Under the current regulations, as a 

domestic corporation, a regulated 

investment company (as defined in 

section 851) or a real estate investment 

trust (as defined in section 856) could 

be a dual resident corporation or own a 

separate unit. In the preamble to the 

proposed regulations, however, the IRS 

and Treasury Department requested 

comments as to whether regulated 

investment companies or real estate 

investment trusts should, like S 

corporations, be excluded from the 

application of the dual consolidated loss 

rules. One commentator suggested that 

regulated investment companies and 

real estate investment trusts should be 

subject to the dual consolidated loss 

rules, but would limit recapture 

pursuant to a domestic use agreement to 

situations where there was a foreign use 

and a section 381 transaction occurred. 

The IRS and Treasury Department 

believe that subjecting regulated 

investment companies and real estate 

investment trusts to the dual 

consolidated loss rules is inappropriate. 

Section 1503(d) was intended to apply 

to domestic corporations that are subject 

to entity-level tax. Although regulated 

investment companies and real estate 

investment trusts are domestic 

corporations under the Code, unlike 

most domestic corporations these 

entities often do not pay tax at the entity 

level because they may deduct the 


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amount of dividends paid to their 

shareholders from their own taxable 

income. Thus, under the final 

regulations regulated investment 

companies and real estate investment 

trusts are excluded from the definition 

of a domestic corporation and, as a 

result, are not subject to the dual 

consolidated loss rules. 

B. Separate Units 

(1) Separate Unit Combination Rule 

Section 1.1503–2(c)(3)(ii) of the 

current regulations provides that 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 available to 

offset the income of the other branches 

under the tax laws of the foreign 

country, then the branches are treated as 

a single separate unit. 

In response to comments that the 

current combination rule was 

unnecessarily limited and did not 

appropriately address the check-the-box 

regulations, the proposed regulations 

adopt a broader combination rule that, 

subject to certain requirements, 

combines all separate units of a single 

domestic corporation. One requirement 

for combining separate units, both 

under the current regulations and the 

proposed regulations, is that the losses 

of each separate unit are made available 

to offset the income of the other separate 

units under the tax laws of a single 

foreign country. 

The combination rule in the proposed 

regulations does not combine dual 

resident corporations that are members 

of the same consolidated group, or 

separate units of multiple domestic 

corporations that are members of the 

same consolidated group. However, in 

the preamble to the proposed 

regulations, the IRS and Treasury 

Department requested comments as to 

whether combination was appropriate 

in these cases. 

Numerous comments were received 

on the scope and application of the 

combination rule. Commentators 

uniformly recommended that the 

combination rule be expanded to 

include separate units that are located 

in or subject to tax in the same foreign 

country (same-country separate units) 

and that are owned by multiple 

domestic corporations that are members 

of the same consolidated group. The IRS 

and Treasury Department believe that 

combining same-country separate units 

of domestic corporations that are 

members of the same consolidated 

group is consistent with the policies 

underlying section 1503(d) because, in 

general, all of the items of income, gain, 

deduction, and loss of such combined 

separate units are taken into account in 

both the United States and the foreign 

country. Therefore, these final 

regulations expand the combination rule 

to apply to same-country separate units 

of multiple domestic corporations that 

are members of the same consolidated 

group. 

Two commentators recommended 

that the combination rule be expanded 

to combine dual resident corporations 

that are members of the same 

consolidated group. The IRS and 

Treasury Department do not believe that 

Congress intended that multiple dual 

resident corporations be treated as a 

single domestic corporation for 

purposes of section 1503(d). Combining 

dual resident corporations and separate 

units would also add complexity 

because certain rules apply differently 

to dual resident corporations and 

separate units. As a result, the 

combination rule in these final 

regulations does not apply to dual 

resident corporations. 

Nevertheless, it is important to note 

that a dual resident corporation will 

often carry on its activities through a 

foreign branch (as defined in § 1.367(a)–

6T(g)(1)) and, as a result, will be a 

domestic owner of a foreign branch 

separate unit. In these cases, the foreign 

branch separate unit through which it 

carries on its activities in the foreign 

country will be eligible for combination. 

In addition, in many cases, a significant 

number of the items of income, gain, 

deduction, and loss of a dual resident 

corporation that owns a foreign branch 

separate unit will be attributable to the 

foreign branch separate unit (and 

therefore will not be items of the dual 

resident corporation itself). As a result, 

not extending the combination rule to 

dual resident corporations should, as a 

practical matter, have limited effect. 

One commentator recommended 

eliminating the proposed regulations’

requirement that losses of each separate 

unit must be available to offset the 

income of other separate units under the 

tax laws of a single foreign country in 

order for them to combine. The IRS and 

Treasury Department believe that it is 

appropriate to remove this requirement, 

provided that the individual separate 

units are located, or subject to income 

tax on a worldwide or residence basis, 

in the same foreign country. This is the 

case because it is likely that all of the 

items of the combined separate unit will 

be recognized in both the United States 

and the foreign jurisdiction, without 

regard to whether such items are 

available for offset under the income tax 

laws of the foreign country. In addition, 

the IRS and Treasury Department 

believe that eliminating this 

requirement will reduce complexity, 

and will further refine the application of 

the rules. As a result, these final 

regulations eliminate this requirement 

from the combination rule. 

Commentators also recommended 

making combination elective in certain 

situations. The IRS and Treasury 

Department believe that elective 

combination would add complexity and 

create administrative burdens. 

Therefore, this comment is not adopted. 

The IRS and Treasury Department 

recognize that the expanded 

combination rule may necessitate that 

the basis of the stock of multiple 

domestic corporations, which are 

members of the same consolidated 

group, be adjusted to reflect the items of 

income, gain, deduction, and loss 

entering into the computation of the 

dual consolidated loss of a combined 

separate unit. These regulations provide 

guidance on the manner of such basis 

adjustments. 

These final regulations also clarify 

that the separate unit combination rule 

generally applies for all purposes of 

section 1503(d). As a result, except as 

specifically provided in these 

regulations, any individual separate unit 

composing a combined separate unit 

loses its character as an individual 

separate unit. For example, in 

determining whether there is a 

triggering event as a result of the 

transfer of the assets of a combined 

separate unit, all of the assets of the 

combined separate unit are taken into 

account (rather than only the assets of 

any individual separate unit within the 

combined separate unit). 

(2) Definition of a Foreign Branch by 

Reference to § 1.367(a)–6T(g) 

One commentator stated that the 

reference in the current and proposed 

regulations to § 1.367(a)–6T(g) for the 

definition of a foreign branch, which 

implicitly includes references to 

§ 1.367(a)–6T(g)(1) through (3), creates 

needless complexity. The IRS and 

Treasury Department generally agree 

with this comment. Accordingly, these 

final regulations clarify that a foreign 

branch is defined, in part, by reference 

to § 1.367(a)–6T(g)(1), rather than by 

reference to § 1.367(a)–6T(g). 

(3) Treaty Exception to the Definition of 

a Foreign Branch Separate Unit 

One commentator suggested that the 

definition of a foreign branch separate 

unit should not include a branch that 

would not be subject to income tax in 

a foreign jurisdiction either as a result 

of an income tax convention or because 

of the passive nature of the activities. 


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This commentator explained that such 

an exclusion is appropriate because in 

these cases there would be no potential 

use of a branch loss for foreign tax 

purposes. 

The IRS and Treasury Department 

agree that it is appropriate to exclude 

from the definition of a foreign branch 

separate unit certain business 

operations that, under an applicable 

income tax convention, would not be 

considered a permanent establishment. 

As a result, these final regulations 

include an exception to the definition of 

a foreign branch separate unit. The IRS 

and Treasury Department do not, 

however, believe an exception is 

appropriate where the business 

operations are not subject to tax in the 

foreign jurisdiction because of the 

passive nature of the activities. Such an 

exception would require the analysis of 

foreign law which, to the extent 

possible, should not be required under 

these rules. 

(4) Activities Owned by a Dual Resident 

Corporation or a Hybrid Entity 

One commentator requested 

clarification that home-country 

activities of a dual resident corporation 

or hybrid entity separate unit can 

qualify as a foreign branch separate unit. 

The IRS and Treasury Department agree 

that this clarification is warranted and 

these final regulations are modified 

accordingly. 

C. Elimination of the Consistency Rule 

As a result of the expansion of the 

separate unit combination rule in these 

final regulations, the IRS and Treasury 

Department believe that the consistency 

rule would have only limited 

application. Therefore, the consistency 

rule has been eliminated from these 

final regulations. The IRS and Treasury 

Department believe that eliminating the 

consistency rule will simplify the 

application of the dual consolidated 

rules and will eliminate various issues 

that arise under the rule. 

D. Domestic Reverse Hybrid Entities 

One commentator noted that the 

application of the current and proposed 

regulations to certain structures 

involving domestic reverse hybrid 

entities appears inconsistent with the 

underlying policies of section 1503(d). 

In a typical structure, a foreign 

corporation owns the majority of the 

interests in a partnership or limited 

liability company that elects to be 

treated as a corporation for U.S. tax 

purposes and, therefore, is subject to tax 

on its worldwide income in the United 

States, but is treated as a pass-through 

entity under foreign law (domestic 

reverse hybrid). The domestic reverse 

hybrid is the parent of a consolidated 

group, is the obligor on group 

indebtedness, and holds stock of other 

group members. This structure allows 

the interest expense of the domestic 

reverse hybrid to offset income of the 

foreign corporation, which is not subject 

to U.S. tax, and to offset income of the 

other members of the consolidated 

group, which is not subject to foreign 

tax. 

The commentator noted that because 

the domestic reverse hybrid is neither a 

dual resident corporation (because it is 

not subject to tax on a residence basis 

or on its worldwide income in the 

foreign country, but is instead treated as 

a pass-through entity) nor a separate 

unit of a domestic corporation, the 

current and proposed regulations do not 

apply to the losses of the domestic 

reverse hybrid. The commentator 

asserted that this result is inconsistent 

with the policies underlying section 

1503(d), which was adopted, in part, to 

ensure that domestic corporations were 

not put at a competitive disadvantage as 

compared to foreign corporations 

through the use of certain inbound 

acquisition structures. See S. Rep. No. 

99–313, 1986–3 CB Vol. 3 at 420, see 

§ 601.601(d)(2)(ii)(b). The commentator 

suggested that the scope of the final 

regulations be broadened to treat such 

entities as separate units, the losses of 

which are subject to the restrictions of 

section 1503(d). This change would, in 

effect, apply the provisions of section 

1503(d) to a separate unit of a foreign 

corporation. 

The IRS and Treasury Department 

recognize that this type of structure 

results in a double dip similar to that 

which Congress intended to prevent 

through the adoption of section 1503(d). 

However, the IRS and Treasury 

Department believe that a domestic 

reverse hybrid is neither a dual resident 

corporation nor a separate unit and, 

therefore, is not subject to section 

1503(d). As a result, this comment is not 

adopted. However, the IRS and Treasury 

Department continue to study these and 

similar structures. 

E. Transparent Entities 

Section 1.1503–2(c)(3) and 1.1503–

2(c)(4) of the current regulations define 

a separate unit of a domestic 

corporation as a foreign branch (within 

the meaning of § 1.367(a)–6T(g)), and an 

interest in a partnership, trust, or hybrid 

entity. As a result, the current 

regulations potentially apply not only to 

entities that are subject to tax in a 

foreign country (for example, hybrid 

entities), but also to entities that are not 

subject to tax in a foreign country, and 

otherwise have no connection to a 

foreign jurisdiction (for example, a 

domestic partnership engaged in a U.S. 

trade or business). 

The proposed regulations modify the 

definition of a separate unit to exclude 

interests in non-hybrid entity 

partnerships and non-hybrid entity 

grantor trusts. These interests were 

excluded because the IRS and Treasury 

Department believe that it is unlikely 

that losses and deductions attributable 

to these interests could be put to a 

foreign use (as that term is defined in 

the proposed regulations). However, the 

proposed regulations retain the rule that 

a domestic corporation can own a 

separate unit through a non-hybrid 

entity partnership or non-hybrid entity 

grantor trust. 

Commentators noted that, as a result 

of this change, the proposed regulations 

may not sufficiently and consistently 

address the treatment of certain entities. 

Such an entity is a pass-through entity 

for U.S. tax purposes (for example, a 

disregarded entity, a partnership or a 

grantor trust), but is not a hybrid entity 

because it is not subject to tax on its 

worldwide income or on a residence 

basis in a foreign country. In addition, 

the entity would not be treated as a 

pass-through entity under the laws of 

the applicable foreign country. One 

example of such an entity (transparent 

entity) is a limited liability company 

organized in the United States that for 

U.S. tax purposes is a partnership or 

disregarded entity, but, for purposes of 

the applicable foreign country, is not 

viewed as a pass-through entity. 

Another example is a foreign entity that 

is a pass-through entity for U.S. 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 (because, for example, it is 

organized in a foreign country that does 

not impose an income tax), and is not 

treated as a pass-through entity under 

the laws of the applicable foreign 

country. 

The commentators noted that under 

the proposed regulations items of 

income, gain, deduction, and loss of a 

transparent entity that is a partnership 

for U.S. tax purposes would be taken 

into account in computing the dual 

consolidated loss of a dual resident 

corporation or hybrid entity separate 

unit that owns an interest in such entity, 

even though it is unlikely that the items 

are taken into account by the 

jurisdiction in which the dual resident 

corporation or hybrid entity is subject to 

tax. As a result, items of deduction or 

loss which are unlikely to be available 

for a double dip (because they are not 


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taken into account by the foreign 

country in which the dual resident 

corporation or hybrid entity is subject to 

tax) could inappropriately result in a 

dual consolidated loss. The 

commentators further noted that items 

of income or gain which are unlikely to 

be taken into account by the foreign 

country could inappropriately reduce 

(or eliminate) a dual consolidated loss 

of the dual resident corporation or 

hybrid entity separate unit that owns an 

interest in such entity. 

The IRS and Treasury Department 

believe that losses attributable to 

interests in transparent entities should 

not be subject to section 1503(d), but 

also believe that items attributable to 

these interests should not influence the 

calculation or use of a dual consolidated 

loss of a dual resident corporation or 

separate unit in a manner that is 

inconsistent with the purposes of 

section 1503(d). Accordingly, these final 

regulations provide four new rules that 

address transparent entities (and 

interests therein). 

First, these final regulations provide a 

definition of a transparent entity that is 

consistent with the description and 

examples in the preceding discussion. 

Second, rules are provided for 

attributing items of income, gain, 

deduction, and loss to interests in 

transparent entities. The rules 

applicable for attributing items to these 

interests are consistent with the rules 

for attributing items to hybrid entity 

separate units. 

Third, these final regulations provide 

that items of income, gain, deduction, 

and loss attributable to interests in 

transparent entities are not considered 

when calculating whether a dual 

resident corporation that holds an 

interest in such entity has income or a 

dual consolidated loss. This 

modification ensures that in cases 

where the foreign country in which the 

dual resident corporation is subject to 

tax is unlikely to take into account items 

of the transparent entity, such items do 

not inappropriately affect the 

computation of income or a dual 

consolidated loss of the dual resident 

corporation. Similar rules apply for 

purposes of calculating the income or 

dual consolidated loss of a separate unit 

through which an interest in a 

transparent entity is owned (directly or 

indirectly). 

Finally, an interest in a transparent 

entity will be treated as a domestic 

affiliate for purposes of determining 

whether there is a domestic use of a 

dual consolidated loss. This change 

prevents a dual consolidated loss from 

being used to offset the income of a 

transparent entity such that there is no 

inappropriate domestic use of the loss. 

These final regulations do not treat 

transparent entities, or interests therein, 

as dual resident corporations or separate 

units and, as a result, do not cause such 

entities (or interests therein) to be 

subject to the limitations of section 

1503(d). Instead, the rules aim to 

appropriately take into account such 

entities when applying the dual 

consolidated loss rules to dual resident 

corporations and separate units. 

F. Reasonable Cause Exception 

The current regulations require 

various filings to be included on a 

timely filed income tax return. In 

addition, taxpayers that fail to include 

these filings must request an extension 

of time to file under §§ 301.9100–1 

through 301.9100–3. The proposed 

regulations eliminate the requirement 

that a taxpayer obtain an extension of 

time under §§ 301.9100–1 through 

301.9100–3 and instead adopt a 

reasonable cause standard. 

On January 31, 2006, the IRS and 

Treasury Department published Notice 

2006–13 (2006–8 IRB 496), see 

§ 601.601(d)(2)(ii)(b), announcing that 

taxpayers that must file agreements, 

statements, and other information under 

section 1503(d) may cure any late filings 

by applying a reasonable cause 

exception similar to the standard 

contained in the proposed regulations, 

until such time as the proposed 

regulations become final. In addition to 

allowing the use of the reasonable cause 

exception prior to the proposed 

regulations being published as final 

regulations in the Federal Register, the 

notice modifies the procedures for 

obtaining reasonable cause relief to 

ensure that requests for reasonable 

cause relief are handled in a timely and 

efficient manner. 

These final regulations adopt the 

reasonable cause standard contained in 

the proposed regulations and Notice 

2006–13, with certain modifications. 

See paragraph S(3) of this preamble for 

the application of the reasonable cause 

exception to losses that are subject to 

the current regulations. 

G. Foreign Use 

(1) In General 

Section 1.1503–2(g)(2)(i) of the 

current regulations provides that, in 

order to elect relief from the general 

limitation on the use of a dual 

consolidated loss to offset income of a 

domestic affiliate ((g)(2)(i) election), the 

taxpayer must, among other things, 

certify that no portion of the 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. If, contrary to this 

certification, there is such a use, the 

dual consolidated loss subject to the 

(g)(2)(i) election generally must be 

recaptured and reported as gross 

income. 

The proposed regulations modify the 

definition of ‘‘use’’ and provide a rule 

based on ‘‘foreign use’’ in order to 

minimize the potential over- and underapplication of the current regulations. 

The proposed regulations provide that a 

foreign use is deemed to occur only if 

two conditions are satisfied. The first 

condition is satisfied if 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 (including items of 

income or gain generated by the dual 

resident corporation or separate unit 

itself), regardless of whether income or 

gain is actually offset, and regardless of 

whether these items are recognized 

under U.S. tax principles. The second 

condition is satisfied if items that are (or 

could be) offset pursuant to the first 

condition are considered, under U.S. tax 

principles, to be items of: (1) A foreign 

corporation; or (2) a direct or indirect 

(for example, through a partnership) 

owner of an interest in a hybrid entity, 

provided such interest is not a separate 

unit. 

(2) Indirect Foreign Use 

As noted, the proposed regulations 

provide that a foreign use of a dual 

consolidated loss will occur when any 

item of deduction or loss, entering into 

the computation of the dual 

consolidated loss, is made available, 

directly or indirectly, to offset under 

foreign law, income of a foreign 

corporation or an owner of an interest 

in a hybrid entity that is not a separate 

unit. The proposed regulations do not 

provide comprehensive examples 

illustrating when an indirect use of a 

dual consolidated loss occurs. However, 

the provision was included in the 

proposed regulations to address 

transactions that are structured to avoid 

the application of section 1503(d) 

through, for example, the use of a backto-back lending or conduit financingtype arrangements, or through the use of 

one or more hybrid instruments. 

Commentators requested additional 

guidance regarding an indirect foreign 

use. In response to these comments, 

these final regulations clarify when an 


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indirect foreign use is deemed to occur, 

include an exception to the general 

indirect foreign use rule for certain 

ordinary course transactions, and 

provide related examples. 

The indirect foreign use rules are 

designed to limit an indirect use to 

situations in which taxpayers have 

engaged in transactions which have the 

effect of transferring an item of 

deduction or loss composing a dual 

consolidated loss to another entity for 

foreign tax purposes, so that it is made 

available to offset the income of a 

foreign corporation or the owner of an 

interest in an entity which is not a 

separate unit. In general, these rules are 

intended to target structured 

transactions that are designed to achieve 

a double dip that is contrary to the 

policies of section 1503(d), and are not 

intended to apply to ordinary business 

transactions. 

(3) Exceptions to Foreign Use 

The proposed regulations contain 

three exceptions to the definition of a 

foreign use, including an exception 

where there is no dilution of an interest 

in a separate unit. In the preamble to the 

proposed regulations, the IRS and 

Treasury Department request comments 

as to whether a de minimis exception 

should be provided to the dilution 

limitation. The preamble also states that 

a revenue procedure would be issued, in 

conjunction with the proposed 

regulations being published as final 

regulations in the Federal Register, that 

would provide additional exceptions 

(safe harbors) under which a triggering 

event would be deemed rebutted if 

various conditions were satisfied, 

including, in certain cases, a 

demonstration that there can be no 

foreign use of a significant portion of the 

dual consolidated loss. 

The IRS and Treasury Department 

received a number of comments on 

transactions and situations that could be 

included in the list of safe harbors. One 

commentator suggested an exception 

whereby recapture would not be 

required following transactions outside 

the taxpayer’s control. For example, this 

commentator suggested that a recapture 

of a dual consolidated loss should not 

occur following the conveyance or 

relinquishment of assets of a separate 

unit, or interests in a separate unit, to 

a foreign government. 

Commentators also suggested that 

relief should be provided following 

certain transactions, similar to those 

mentioned in the preamble to the 

proposed regulations, where there is a 

de minimis potential for foreign use, a 

de minimis carryover of asset basis, and 

for which rebuttal would otherwise be 

difficult or impossible. According to 

these commentators, this safe harbor 

would apply to many common business 

transactions in which the policies 

underlying section 1503(d) would not 

be violated because of only a de 

minimis potential for foreign use. 

Another commentator stated that an 

exception to foreign use would be 

appropriate where the taxpayer enters 

into a binding and irrevocable 

agreement with the tax authorities of a 

foreign country which ensures that no 

portion of the dual consolidated loss 

can be put to a foreign use in the foreign 

country. The commentator explained 

that, pursuant to such an arrangement, 

the taxpayer and the foreign tax 

authorities would agree that the foreign 

tax attributes of a dual resident 

corporation or separate unit (for 

example, loss carryforwards and asset 

basis) would be eliminated such that 

there would be no opportunity for a 

foreign use. 

After considering these comments, the 

IRS and Treasury Department believe 

that it is appropriate to include certain 

safe harbors where a foreign use will be 

deemed not to occur. As a result, these 

final regulations (rather than a revenue 

procedure) set forth additional 

exceptions to the definition of a foreign 

use. These exceptions generally apply in 

cases where the potential for foreign use 

is de minimis, or where the transaction 

giving rise to a foreign use occurs as a 

result of events largely outside of the 

taxpayer’s control. 

These new exceptions to foreign use 

include a de minimis rule and rules that 

apply to certain transactions involving 

the carry over of asset basis and the 

assumption of liabilities. Another new 

exception applies to a transaction that 

qualifies for the multiple-party event 

exception to a triggering event (referred 

to as successor elector events under the 

proposed regulations) where the 

acquiring unaffiliated domestic owner 

or consolidated group owns, 

immediately after the transaction, less 

than 100 percent of the acquired assets 

or interests. Without this exception to 

foreign use, many transactions that 

would qualify for the multiple-party 

event exception would immediately 

result in a foreign use triggering event 

when the unaffiliated domestic 

corporation or consolidated group 

acquires between 90 and 100 percent of 

the assets or interests. Finally, these 

regulations modify the ‘‘no dilution’’

exception contained in the proposed 

regulations to, among other things, 

incorporate a de minimis exception. 

These final regulations provide that 

the exceptions may be supplemented 

through subsequent guidance published 

in the Internal Revenue Bulletin, as 

appropriate. As a result, the IRS and 

Treasury Department request comments 

on additional transactions or situations 

that should be added as safe harbors. 

For example, additional comments are 

requested on arrangements with foreign 

tax authorities whereby foreign tax 

attributes could be eliminated to ensure 

that no portion of the dual consolidated 

loss can be put to a foreign use. 

(4) Ordering Rules for Determining a 

Foreign Use 

The current and proposed regulations 

provide rules for determining the order 

in which dual consolidated losses are 

used in cases where the laws of a 

foreign country provide for the foreign 

use of such loss, but do not provide 

applicable rules for determining the 

order in which these losses are used in 

a taxable year. 

A commentator noted that in certain 

cases involving dual consolidated losses 

incurred in different taxable years, the 

ordering rules may result in losses being 

deemed to be made available for a 

foreign use resulting in recapture, even 

though there are other losses which, if 

deemed to be used, would not result in 

recapture. This commentator 

recommended that in these situations 

the losses be deemed to first be used in 

a manner that will not result in the 

recapture of a dual consolidated loss. 

The commentator also noted that this 

approach is consistent with the 

exception to foreign use contained in 

§ 1.1503(d)–1(b)(14)(iii)(B) of the 

proposed regulations where there is no 

foreign country rule for determining 

use. Finally, the commentator stated 

that losses that do give rise to a foreign 

use should be deemed to be used on a 

‘‘last-in/first-out’’ basis. The IRS and 

Treasury Department believe these rules 

are appropriate and, as a result, these 

comments are adopted. 

(5) Mirror Legislation 

The current regulations contain a 

mirror legislation rule that denies a 

taxpayer the ability to make an election 

to use a dual consolidated loss to offset 

the income of a domestic affiliate where 

the foreign country has enacted 

legislation that operates in a manner 

similar to section 1503(d), and, as a 

result, prohibits the taxpayer from 

claiming the dual consolidated loss in 

the foreign country. The mirror 

legislation rule was designed to prevent 

the revenue gain resulting from the 

disallowance of a double dip from 

inuring solely to the foreign country. 

Staff of the Joint Committee on 

Taxation, General Explanation of the 

Tax Reform Act of 1986, at 1065–66 (J. 


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Comm. Print 1987), see 

§ 601.601(d)(2)(ii)(b); see also British 

Car Auctions, Inc. v. United States, 35 

Fed. Cl. 123 (1996), aff’d without op., 

116 F.3d 1497 (Fed. Cir. 1997) 

(upholding the validity of the mirror 

legislation rule). The effect of the mirror 

legislation rule is that a dual 

consolidated loss may be disallowed in 

the United States and in the foreign 

country. In such cases, Congress 

intended for the Treasury Department to 

pursue a bilateral agreement with the 

foreign jurisdiction so that the loss 

could offset income of an affiliate in 

only one country. 

The proposed regulations retain the 

mirror legislation rule and modify it to 

better take into account the policies 

underlying its adoption. 

A number of comments were received 

on the scope and utility of the mirror 

legislation rule. Several commentators 

encouraged the IRS and the Treasury 

Department to pursue bilateral 

agreements where the dual consolidated 

loss is disallowed in both the United 

States and the foreign country. 

The IRS and Treasury Department 

agree that such agreements are 

necessary and recently concluded a 

competent authority agreement on such 

matters with the United Kingdom on 

October 6, 2006 (the Agreement). For 

the text of the Agreement, see 

Announcement 2006–86, 2006–45 IRB 

842; see § 601.601(d)(2)(ii)(b). The 

Agreement applies to dual consolidated 

losses attributable to certain UK 

permanent establishments that are 

otherwise subject to both section 

1503(d) and mirror legislation enacted 

by the United Kingdom. In general, the 

Agreement provides that taxpayers can 

elect to use or relieve the loss in either 

the United Kingdom or the United 

States, but not both. 

The IRS and Treasury Department 

believe that these final regulations and 

the Agreement appropriately refine and 

limit the scope of the mirror rule. In 

addition, the IRS and Treasury 

Department believe that the provisions 

of the Agreement can serve as a model 

for future competent authority 

agreements, if necessary, between the 

United States and its treaty partners 

which would further the Congressional 

intent with respect to the application of 

the mirror legislation rule. Accordingly, 

comments are requested on the 

provisions of the Agreement and on 

specific jurisdictions and considerations 

that should be taken into account in 

future agreements. 

Commentators also suggested that a 

‘‘stand-alone’’ exception to the mirror 

legislation rule be adopted. This 

exception would apply where filing a 

domestic use election with respect to a 

dual consolidated loss otherwise subject 

to the mirror legislation rule would not 

violate the policies of section 1503(d). 

According to the commentators, this is 

the case because the mirror legislation 

in the foreign country would not have 

the effect of forcing taxpayers to use the 

losses in the United States. The 

commentators suggested that the mirror 

legislation rule would not apply 

provided there is not a foreign affiliate 

to which the separate unit or dual 

resident corporation could put the dual 

consolidated loss to a foreign use. The 

commentators noted that in these 

situations, the mirror legislation does 

not result in the revenue loss inuring 

solely to the United States, because it is 

factually impossible for the loss to offset 

taxable income in the foreign country 

that is not also taken into account in the 

United States. 

The IRS and Treasury Department 

generally agree with this comment. As 

a result, these final regulations contain 

a stand-alone exception to the mirror 

legislation rule. 

H. Elimination of a Dual Consolidated 

Loss After Certain Transactions 

Both the current and proposed 

regulations contain rules that eliminate 

a dual consolidated loss that is subject 

to the general restrictions under section 

1503(d)(1) following certain 

transactions. In the case of a dual 

resident corporation, the dual 

consolidated loss is generally 

eliminated in transactions described in 

section 381(a) because the dual resident 

corporation ceases to exist. In the case 

of a separate unit, the dual consolidated 

loss is generally eliminated in 

transactions where the separate unit 

ceases to be a separate unit of its 

domestic owner (either through a 

transaction described in section 381(a) 

or otherwise). In these cases, and subject 

to the exceptions discussed in this 

preamble, after the transaction it is no 

longer possible for the dual resident 

corporation or separate unit to generate 

income that can be offset by the dual 

consolidated loss. As a result, any 

unused dual consolidated loss is 

eliminated. 

Both the current and the proposed 

regulations provide exceptions to the 

general elimination rule in the case of 

certain transactions to which section 

381(a) applies. These exceptions 

generally apply in cases where it is 

possible that income that is generated 

by the transferee corporation after the 

transaction is subject to tax in both the 

United States and the foreign country 

such that it is appropriate for the 

income to be offset by the dual 

consolidated loss that carries over to the 

transferee. 

These final regulations make certain 

modifications to the elimination rules. 

For example, the rules are modified to 

reflect the expansion of the separate 

unit combination rule. Thus, these final 

regulations take into account 

transactions involving combined 

separate units that have more than one 

domestic owner. For example, a dual 

consolidated loss of a domestic owner 

that is attributable to a separate unit will 

not be eliminated under these final 

regulations if the separate unit 

continues to be a separate unit of any 

member of its domestic owner’s 

consolidated group. 

I. Application of SRLY Limitation to a 

Former Dual Resident Corporation 

Section 1.1503(d)–3(c)(3) of the 

proposed regulations provides that a 

dual consolidated loss is treated as a 

loss incurred by a dual resident 

corporation or separate unit in a 

separate return limitation year (SRLY) 

and is generally subject to all the 

limitations of § 1.1502–21(c). The 

proposed regulations provide that when 

determining the general SRLY limitation 

with respect to a dual resident 

corporation, the calculation of aggregate 

consolidated taxable income only 

includes income, gain, deduction, and 

loss generated in years in which the 

dual resident corporation is a resident 

(or is taxed on its worldwide income) in 

the same foreign country in which it 

was a resident (or was taxed on its 

worldwide income) during the year in 

which the dual consolidated loss was 

generated. See proposed § 1.1503(d)–

3(c)(3)(iii). 

One commentator noted that this rule 

prevents the dual consolidated loss of a 

dual resident corporation from being 

taken into account by its consolidated 

group after the dual resident corporation 

ceases to be subject to tax on a residence 

basis (or on its worldwide income), 

regardless of whether the former dual 

resident corporation contributes taxable 

income to the consolidated taxable 

income of the group. The commentator 

stated that this result is inappropriate 

because it does not merely limit the use 

of a dual consolidated loss from 

offsetting the income of a domestic 

affiliate, but has the effect of limiting 

the use of a dual consolidated loss from 

offsetting the domestic corporation’s 

own taxable income. 

The IRS and Treasury Department 

agree with this comment. Section 

1503(d)(1) provides that a dual 

consolidated loss of a corporation shall 

not reduce the taxable income of any 

other member of the affiliated group for 


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the taxable year or for any other taxable 

year. However, the limitations of section 

1503(d)(1) do not prevent the use of a 

dual consolidated loss to offset the 

income of the dual resident corporation 

that incurred the loss, even where the 

dual resident corporation ceases to be 

subject to tax in the foreign country. As 

a result, this rule is not contained in 

these final regulations. But see section 

1503(d)(4) (relating to tainted assets 

contributed to a dual resident 

corporation). 

J. Effect of Section 1503(d) on Foreign 

Tax Credits 

Section 1503(d)(2) generally defines a 

dual consolidated loss to mean any net 

operating loss of a dual resident 

corporation or a separate unit. Section 

172(c) generally defines a net operating 

loss as the excess of deductions over 

gross income. Section 164(a)(3) 

generally provides that foreign taxes are 

allowed as a deduction for the taxable 

year in which paid or accrued. 

However, section 275(a)(4) provides that 

no deduction is allowed for any such 

taxes, to the extent the taxpayer chooses 

to take to any extent the benefits of 

section 901 (which permits taxpayers to 

claim a credit for certain taxes paid or 

accrued during the taxable year to any 

foreign country or any possession of the 

United States). 

Commentators asked whether a 

creditable foreign tax expenditure 

incurred by a dual resident corporation 

or separate unit, for which an election 

is made to claim a credit pursuant to 

section 901, may be subject to the 

limitations of section 1503(d)(1). 

The IRS and Treasury Department 

recognize that policy concerns arise in 

certain transactions in which two or 

more parties claim a credit for the same 

foreign taxes. Although these policy 

concerns are similar to those arising 

under section 1503(d), the IRS and 

Treasury Department do not believe that 

Congress intended the limitations of 

section 1503(d) to apply to foreign taxes, 

so long as the foreign taxes do not enter 

into the computation of a net operating 

loss (that is, so long as an election is 

made to claim a credit for such taxes, in 

lieu of deducting them). As a result, 

under the terms of the statute, the 

limitations of section 1503(d) do not 

apply to creditable foreign tax 

expenditures incurred by a dual 

resident corporation or a separate unit, 

provided an election is made to claim a 

credit with respect to such expenditures 

in accordance with section 901 and the 

related regulations. 

Even though section 1503(d) does not 

apply to foreign tax credits that are 

claimed by more than one person, the 

IRS and Treasury Department continue 

to study these transactions and, as 

appropriate, intend to address them in 

future published guidance under other 

provisions. 

K. Tainted Income Rule 

Section 1503(d)(4) grants the 

Secretary authority to prescribe such 

regulations as may be necessary or 

appropriate to prevent the avoidance of 

the purposes of section 1503(d) by 

contributing assets to the corporation 

with the dual consolidated loss after 

such loss is incurred. Section 1.1503–

2(e) of the current regulations prevents 

the dual consolidated loss of a dual 

resident corporation that ceases being a 

dual resident corporation from offsetting 

the income from assets that are acquired 

by the dual resident corporation in a 

nonrecognition transaction, or 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 any time 

thereafter. The proposed regulations 

retained the tainted income rule, with 

certain modifications. 

One commentator noted that the 

tainted income rule of the current and 

proposed regulations applies with 

respect to assets acquired by a dual 

resident corporation, regardless of 

whether such tainted assets were 

received from a member of the dual 

resident corporation’s affiliated group. 

According to this commentator, because 

section 1503(d) was intended to prevent 

the use of a dual consolidated loss from 

offsetting the taxable income of any 

other member of the affiliated group, 

applying the tainted income rule where 

the tainted assets were not received 

from a member of the dual resident 

corporation’s affiliated group is 

inconsistent with the policies 

underlying section 1503(d). 

Section 1503(d)(4) grants the 

Secretary broad regulatory authority to 

implement the tainted income rule. In 

addition, the IRS and Treasury 

Department believe that adopting the 

rule suggested by the commentator 

would require the IRS to trace the 

source of tainted assets received (for 

example, to ensure that the rule cannot 

be avoided through the imposition of an 

intermediary entity, such as a 

partnership, or through indirect 

transfers of assets). Moreover, such a 

rule would be difficult for both 

taxpayers and the IRS to apply, and 

would increase complexity. 

Accordingly, the IRS and Treasury 

Department believe that the tainted 

income rule should continue to apply 

without regard to the source of the 

tainted assets. As a result, this comment 

is not adopted. 

L. Items Taken Into Account in 

Computing Income or a Dual 

Consolidated Loss 

(1) In General 

Section 1503(d)(2)(A) generally 

defines a dual consolidated loss to mean 

any net operating loss of a domestic 

corporation which is subject to an 

income tax of a foreign country on its 

income without regard to whether such 

income is from sources inside or outside 

such foreign country, or is subject to 

such a tax on a residence basis. Section 

1503(d)(3) grants the Secretary broad 

authority to subject any loss of a 

separate unit of a domestic corporation 

to the limitations of section 1503(d). 

Because separate units are not 

themselves taxpayers, it is necessary to 

determine which items of income, gain, 

deduction, and loss of the domestic 

owner of the separate unit should be 

taken into account for purposes of 

calculating a dual consolidated loss. 

Section 1.1503–2(d)(1)(ii) of the 

current regulations provides a limited 

rule for attributing items of a domestic 

owner to a separate unit. Under this 

rule, a separate unit must compute its 

income as if it were a separate domestic 

corporation that is a dual resident 

corporation, using only those items of 

income, expense, deduction, and loss 

that are otherwise attributable to such 

separate unit. For this purpose, only 

items of the domestic owner that are 

recognized for U.S. tax purposes are 

taken into account. 

In response to requests for additional 

guidance in this area, the proposed 

regulations provide more detailed rules 

for determining the amount of income 

or dual consolidated loss of a separate 

unit. This determination depends on 

various factors, including the type of 

separate unit, the ownership structure, 

and the nature of the item. The 

determination generally turns on 

whether it is likely that the relevant 

foreign country would take into account 

the item (assuming the item is 

recognized) for tax purposes. This 

determination is solely for purposes of 

section 1503(d) and does not apply for 

any other purpose, such as attributing 

items under an applicable income tax 

treaty or under other Code sections such 

as section 884 or 987. 

These final regulations adopt the 

attribution rules contained in the 

proposed regulations, with 

modifications. 


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(2) Books and Records 

The proposed regulations provide 

that, in general, the items of income, 

gain, deduction, and loss that are 

attributable to a hybrid entity (and, 

therefore, attributable to interests in the 

hybrid entity) are those that are properly 

reflected on its books and records, as 

adjusted to conform to U.S. tax 

principles. The proposed regulations 

further provide that the principles of 

§ 1.988–4(b)(2) apply for purposes of 

making this determination. 

One commentator asked whether 

§ 1.988–4(b)(2) is a strict booking rule, 

or whether it would instead permit 

taxpayers to take positions contrary to 

how items are reflected on the books 

and records if, under the facts and 

circumstances, the items were not 

appropriately reflected on the books and 

records. Another commentator stated 

that the clause ‘‘to the extent consistent 

with U.S. tax principles’’ in the 

proposed regulations created 

uncertainty. 

In response to these comments, the 

final regulations clarify that only the 

Commissioner, and not the taxpayer, 

may make adjustments to the books and 

records where the booking practices are 

employed with a principle purpose of 

avoiding the principles of section 

1503(d), including inconsistently 

treating the same or similar items of 

income, gain, deduction, and loss. In 

addition, these final regulations clarify 

that, in general, a domestic owner’s 

items of income, gain, deduction, and 

loss are attributable to the domestic 

owner’s hybrid entity separate unit, or 

interest in a transparent entity, to the 

extent such items are reflected on the 

hybrid entity or transparent entity’s 

books and records (as defined in 

§ 1.989(a)–1(d)), as adjusted to conform 

to U.S. tax principles. 

The books and records standard set 

forth in these final regulations is 

intended to be consistent with the more 

detailed approach for attributing items 

that was adopted in proposed § 1.987–

2(b) that was published on September 7, 

2006 (REG–208270–86, 71 FR 52875). It 

is anticipated that when those 

regulations are published as final 

regulations in the Federal Register, that 

approach will, as appropriate, be 

incorporated into these regulations. The 

IRS and Treasury Department believe 

that applying consistent standards 

under these two provisions, where 

appropriate, would make the rules more 

administrable. Comments are requested 

as to whether the standard contained in 

the section 987 proposed regulations is 

appropriate for purposes of section 

1503(d). 

(3) Attributing Interest Expense Under 

the Principles of § 1.882–5 

The proposed regulations provide that 

the principles of § 1.882–5, as modified, 

apply for purposes of determining the 

interest expense that is attributable to a 

foreign branch separate unit. In making 

this determination, and solely for this 

purpose, the domestic owner is treated 

as a foreign corporation, the foreign 

branch separate unit is treated as a trade 

or business within the United States, 

and assets other than those of the 

foreign branch separate unit are treated 

as assets that are not U.S. assets. 

Two comments were received on the 

application of this rule. First, 

commentators stated that adopting the 

principles of § 1.882–5 results in 

unnecessary complexity. These 

commentators suggested that, in lieu of 

using the principles of § 1.882–5, the 

interest expense of a foreign branch 

separate unit be determined by 

reference to its books and records. 

Another commentator noted the 

rationale of using the principles of 

§ 1.882–5 as a general matter, but 

suggested that where the foreign country 

looks to the books and records of the 

foreign branch separate unit for 

purposes of computing the interest 

expense of the separate unit, it would be 

appropriate to use the books and records 

for purposes of section 1503(d). 

The IRS and Treasury Department 

continue to believe that the principles of 

§ 1.882–5, as modified, serve as a 

reasonable proxy for determining the 

items of interest expense recognized for 

U.S. tax purposes that, if recognized by 

the foreign country, would be taken into 

account by the foreign country. 

Therefore, the principles of § 1.882–5, as 

modified, are retained as the general 

rule for purposes of determining the 

interest expense that is attributable to a 

foreign branch separate unit. 

However, to minimize complexity, the 

IRS and Treasury Department believe it 

is appropriate to use a books and 

records approach, where possible. 

Therefore, these final regulations 

provide an exception to the general rule 

such that interest expense is attributable 

to a foreign branch separate unit to the 

extent it is reflected on its books and 

records. This exception only applies if 

the foreign country in which the foreign 

branch is located determines, for 

purposes of computing the taxable 

income (or loss) 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. This rule will not apply, 

however, in cases where the foreign 

country does not use a strict booking 

approach for interest expense. 

Finally, it is important to note that in 

all cases only items of interest expense, 

as determined for U.S. tax purposes, are 

taken into account. The treatment of 

interest expense in the foreign country 

is only relevant for purposes of 

determining the method under which 

items of interest expense (determined 

for U.S. tax purposes) is attributed to the 

foreign branch separate unit. 

(4) Treaty-Based Methods 

The proposed regulations provide that 

for purposes of determining the items of 

income, gain, deduction (other than 

interest), and loss that are taken into 

account in determining the taxable 

income or loss of a foreign branch 

separate unit, the principles of sections 

864(c)(2) and (c)(4) as set forth in 

§§ 1.864–4(c) and 1.864–6 shall apply. 

One commentator stated that 

domestic corporations operating foreign 

branch separate units should be allowed 

to attribute items to the foreign branch 

separate unit based on the method 

provided under an income tax treaty 

between the United States and the 

foreign country (or between two foreign 

countries if foreign branch operations 

are conducted by a hybrid entity outside 

its home country). The IRS and Treasury 

Department believe that this approach is 

inappropriate for two reasons. First, it 

would have the effect of attributing 

items recognized by the foreign 

jurisdiction, which may not be 

recognized as items for U.S. tax 

purposes. This would be inconsistent 

with section 1503(d), which defines a 

dual consolidated loss solely based on 

U.S. tax rules. Second, this approach 

would require the interpretation of 

foreign law, which the IRS and Treasury 

Department believe should be avoided, 

to the extent possible. Accordingly, this 

comment is not adopted. 

(5) Gain or Loss Recognized Under 

Section 987 

The proposed regulations do not 

provide whether gain or loss of a 

domestic owner recognized under 

section 987 as a result of a remittance 

or transfer is attributable to a separate 

unit for purposes of calculating income 

or dual consolidated loss, but instead 

request comments. 

Commentators stated that gain or loss 

recognized under section 987 should 

not be attributable to a separate unit 

because in most cases the foreign 

country would not recognize such items 

since the income of the separate unit 

will be computed in the local currency. 

The IRS and Treasury Department agree 


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with this comment. As a result, these 

final regulations provide that gain or 

loss recognized under section 987, as a 

result of a remittance or transfer, will 

not be taken into account for purposes 

of computing the income or dual 

consolidated loss of a separate unit. 

(6) Attributable To or Taken Into 

Account 

The proposed regulations generally 

provide that items are attributable to a 

hybrid entity separate unit, but are 

taken into account by a foreign branch 

separate unit. The IRS and Treasury 

Department believe that the use of these 

different terms is unnecessary and may 

lead to confusion. As a result, these 

final regulations provide that items are 

attributable to a separate unit, regardless 

of whether the separate unit is a foreign 

branch separate unit or a hybrid entity 

separate unit. 

M. Basis Adjustments 

Section 1.1503–2(d)(3) of the current 

regulations contains special basis 

adjustment rules that override the 

normal investment adjustment rules 

under § 1.1502–32 for stock of affiliated 

dual resident corporations and affiliated 

domestic owners owned by other 

members of the consolidated group. 

Similar rules apply to separate units 

arising from the ownership of an 

interest in a partnership. These special 

basis adjustment rules were included in 

the current regulations to prevent the 

indirect deduction of a dual 

consolidated loss. Although the 

proposed regulations retain these rules, 

the IRS and Treasury Department 

requested comments on whether the 

special basis adjustment rules should be 

retained. 

A number of commentators 

recommended that the special basis 

adjustment rules be removed for several 

reasons. For example, the commentators 

noted that an indirect use, which the 

special basis rules were intended to 

prevent, may not occur for many years 

after the dual consolidated loss was 

incurred. In response to these 

comments, the special basis rules are 

not contained in these final regulations. 

Thus, the basis adjustment rules under 

§ 1.1502–32 shall apply without 

modification for purposes of 

determining the adjusted basis in the 

stock of a dual resident corporation or 

the stock of an affiliated domestic owner 

owned by other members of the 

consolidated group. These final 

regulations also contain rules to ensure 

consistent treatment for a partner’s basis 

in a partnership interest that is a 

separate unit, or through which a 

separate unit is owned indirectly. 

N. Losses of a Foreign Insurance 

Company Treated as a Domestic 

Corporation 

(1) In General 

Section 953(d) generally provides that 

a foreign corporation that would qualify 

to be taxed as an insurance company if 

it were a domestic corporation may, 

under certain circumstances, elect to be 

treated as a domestic corporation 

(section 953(d) company). Section 

953(d)(3) provides that if a section 

953(d) company is treated as a member 

of an affiliated group, any loss of such 

corporation is treated as a dual 

consolidated loss for purposes of section 

1503(d), without regard to section 

1503(d)(2)(B) (grant of regulatory 

authority to exclude losses which do not 

offset the income of foreign corporations 

from the definition of a dual 

consolidated loss). 

The current regulations do not 

address the application of section 

953(d)(3). In the proposed regulations, 

however, the definition of a dual 

resident corporation includes a section 

953(d) company that is a member of an 

affiliated group. In addition, the 

proposed regulations clarify that a 

section 953(d) company may not make 

a domestic use election. These rules are 

consistent with section 953(d)(3). 

In response to comments, these final 

regulations provide additional guidance 

on the application of the dual 

consolidated loss rules to section 

953(d)(3) companies, including the 

treatment of separate units owned by 

such companies. 

(2) Transactions Intended To Avoid the 

Limitations of Sections 953(d)(3) and 

1503(d) 

The IRS and Treasury Department 

understand that taxpayers may be 

implementing structures that result in 

the same overall tax consequences as 

structures that Congress intended to be 

subject to the loss limitation rules 

provided under sections 953(d)(3) and 

1503(d). However, taxpayers may be 

taking the position that the structures 

are not subject to these loss limitation 

rules. For example, a foreign insurance 

company may, in lieu of making an 

election under section 953(d) and thus 

being subject to the limitations of 

sections 953(d)(3) and 1503(d), file a 

certificate of domestication in a state as 

a limited liability company. As a 

business entity with multiple charters, 

this entity would be treated as a 

domestic corporation for U.S. tax 

purposes under § 301.7701–2(b)(9). 

Taxpayers may take the position that 

this entity would be entitled to the same 

benefits of a company that makes an 

election under section 953(d), without 

being subject to the limitations on the 

use of its losses that are imposed under 

sections 953(d)(3) and 1503(d). 

The IRS and Treasury Department 

disagree with the taxpayer’s 

characterization of these structures 

under current law. In addition, the IRS 

and Treasury Department believe the 

taxpayers’ characterization of the 

structures is contrary to the policies 

underlying section 953(d). Accordingly, 

the IRS and Treasury Department are 

considering issuing regulations, which 

may be retroactive, that would clarify 

the application of section 953(d)(3) to 

these structures. These regulations 

would provide that if a foreign 

insurance company is eligible to make 

an election to be treated as a domestic 

corporation pursuant to section 953(d), 

but in lieu of making such election 

becomes a domestic corporation through 

other means (for example, by filing a 

certificate of domestication in a state as 

a limited liability company), then such 

company shall be subject to the 

limitations under sections 953(d)(3) and 

1503(d) (without regard to paragraph 

(2)(B) thereof). The IRS and Treasury 

Department request comments regarding 

appropriate rules to address these 

structures and other structures that are 

intended to avoid the purposes of 

section 953(d)(3). 

O. All or Nothing Rule 

Under the current regulations a 

triggering event (other than a foreign 

use) generally can be rebutted only if no 

portion of the dual consolidated loss 

can be used by (or carries over to) 

another person under foreign law. See 

§ 1.1503–2(g)(2)(iii)(A)(2) through (7). 

Thus, even a de minimis foreign use 

will cause the entire amount of the dual 

consolidated loss to be recaptured and 

reported as income. 

The proposed regulations retain this 

so-called all or nothing principle 

because the IRS and Treasury 

Department recognize that departing 

from it would lead to significant 

administrative burdens for the 

Commissioner and taxpayers. Although 

the all or nothing principle was 

retained, the IRS and Treasury 

Department requested comments 

regarding administrable alternatives that 

would not involve substantial analysis 

of foreign law. 

Several comments were received with 

respect to this issue. A number of 

commentators stated that the final 

regulations should remove the all or 

nothing principle and allow for a prorata recapture such that, for example, 

the disposition of an individual separate 

unit, which is part of a combined 


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separate unit, would not result in the 

entire recapture of the combined 

separate unit’s dual consolidated loss, 

but only the portion of the loss 

attributable to the individual separate 

unit. Another commentator suggested 

removing the all or nothing rule and 

allowing a taxpayer to establish that the 

losses otherwise subject to recapture 

were not, in fact, used under foreign 

law. The commentator suggested that 

any concerns regarding an analysis of 

foreign law could be mitigated by 

requiring the taxpayer to provide 

certified copies of foreign tax returns 

and, in addition, where the foreign tax 

base differs substantially from the U.S. 

tax base, by adopting an apportionment 

methodology. 

The IRS and Treasury Department 

continue to believe that, even under the 

approaches suggested by these 

commentators, departing from the all or 

nothing principle would lead to 

substantial administrative complexity. 

As a result, these comments are not 

adopted. 

Another commentator suggested that 

the final regulations include a general 

de minimis rule for purposes of 

applying the triggering and recapture 

provisions. Under this approach, if a 

taxpayer could establish that less than a 

specific percentage of the dual 

consolidated loss is available for a 

foreign use, the taxpayer could avoid 

recapture altogether. However, in 

situations where the potential loss 

available for a foreign use exceeds the 

de minimis amount, the dual 

consolidated loss would be recaptured 

to the extent it was actually put to a 

foreign use. 

The IRS and Treasury Department do 

not believe that a de minimis rule as 

described would be meaningful given 

that the Commissioner and taxpayers 

would be required to determine the 

actual amount of the dual consolidated 

loss available for foreign use, which 

poses the same administrative concerns 

as generally departing from the all or 

nothing principle (that is, a complex 

analysis of foreign law or complicated 

ordering, stacking, or tracing rules). As 

a result, this suggestion is not adopted. 

Finally, commentators suggested that 

following certain events otherwise 

requiring recapture, a taxpayer should 

be allowed to reduce the amount of 

recapture by establishing that a portion 

of the dual consolidated loss is 

attributable to items of deduction or loss 

that, due to permanent differences 

between the U.S. and foreign tax law, do 

not give rise to a corresponding item of 

deduction or loss in the foreign country. 

The commentators cited items of 

deduction or loss composing the dual 

consolidated loss attributable to a basis 

step-up following a section 338 election, 

or attributable to a deduction arising 

from the amortization of goodwill or 

certain intangibles under section 197, as 

examples of such items. 

The IRS and Treasury Department 

recognize that items of deduction or loss 

that are never taken into account in the 

foreign country cannot be put to a 

foreign use. However, the IRS and 

Treasury Department believe that the 

suggested approach would, in most 

situations, involve many items of 

deduction and loss and, as a result, 

would present the same concerns as are 

present in the other approaches 

discussed above. For example, if the 

deductions giving rise to a dual 

consolidated loss were the result of a 

step-up in basis following a section 338 

election, but the various assets to which 

such basis attached had, prior to the 

election, a basis for foreign tax 

purposes, complex ordering and 

stacking rules would be required to 

determine that, in fact, no portion of the 

dual consolidated loss is attributable to 

the pre-existing foreign tax basis. In 

addition, this approach would require 

rules to distinguish a permanent (or 

base) difference from a timing 

difference, in order to ensure that the 

portion of the dual consolidated loss 

that is not being recaptured would not 

be available for a foreign use at some 

point in the future. As a result, such 

rules would add complexity and would 

be administratively burdensome. 

Accordingly, this comment is not 

adopted. 

Although these comments are not 

adopted in the final regulations, the IRS 

and Treasury Department believe that 

the application of the all or nothing rule 

will be significantly reduced under 

these regulations as a result of the new 

exceptions to foreign use and the further 

reduction of the term of the certification 

period. 

P. Triggering Events and Related Rules 

(1) Modification of Exceptions to 

Triggering Events 

The proposed regulations contain 

exceptions to triggering events that 

generally apply where assets or interests 

sold or disposed of are acquired, 

directly or through certain whollyowned pass-through entities, by 

members of the consolidated group that 

includes the dual resident corporation 

or separate unit, or by the unaffiliated 

domestic owner. 

The final regulations generally retain 

these exceptions, but modify them to 

take into account the new exceptions to 

foreign use. For example, the exceptions 

are modified to include certain 

acquisitions by pass-through entities 

that are more than 90-percent owned 

(rather than wholly owned) by the 

consolidated group or unaffiliated 

domestic owner. These rules also 

address certain deemed transactions (for 

example, pursuant to Rev. Rul. 99–5 

(1999–1 CB 434)) to minimize the 

likelihood that they result in triggering 

events, where appropriate, see 

§ 601.601(d)(2)(ii)(b). 

Finally, in response to comments 

discussed in section G(3) of this 

preamble, these regulations contain a 

new exception to triggering events that 

occur as a result of certain compulsory 

transfers. 

(2) Rebuttal 

Under the current regulations, 

taxpayers may rebut all but two of the 

triggering events such that there is no 

recapture of a certified dual 

consolidated loss (or related interest 

charge) as a result of a putative 

triggering event. In general, under the 

current regulations, a triggering event is 

rebutted if the taxpayer demonstrates to 

the satisfaction of the Commissioner 

that, depending on the triggering event, 

either: (1) The losses, expenses, or 

deductions of the dual resident 

corporation (or separate unit) cannot be 

used to offset income of another person 

under the laws of a foreign country; or 

(2) the transfer of assets did not result 

in a carryover under foreign law of the 

losses, expenses, or deductions of the 

dual resident corporation (or separate 

unit). See § 1.1503–2(g)(2)(iii)(A)(2) 

through 1.1503–2(g)(2)(iii)(A)(7). The 

dual consolidated loss rules do not 

require recapture or an interest charge 

in such cases because there is no 

opportunity for any portion of the dual 

consolidated loss to be used to offset 

income of any other person under the 

income tax laws of a foreign country. 

The proposed regulations generally 

retain the rebuttal standard contained in 

the current regulations, with 

modifications. Taxpayers may rebut a 

triggering event under the proposed 

regulations if it can be demonstrated, to 

the satisfaction of the Commissioner, 

that there can be no foreign use of the 

dual consolidated loss. However, unlike 

the current regulations that have 

different standards for different 

triggering events, the proposed 

regulations apply the same standard to 

all triggering events (other than a foreign 

use triggering event, which cannot be 

rebutted). 

One commentator noted that the 

rebuttal standard of the proposed 

regulations is unnecessarily broad with 

respect to certain asset transfers. For 


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example, according to this 

commentator, a triggering event cannot 

be rebutted under this standard where a 

separate unit transfers over 50 percent 

of its assets in a transaction that does 

not result in a loss carryover to the 

transferee under foreign law. This is the 

case because the separate unit would 

not be able to establish that the dual 

consolidated loss, which did not carry 

over to the transferee, could never be 

put to a foreign use. Accordingly, this 

commentator requested that the rebuttal 

standard for asset transfers contained in 

the current regulations be adopted in 

the final regulations. 

The IRS and Treasury Department 

agree with this comment and these final 

regulations are modified accordingly. 

Another commentator noted that 

neither the proposed nor current 

regulations specify how taxpayers must 

demonstrate that there can be no foreign 

use during the remaining certification 

period by any means. The commentator 

stated that this lack of specificity creates 

uncertainty and, as a result, requested 

additional guidance as to how the 

determination is to be made. 

The IRS and Treasury Department 

believe that this demonstration can be 

made in a number of ways, including 

based on the taxpayer’s interpretation of 

foreign law, on an opinion from local 

advisors, or on assurance from the local 

country tax authorities. In all cases, 

however, the determination must be 

made to the satisfaction of the 

Commissioner. These final regulations 

are modified accordingly. 

(3) Reduction of Recapture Amount 

The proposed regulations permit the 

elector to reduce the amount of the dual 

consolidated loss that must be 

recaptured upon a triggering event. The 

recapture amount can be reduced to the 

extent the elector demonstrates that the 

dual consolidated loss would have 

offset other income of the dual resident 

corporation or separate unit 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 if 

such loss had been subject to the 

limitation under § 1.1503(d)–2(b) of the 

proposed regulations. 

Commentators questioned the 

requirements for the reduction of the 

recapture amount. One commentator 

suggested that recapture should be 

reduced by the amount of subsequent 

income attributable to the dual resident 

corporation or separate unit, 

irrespective of the income or loss of 

other group members. 

The IRS and Treasury Department 

recognize that the policies underlying 

the SRLY rules differ from those 

underlying section 1503(d). Although 

the SRLY rules do not provide for a 

reduction in recapture in all cases 

consistent with the views of this 

commentator, the IRS and Treasury 

Department continue to believe that the 

SRLY rules are a reasonable and 

appropriate mechanism for 

implementing the restrictions of section 

1503(d)(1) in the vast majority of cases. 

Further, the IRS and Treasury 

Department believe that deviating from 

the SRLY mechanism would add 

considerable complexity to the rules 

and could lead to unintended 

consequences. As a result, this comment 

is not adopted. The IRS and Treasury 

Department will consider addressing the 

interaction of the SRLY rules with the 

recapture provisions in future guidance. 

Comments are requested as to 

alternative mechanisms that are more 

consistent with dual consolidated loss 

policy and that are not unduly 

complicated. 

(4) Interest Due on Recapture 

Under both the current regulations 

and these final regulations, taxpayers 

must pay an interest charge in 

connection with recapture that is 

computed under the rules of section 

6601. In response to comments, these 

final regulations clarify that this interest 

charge is deductible to the same extent 

as interest under section 6601. 

(5) Treatment of Recapture Income 

Under Section 384 

One commentator requested 

clarification regarding a subsequent 

elector’s agreement to treat potential 

recapture amounts as unrealized built-in 

gain for purposes of section 384(a). The 

commentator stated that it may be 

unclear as to whether section 384 must 

otherwise apply to the transaction, 

whether the thresholds of section 384 

apply, and whether potential recapture 

income treated as unrealized built-in 

gain is subject to reduction for income 

earned by a separate unit or dual 

resident corporation. 

The IRS and Treasury Department 

believe that potential recapture amounts 

should be treated as unrealized built-in 

gains for purposes of determining 

whether section 384 applies, but that 

the requirements and exceptions of 

section 384 otherwise apply. In 

addition, the potential recapture amount 

treated as unrealized built-in gain may 

be reduced by potential offset, as 

permitted under the regulations. These 

final regulations have been modified 

accordingly. 

(6) Reconstituted Dual Consolidated 

Loss 

Both the current and proposed 

regulations contain a reconstituted loss 

provision. This rule generally provides 

that if a dual consolidated loss is 

recaptured as a result of a triggering 

event, the dual resident corporation or 

separate unit that incurred the loss is 

treated as having a net operating loss in 

an amount equal to the amount 

recaptured. The loss is reconstituted in 

the taxable year immediately following 

the year of the recapture and is subject 

to the general restrictions of section 

1503(d). This rule is intended to put the 

taxpayer in the same approximate 

position it would have been in had it 

never made an election to use the dual 

consolidated loss. 

These final regulations modify the 

proposed regulations’ reconstituted loss 

rule to reflect the expansion of the 

separate unit combination rule and the 

rules that eliminate dual consolidated 

losses following certain transactions. In 

addition, the rule was modified to better 

take into account the interaction of the 

dual consolidated loss rules with the 

general loss carryover rules. For 

example, these final regulations provide 

that, other than with respect to the 

multiple-party event exception, a 

transfer of an interest in a separate unit 

by its domestic owner to another 

corporation cannot cause all or a portion 

of the dual consolidated loss of such 

separate unit to carry over to the 

acquiring corporation, absent the 

application of section 381. 

Q. Certification Period 

Section 1.1503–2(g)(2)(vi)(B) of the 

current regulations provides that if a 

(g)(2)(i) election is made with respect to 

a dual consolidated loss of a dual 

resident corporation or a hybrid entity 

separate unit, the consolidated group, 

unaffiliated dual resident corporation, 

or unaffiliated domestic owner, as the 

case may be, must file with its tax return 

an annual certification during the 15 

year certification period. This filing 

permits the dual consolidated loss to be 

used in the United States to offset the 

income of a domestic affiliate but 

certifies that the losses 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. The current 

regulations do not require annual 

certifications for (g)(2)(i) agreements 

entered into with respect to dual 

consolidated losses of foreign branch 

separate units. The current regulations 

also provide that if there is a triggering 

event during the 15 year period 


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following the year in which the dual 

consolidated loss was incurred 

(certification period), the taxpayer must 

recapture and report as income the 

amount of the dual consolidated loss, 

and pay an interest charge. § 1.1503–

2(g)(2)(iii)(A). 

The proposed regulations reduce the 

certification period from 15 years to 

seven years, and expand the annual 

certification requirement to include 

dual consolidated losses of foreign 

branch separate units. 

Commentators recommended that the 

certification period in the proposed 

regulations be further reduced to five 

years, because such five-year period 

would be sufficient to deter the types of 

double dips with which section 1503(d) 

is concerned, and would be consistent 

with time periods used under similar 

provisions (for example, the term of gain 

recognition agreements entered into 

under section 367(a)). The IRS and 

Treasury Department agree with this 

comment, and, as a result, the 

certification period in these final 

regulations is five years. 

Another commentator asserted that 

extending the annual certification 

requirement to foreign branch separate 

units is both unnecessary and 

administratively burdensome and, as a 

result, such certification should not be 

included in these final regulations. 

The IRS and Treasury Department 

continue to believe that the annual 

certification requirement improves 

taxpayer compliance and is beneficial in 

monitoring and deterring inappropriate 

double dips. In addition, the IRS and 

Treasury Department believe that, 

where appropriate, treating foreign 

branch separate units, hybrid entity 

separate units, and dual resident 

corporations consistently for purposes 

of section 1503(d) will reduce the 

administrative complexity of these 

regulations. As a result, this comment is 

not adopted. 

R. Other Comments and Modifications 

(1) Information Provided With Domestic 

Use Election 

One commentator recommended that 

certain information provided with the 

domestic use election should not bind a 

taxpayer if the information is provided 

in good faith, but subsequently is 

determined to be erroneous. The IRS 

and Treasury Department believe that 

adopting this recommendation would be 

administratively burdensome. 

Accordingly, this comment is not 

adopted. 

(2) No possibility of Foreign Use 

One commentator noted that 

taxpayers may be eligible to 

demonstrate no possibility of foreign 

use, but still choose to enter into a 

domestic use agreement. The 

commentator explained that taxpayers 

may do so to avoid the cost and effort 

required to satisfy the no possibility of 

foreign use standard, recognizing that 

this demonstration would only be 

beneficial if there is a triggering event 

during the certification period. The 

commentator further stated that the 

taxpayer should nonetheless retain the 

ability to argue at a later time, when a 

foreign use may occur after a change in 

foreign law, that no dual consolidated 

loss existed in the year in which the loss 

was actually incurred. Thus, if there 

was a change in foreign law, taxpayers 

would not be penalized for being unable 

to rebut the triggering event in the 

current year (due to a change in foreign 

law) but could instead rely on the 

foreign law in effect for the year in 

which the loss was incurred. 

The IRS and Treasury Department 

recognize that taxpayers may simply 

choose to file a domestic use election, 

rather than engage in additional efforts 

to demonstrate no possibility of foreign 

use. The IRS and Treasury Department 

believe that these final regulations 

provide ample opportunities for 

taxpayers willing to demonstrate no 

possibility of foreign use. Taxpayers 

have three opportunities to demonstrate 

no possibility of foreign use under the 

final regulations: first under 

§ 1.1503(d)–6(c) to be excepted from the 

domestic use limitation, second under 

§ 1.1503(d)–6(e)(2) to rebut a triggering 

event, and third under § 1.1503(d)–

6(j)(2) to terminate a domestic use 

agreement. Because of these 

opportunities and the administrative 

burdens that would ensue from taking 

into account changes in foreign law, this 

comment is not adopted. 

S. Effective Dates 

(1) General Rule 

Except as provided in this preamble, 

these final regulations apply to dual 

consolidated losses incurred in taxable 

years beginning on or after April 18, 

2007. However, a taxpayer may apply 

these regulations, in their entirety, to 

dual consolidated losses incurred in 

taxable years beginning on or after 

January 1, 2007. 

(2) Certification Period 

A number of commentators requested 

that the reduced certification period of 

these final regulations apply with 

respect to dual consolidated losses that 

are subject to the current regulations. 

The commentators asserted that the 

policies underlying the reduced 

certification period should apply 

equally to dual consolidated losses that 

are subject to the current regulations. 

Commentators also recommended that 

the reduced certification period 

contained in these final regulations 

apply to closing agreements entered into 

between taxpayers and the IRS pursuant 

to § 1.1503–2(g)(2)(iv)(B)(3)(i) and Rev. 

Proc. 2000–42 (2000–2 CB 394), see 

§ 601.601(d)(2)(ii)(b). 

The IRS and Treasury Department 

generally agree with these comments 

and these final regulations are modified 

accordingly. 

(3) Reasonable Cause Exception 

These final regulations adopt the 

reasonable cause procedure for purposes 

of curing all late filings as introduced in 

the proposed regulations, and 

subsequently modified by Notice 2006–

13 (2006–8 IRB 496) see 

§ 601.601(d)(2)(ii)(b). Moreover, these 

final regulations provide that the 

reasonable cause procedures supplant 

the current procedures for all untimely 

filings with respect to dual consolidated 

losses incurred under the current 

regulations as well, except with respect 

to requests for closing agreements. 

Taxpayers requiring relief to cure a late 

request for a closing agreement must 

continue to seek extensions of time 

under §§ 301.9100–1 through 301.9100–

3 and Rev. Proc. 2000–42 (2000–2 CB 

394), see § 601.601(d)(2)(ii)(b). 

Taxpayers seeking relief for other late 

filings required in connection with such 

closing agreements must, however, use 

the reasonable cause procedure of these 

final regulations. Therefore, as a result 

of these changes, untimely filings under 

section 1503(d) and these regulations 

will no longer be eligible for the relief 

provided by §§ 301.9100–1 through 

301.9100–3, regardless of whether such 

filings were required under the current 

regulations (except for certain closing 

agreements) or these final regulations. 

(4) Multiple-Party Event Exception to 

Triggering Events 

These final regulations provide an 

exception to certain triggering events 

involving multiple parties. In general, 

the exceptions provided under these 

final regulations with respect to 

multiple-party events are similar to 

those provided under § 1.1503–

2(g)(2)(iv)(B)(1). The procedures 

required to satisfy these multiple-party 

event exceptions are also similar to 

those found in § 1.1503–2(g)(2)(iv)(B)(3). 

One important difference is that these 

final regulations do not require (or 

permit) taxpayers to obtain closing 

agreements. These final regulations also 

provide a special effective date 


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12914 Federal Register / Vol. 72, No. 52 / Monday, March 19, 2007 / Rules and Regulations 

provision with respect to events 

described in § 1.1503–2(g)(2)(iv)(B)(1) 

that occur after April 18, 2007, that are 

with respect to dual consolidated losses 

subject to the current regulations. Such 

events are not eligible for the exception 

described in § 1.1503–2(g)(2)(iv)(B)(1) 

and thus are not eligible for a closing 

agreement as described in § 1.1503–

2(g)(2)(iv)(B)(3)(i). Instead, such events 

are eligible for the multiple-party event 

exception described in these final 

regulations and as modified by the 

special effective date provision of 

§ 1.1503(d)–8(b)(4). Taxpayers may, 

however, choose to apply the multipleparty exception to events described in 

§ 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 Adjustments 

One commentator requested that the 

elimination of the special basis 

adjustments described in paragraph M 

of this preamble be applied 

retroactively. The commentator further 

requested that such retroactive 

application apply to adjustments that 

occurred in closed taxable years if the 

basis of the stock is relevant in an open 

taxable year. 

The IRS and Treasury Department 

agree with this comment. As a result, 

these regulations provide that taxpayers 

may apply the basis adjustment rules of 

these final regulations for all taxable 

years if such adjustments affected tax 

basis that is relevant in an open taxable 

year. 

(6) Other Provisions 

A number of commentators requested 

that the IRS and Treasury Department 

provide that taxpayers be allowed to 

electively apply other provisions of 

these regulations to dual consolidated 

losses that are subject to the current 

regulations. 

The IRS and Treasury Department do 

not believe that it would be appropriate 

to allow taxpayers to selectively apply 

provisions of these regulations (other 

than those that the IRS and Treasury 

Department view as clarifications) 

retroactively, because it would lead to 

administrative complexity for the IRS 

and could lead to unintended results. 

Effect on Other Documents 

These final regulations obsolete 

Notice 2006–13 (2006–8 IRB 496), see 

§ 601.601(d)(2)(ii)(b). These final 

regulations also obsolete Rev. Proc. 

2000–42 (2000–2 CB 394), see 

§ 601.601(d)(2)(ii)(b), with respect to 

triggering events occurring after April 

18, 2007. 

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 

is hereby certified that these regulations 

will 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 notice of 

proposed rulemaking preceding this 

regulation was submitted to the Chief 

Counsel for Advocacy of the Small 

Business for comment on its impact on 

small business. 

Drafting Information 

The principal authors of these 

regulations are Jeffrey P. Cowan, of the 

Office of the Associate Chief Counsel 

(International), and Christopher L. 

Trump, formerly of the Office of the 

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 

■ Accordingly, 26 CFR parts 1 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(d) also issued under 26 

U.S.C. 953(d) and 26 U.S.C. 1502. 

§ 1.1502–21 [Amended] 

■ Par. 2. In § 1.1502–21, paragraph 

(c)(2)(v) is amended by removing the 

language ‘‘§ 1.1503–2’’ and adding 

‘‘§§ 1.1503(d)–1 through 1.1503(d)–8’’ in 

its place. 

§ 1.1503–2A [Removed] 

■ Par. 3. Section 1.1503–2A is removed. 

■ Par. 4. New §§ 1.1503(d)–0 through 

1.1503(d)–8 are added to read as 

follows: 

§ 1.1503(d)–0 Table of contents. 

This section lists the captions 

contained in §§ 1.1503(d)–1 through 

1.1503(d)–8. 

§ 1.1503(d)–1 Definitions and special rules 

for filings under section 1503(d). 

(a) In general. 

(b) Definitions. 

(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. 

§ 1.1503(d)–2 Domestic use. 

§ 1.1503(d)–3 Foreign 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. 


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(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. 

§ 1.1503(d)–4 Domestic use limitation and 

related operating rules. 

(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. 

§ 1.1503(d)–5 Attribution of items and basis 

adjustments. 

(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 § 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. 

§ 1.1503(d)–6 Exceptions to the domestic 

use limitation rule. 

(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. 


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(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. 

§ 1.1503(d)–7 Examples. 

(a) In general. 

(b) Presumed facts for examples. 

(c) Examples. 

§ 1.1503(d)–8 Effective dates. 

(a) General rule. 

(b) Special rules. 

(1) Reduction of term of agreements filed 

under §§ 1.1503–2(g)(2)(i) or 1.1503–

2T(g)(2)(i). 

(2) Reduction of term of closing agreements 

entered into pursuant to § 1.1503–

2(g)(2)(iv)(B)(3)(i). 

(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. 

§ 1.1503(d)–1 Definitions and special rules 

for filings under section 1503(d). 

(a) In general. This section and 

§§ 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 

§§ 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 §§ 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): 

(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 § 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 § 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 

§§ 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 § 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 

§ 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 § 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 § 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. 


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(8) Consolidated group has the 

meaning provided in § 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 § 1.1503(d)–2. 

(14) Foreign use. See § 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—

(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 

§ 1.1503(d)–7(c) Example 26. 

(17) Disregarded entity means an 

entity that is disregarded as an entity 

separate from its owner, under 

§§ 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 

§§ 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 § 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. 

(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. 

(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 


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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 § 1.6001–1(e). 

§ 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 

§ 1.1503(d)–7(c) Examples 2 through 4. 

§ 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—

(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 

§ 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—

(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 § 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 § 1.1503(d)–6(c), (e)(2)(i), 

or (j)(2). But see § 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 § 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 


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or carry forward of an item of deduction 

or loss composing such dual 

consolidated loss as a result of such 

ownership. See § 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 

§ 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 § 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 § 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 § 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 § 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 § 1.1503(d)–7(c) Examples 5, 13, 

and 14. See also § 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 § 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 § 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 

§ 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 § 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 § 1.1503(d)–7(c) 

Example 37. 


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(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 § 1.1503(d)–6(e), 

and the exceptions thereto under 

§ 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 

§ 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 § 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 

§ 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 § 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 

§ 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 § 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 

§ 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 § 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 § 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. 

§ 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 

§ 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 § 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 § 1.1503(d)–6, the domestic 

use of a dual consolidated loss is not 

permitted. See § 1.1503(d)–2 for the 

definition of a domestic use. See also 

§ 1.1503(d)–7(c) Examples 2 through 4. 


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(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 § 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 

§ 1.1502–21(c) (SRLY limitation), 

subject to the following modifications—

(i) Notwithstanding § 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 § 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 § 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 § 1.1502–

21(c)(1)(i), the calculation of aggregate 

consolidated taxable income shall not 

include any amount included in income 

pursuant to § 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 § 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 § 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 

§ 1.1503(d)–6(h)(6)(iii), section 1503(d) 

and these regulations do not alter these 

general rules. Thus, the provisions of 

§§ 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 

§ 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 


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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 

§ 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. 

(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 § 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 § 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 

§ 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 § 1.1503(d)–7(c) Example 21. 

(iv) Special rules for foreign insurance 

companies. See § 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 § 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. 

(2) Tainted income—(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 

§ 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 


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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. 

§ 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 § 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 § 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 § 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 

§§ 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. 

(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). 

(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 

§ 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 

§ 1.1503(d)–7(c) Example 24. See also 

the separate unit combination rule in 

§ 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 § 1.864–4(c), and §§ 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 


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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 § 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 § 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 § 1.882–5. For 

purposes of paragraph (c)(2)(i) of this 

section, the principles of § 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 

§ 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 § 1.861–9(i) 

for purposes of determining the value of 

its U.S. assets pursuant to § 1.882–

5(b)(2) and its worldwide assets 

pursuant to § 1.882–5(c)(2); 

(C) For purposes of determining the 

value of a U.S. asset pursuant to 

§ 1.882–5(b)(2), and worldwide assets 

pursuant to § 1.882–5(c)(2), the taxpayer 

must use the same methodology under 

§ 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 § 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 § 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 § 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 § 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 § 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 § 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 § 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)(2) 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 


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account under paragraph (c)(2) of this 

section when applying the principles of 

864(c)(2), (c)(4), (c)(5) (as set forth in 

§ 1.864–4(c), and §§ 1.864–5 through 

1.864–7), and § 1.882–5 (as modified in 

paragraph (c)(2)(ii) of this section). See 

§ 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 

§ 1.1503(d)–7(c) Examples 25 and 26. 

(ii) Combined separate unit. If two or 

more individual separate units defined 

in § 1.1503(d)–1(b)(4)(i) are treated as 

one combined separate unit pursuant to 

§ 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 § 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 § 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 § 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 § 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 § 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 § 1.1503(d)–

6(h), such amount shall be attributable 

to the separate unit that incurred the 

dual consolidated loss being recaptured. 

See § 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 § 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 § 1.1502–32. Corresponding 

adjustments shall be made to the stock 

of other members in accordance with 

the provisions of § 1.1502–32. In the 

case where two or more individual 


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separate units are treated as a combined 

separate unit pursuant to § 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—

(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 § 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 § 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 § 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 

§ 1.1503(d)–4(b), then for purposes of 

this paragraph (g) and § 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. 

§ 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 

§ 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 § 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 § 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 § 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 § 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 

§ 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 § 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 § 1.1503(d)–7(c) 

Example 19. 

(c) No possibility of foreign use—(1) In 

general. The domestic use limitation 

rule of § 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 § 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 


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which the dual consolidated loss is 

incurred. See § 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 § 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 § 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 § 1.1503(d)–3) during the 

certification period (as defined in 

§ 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 § 1.1503(d)–4(b). See 

§ 1.1503(d)–7(c) Examples 5 through 7. 

See also § 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 

§ 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 § 1.1503(d)–3) of the dual 

consolidated loss. See § 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 § 1.1502–1(b), or if the group 

ceases to exist (for example, when the 

group no longer files a consolidated 

return). See § 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 


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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 § 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 § 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 § 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 § 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 § 1.1503(d)–3(e)(2), the 

conditions described in § 1.1503(d)–

3(e)(2)(i) are no longer satisfied. See 

§ 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 § 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 § 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 § 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: 

(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 


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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) Multipleparty 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 § 1.1503(d)–3(c)(8). See 

also § 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 § 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-ininterest of such member, is not a 

member of the surviving group 

immediately after the terminating group 

ceases to exist. See § 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 § 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 

§ 601.601(d)(2)(ii)(b), and section 708 

and the related regulations. See also 

§ 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 

§ 1.1503(d)–7 Example 35. 


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(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 § 1.1503(d)–

3(e)(2)(ii) for additional certifications 

required where taxpayers elect the 

stand-alone exception of § 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 § 1.1503(d)–5(c)(4)(vi) 

for rules with respect to the attribution 

of recapture income to a separate unit. 

See also § 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 

§ 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 § 1.1503(d)–4(b) (and 

therefore subject to the limitation under 

§ 1.1503(d)–4(c)). For this purpose, the 

rules for attributing items of income, 

gain, deduction, and loss under 

§ 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 § 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 § 1.1503(d)–

4(b) (and therefore subject to the 

limitations under § 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 § 1.1503(d)–4(b) (and therefore 

subject to the limitations under 

§ 1.1503(d)–4(c)). The computation must 

be labeled ‘‘Reduction of Interest 

Charge’’ at the top of the page and must 


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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 

§ 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 § 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. 

(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 

§ 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 § 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 § 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 


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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 § 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. 

(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 § 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 

§ 1.1503(d)–4(c)(4) shall apply. See 

§ 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 § 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 § 1.1503(d)–4(b) (and 

therefore subject to the limitation under 

§ 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 

§ 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 

§ 1.1503(d)–4(d) if no domestic use 

election had been made for such loss. 

See § 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 § 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—

(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 


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prior subsequent electors in certain 

cases; or 

(iii) A dual consolidated loss is 

recaptured pursuant to paragraph (h) of 

this section. See § 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—

(A) Demonstrates, to the satisfaction 

of the Commissioner, that as of the end 

of such taxable year no foreign use (as 

defined in § 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 

§ 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). 

§ 1.1503(d)–7 Examples. 

(a) In general. This section provides 

examples that illustrate the application 

of §§ 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 § 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 § 1.1503(d)–

3(e)(1), in the applicable foreign 

country. 

(10) There is no elective agreement 

described in § 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 § 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 

§ 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 

§§ 1.1503(d)–1 through 1.1503(d)–6: 

Example 1. Separate unit combination 

rule. (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 § 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 § 1.367(a)–6T(g)(1). S 

owns DE2X. 

(ii) Result. Pursuant to § 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. 

Example 2. Definition of a separate unit 

and application of domestic use limitation—

foreign branch separate unit. (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 § 1.1503(d)–5. 

(ii) Result. Under §§ 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 § 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 


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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 

§ 1.1503(d)–6(a)(2). Accordingly, unless an 

exception under § 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 § 1.1503(d)–

4(b). As a result, pursuant to § 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 

§ 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 § 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 

§ 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 § 1.1503(d)–

1(b)(4)(i)(A), the exception under 

§ 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 § 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. 

Example 3. Domestic use limitation—

foreign branch separate unit owned through 

a partnership. (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 

§ 1.1503(d)–5. 

(ii) Result. Under § 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 

§ 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 § 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 § 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. 

Example 4. Definition of a separate unit 

and domestic use limitation—interest in 

hybrid entity partnership and indirectly 

owned foreign branch separate unit. (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 

§ 1.367(a)–6T(g)(1). 

(ii) Result. Under § 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 

§ 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 § 1.1503(d)–1(b)(4)(i)(B). These 

individual separate units are also combined 

into a single separate unit under § 1.1503(d)–

1(b)(4)(ii). Unless an exception under 

§ 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 

§ 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 

§ 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. 

Example 5. Foreign use—general rule and 

de minimis reduction exception. (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 § 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 § 1.1503(d)–6(d)(2), and such loss will 

be subject to the domestic use limitation rule 

of § 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 § 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 § 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 

§ 1.1503(d)–3(a)(1). Finally, the transfer is a 

triggering event pursuant to § 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 

§ 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 § 1.1503(d)–3(a)(1). 

However, pursuant to the exception under 

§ 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 § 1.1503(d)–

6(f)(1) and (3), the deemed transfers pursuant 

to Rev. Rul. 1999–5 as a result of the sale are 

not treated as triggering events described in 

§ 1.1503(d)–6(e)(1)(iv) or (v). 


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Example 6. Foreign use and indirect 

foreign use—foreign reverse hybrid structure 

and disregarded payments. (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 § 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 § 1.1503(d)–6(d)(2), 

and such loss will be subject to the domestic 

use limitation rule of § 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. 

(B) Pursuant to § 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 

§ 1.1503(d)–6(d)(2). Thus, the loss will be 

subject to the domestic use limitation rule of 

§ 1.1503(d)–4(b). 

Example 7. Indirect foreign use—hybrid 

instrument. (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 § 1.1503(d)–6(d)(2). 

Thus, the year 1 dual consolidated loss will 

be subject to the domestic use limitation rule 

of § 1.1503(d)–4(b). 

Example 8. No indirect foreign use—

transaction entered into in the ordinary 

course of business. (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 

§ 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 § 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 

§ 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. 

Example 9. Foreign use—dual resident 

corporation with hybrid entity joint venture. 

(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 § 1.1503(d)–1(b)(4)(ii) only applies 

to separate units. The $100x year 1 net 

operating loss incurred by DRCX (without 


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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 § 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 § 1.1503(d)–6(d)(2). Therefore, 

such loss will be subject to the domestic use 

limitation rule of § 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). 

Example 10. Foreign use—foreign parent 

corporation. (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 

§ 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 

§ 1.1503(d)–6(d)(2). As a result, such loss will 

be subject to the domestic use limitation rule 

of § 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 

§ 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. 

Example 11. No foreign use—absence of 

foreign loss allocation rules. (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 § 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 § 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 § 1.1503(d)–

6(d)(2), and such loss will be subject to the 

domestic use limitation rule of § 1.1503(d)–

4(b). 

Example 12. No foreign use—absence of 

foreign loss usage ordering rules. (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. 

(B) In year 1, DRCX incurs a capital loss of 

$80x which, under § 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 

§ 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 § 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 § 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. 

Example 13. Exception to foreign use 

through partnership interest. (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 § 1.367(a)–


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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 § 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 § 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 § 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 

§ 1.1503(d)–3(c)(4)(iii), the exception to 

foreign use provided under § 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. 

Example 14. Exception to foreign use 

through partnership interest—combination 

rule. (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 § 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 

§ 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 § 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 

§ 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 § 1.1503(d)–

3(c)(4)(i) and (ii). 

Example 15. No foreign use—asset basis 

carryover exception. (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 

§ 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 § 1.1503(d)–3(c)(6). 

Example 16. No foreign use—liability 

assumption exception. (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 § 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 


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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 § 1.1503(d)–3(c)(7). 

(B) The transfer of all the assets of FBX to 

FSX is a triggering event under § 1.1503(d)–

6(e)(1)(iv), unless P can rebut the triggering 

event under § 1.1503(d)–6(e)(2). For purposes 

of determining whether, under § 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 § 1.1503(d)–6(c), (e)(2)(i) or (j)(2)). See 

§ 1.1503(d)–3(c)(1). Provided the other 

requirements of § 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. 

Example 17. Mirror legislation rule—dual 

resident corporation and hybrid entity 

separate unit. (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 § 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 § 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 § 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 § 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 § 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). 

Example 18. Mirror legislation rule—

standalone foreign branch separate unit. (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 § 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 § 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 § 1.1503(d)–3(e)(2) 

may apply, provided P complies with the 

requirements of § 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 

§ 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 § 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 § 1.1503(d)–

4(e) and a domestic use election can be made 

for such loss. 

Example 19. Application of mirror 

legislation rule to combined separate unit. (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 § 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 § 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 § 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 


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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 § 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 § 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 § 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 § 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 § 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. 

Example 20. Dual consolidated loss 

limitation after section 381 transaction—

disposition of assets and subsequent 

liquidation of dual resident corporation. (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 § 1.1503(d)–4(b), DRCX’s year 1 

dual consolidated loss is subject to the 

limitations under § 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, § 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. 

Example 21. Dual consolidated loss 

limitation applied to a separate unit 

transferred in a section 381 transaction. (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 § 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 § 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 

§ 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 

§ 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 

§ 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 § 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 § 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 § 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 § 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 § 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 § 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 

§ 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. 

Example 22. Tainted income. (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 § 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


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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) × $100x) also is treated as tainted 

income and cannot be offset by the year 1 

dual consolidated loss of DRCZ under 

§ 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. 

Example 23. Treatment of disregarded item 

and books and records of a hybrid entity. (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 § 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 § 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. 

Example 24. Dividend income attributable 

to a separate unit. (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 

§ 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 § 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 § 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 § 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. 

Example 25. Items reflected on books and 

records of a combined separate unit. (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 § 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 

§ 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 § 1.864–4(c) 

and §§ 1.864–5 through 1.864–7) must be 

applied and, for interest expense, the 

principles of § 1.882–5, as modified under 

§ 1.1503(d)–5(c)(2)(ii), must be applied; 

however, for these purposes, pursuant to 

§ 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. § 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 § 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. 

Example 26. Items attributable to a 

combined separate unit. (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 § 1.367(a)-6T(g)(1). 


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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 § 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 

§ 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 § 1.1503(d)–5(c)(2)(i), the 

principles of section 864(c)(2), (c)(4), and 

(c)(5) (as set forth in § 1.864–4(c) and 

§§ 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 § 1.882–

5, as modified under § 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, 

§ 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 § 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. 

§ 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 

§ 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. § 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 

§ 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 § 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. 

Example 27. Sale of separate unit by 

another separate unit. (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 § 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 § 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 § 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 

§ 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 § 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 § 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 

§ 1.1503(d)–4(b), it is eliminated pursuant to 

§ 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 § 1.1503(d)–

6(e)(1)(iv). 

Example 28. Gain on sale of tiered separate 

units. (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 § 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 § 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 § 1.1503(d)–

5(c)(4)(iii)(B), $100x of the total $150x of gain 

recognized ($200x/$300x × $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 × $150x) is attributable to P’s 

interest in HPSX. 

Example 29. Effect on domestic affiliate. (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 § 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 

§ 1.1503(d)–5 are as follows: 

Item Year 1 Year 2 

Sales income .................... $100x $160x 

Salary 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 § 1.1503(d)–4(b) 

and (c)(2), the year 1 dual consolidated loss 


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of $50x is treated as a loss incurred by a 

separate domestic corporation and is subject 

to the limitations under § 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 

§ 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 × $50x); $16.67x of research and 

experimental expense ($50x/$150x × $50x); 

and $8.33x of interest expense ($25x/$150x 

× $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 § 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 § 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 × $10x); $3.33x of research and 

experimental expense ($16.67x/$50x × $10x); 

and $1.67x of interest expense ($8.33x/$50x 

× $10x). The remaining amount of each item 

shall continue to be subject to the limitations 

under § 1.1503(d)–4(c). 

Example 30. Exception to domestic use 

limitation—no possibility of foreign use 

because items are not deducted or 

capitalized under foreign law. (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 § 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 

§ 1.1503(d)–6(c)(1), if P prepares a statement 

described in § 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 § 1.1503(d)–4(b). 

Example 31. No exception to domestic use 

limitation—inability to demonstrate no 

possibility of foreign use. (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 

§ 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 § 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 

§ 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 § 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 § 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 

§ 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. 

Example 32. Triggering event rebuttal—

expiration of losses in foreign country. (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 

§ 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 

§ 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 § 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 

§ 1.1503(d)–6(j)(1)(iii) because the dual 

consolidated loss would be recaptured. 

Example 33. Triggering events and 

rebuttals—tax basis carryover transaction. (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. 

(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 § 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 


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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 § 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 

§ 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 

§ 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 

§ 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. 

Example 34. Triggering event resulting in a 

single consolidated group where acquirer 

files a new domestic use agreement. (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 § 1.1503(d)–

6(f)(2)(ii)(B), the acquisition by T of the P 

consolidated group is not an event described 

in § 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 § 1.1503(d)–6(f)(2)(iii)(A). If a 

new domestic use agreement is filed, then 

pursuant to § 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 § 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 § 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. 

Example 35. Triggering event exceptions 

for certain deemed transfers. (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 § 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 § 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 

§ 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 § 1.1503(d)–

6(e)(1)(iv) and (v) without regard to the 

occurrence of a deemed transaction. 

Therefore, § 1.1503(d)–6(f)(4) does not apply. 

Example 36. Triggering event exception 

involving multiple parties. (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 

§ 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 § 1.1503(d)–

6(f)(2)(i)(B), the acquisition by T of the 

interest in DE1X is not an event described in 

§ 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 

§ 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 

§ 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 

§ 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 

§ 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 

§ 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 

§ 1.1503(d)–6(h)(3)(iii). Pursuant to 

§ 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 § 1.1503(d)–6(h)(3)(iv)(B). 

Pursuant to § 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 

§ 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 

§ 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 § 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 

§ 1.1503(d)–6(h)(6)(i). 

Example 37. No foreign use following 

multiple-party event exception to triggering 

event. (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 § 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 


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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 § 1.1503(d)–

6(e)(1)(iv) and (v). However, if P and T 

comply with the requirements under 

§ 1.1503(d)–6(f)(2)(iii), the sale would qualify 

for the multiple-party event exception under 

§ 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 § 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 § 1.1503(d)–3(c)(8). 

Example 38. Character and source of 

recapture income. (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 ............................................... $100x 

Salary 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 § 1.861–8, the $75x of 

salary expense incurred by FBX is allocated 

and apportioned entirely to foreign source 

general limitation income. Pursuant to 

§ 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 

§ 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 § 1.1503(d)–6(e)(1), and P 

continues to own FBX following the 

triggering event. Pursuant to § 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 § 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 § 1.1503(d)–

5(c)(4)(vi). Pursuant to § 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 § 1.1503(d)–6(h)(5), the pro rata 

computation described in § 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 § 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 § 1.1503(d)–4(b) (and 

therefore subject to the restrictions of 

§ 1.1503(d)–4(c)). Pursuant to § 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. 

Example 39. Interest charge without 

recapture. (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 § 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 

§ 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 

§ 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 § 1.1503(d)–6(h)(2)(i). However, 

P is liable for one year of interest charge 

under § 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 § 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. 

Example 40. Reduced recapture and 

interest charge, and reconstituted dual 

consolidated loss. (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 

§ 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 

§ 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 § 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 § 1.1503(d)–6(h)(1)(i), S must recapture 

$100x (plus applicable interest). However, 

under § 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 

§ 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 § 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 § 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 § 1.1503(d)–

5(c)(4)(vi). 

(C) Pursuant to § 1.1503(d)–6(h)(6)(i), 

commencing in year 4, the $60x recapture 


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Federal Register / Vol. 72, No. 52 / Monday, March 19, 2007 / Rules and Regulations 12945 

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 § 1.1503(d)–4(b) (and therefore subject 

to the restrictions of § 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 § 1.1503(d)–6(b) through (d). 

Pursuant to § 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 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 

§ 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 

§ 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. 

§ 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 §§ 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 

§§ 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 

§§ 1.1503–2(g)(2)(i) or 1.1503–

2T(g)(2)(i). If an agreement was filed (or 

subsequently treated as filed) under 

§§ 1.1503–2(g)(2)(i) or 1.1503–2T(g)(2)(i) 

and remains in effect (that is, the dual 

consolidated loss subject to the 

agreement has not been recaptured 

pursuant to § 1.1503–2(g)(2)(vii)) as of 

the application date, 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 closing 

agreements entered into pursuant to 

§ 1.1503–2(g)(2)(iv)(B)(3)(i). Taxpayers 

subject to the terms of a closing 

agreement entered into with the Internal 

Revenue Service pursuant to § 1.1503–

2(g)(2)(iv)(B)(3)(i) and Rev. Proc. 2000–

42 (2000–2 CB 394), see 

§ 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 

§ 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 § 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 § 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 § 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 §§ 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 §§ 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 

§ 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 

§ 601.601(d)(2)(ii)(b) of this chapter, (or 

any succeeding document) and use the 

reasonable cause procedure set forth in 

§ 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 § 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 § 1.1503–

2(g)(2)(iv)(B)(1), but instead are eligible 

for the multiple-party event exception 

described in § 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 § 1.1503–

2(g)(2)(iv)(B)(3)(i) and Rev. Proc. 2000–

42. For purposes of applying 

§ 1.1503(d)–6(f)(2)(i) to transactions 

covered by this paragraph, agreements 

described in § 1.1503–2(g)(2)(i) (rather 

than domestic use agreements) shall be 


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12946 Federal Register / Vol. 72, No. 52 / Monday, March 19, 2007 / Rules and Regulations 

filed, and subsequent triggering events 

and exceptions thereto have the 

meaning provided in § 1.1503–

2(g)(2)(iii)(A) and (iv) (other than the 

exception provided under § 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 § 1.1503–2(g)(2)(i) 

with respect to a dual consolidated loss 

that was incurred in 2004, and a 

triggering event described in § 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 § 1.1503(d)–6(f)(2)(i) (and not the 

exception under § 1.1503–

2(g)(2)(iv)(B)(1)). However, in order to 

comply with § 1.1503(d)–6(f)(2)(iii)(A), 

the subsequent elector must file a new 

agreement described in § 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, § 1.1503–2(g)(2)(iii)(A) 

and (iv) (other than the exception 

provided under § 1.1503–

2(g)(2)(iv)(B)(1)) shall apply. 

Notwithstanding the general application 

of this paragraph (b)(4) to events 

described in described in § 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 § 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 

§ 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 

§ 1.1503(d)–5(g), however, must do so 

consistently for all open years. 

PART 602—OMB CONTROL NUMBERS 

UNDER PAPERWORK REDUCTION 

ACT 

■ Par. 5. The authority citation for part 

602 continues to read as follows: 

Authority: 26 U.S.C. 7805. 

■ Par. 6. In § 602.101, paragraph (b) is 

amended by adding entries in numerical 

order to the table to read as follows: 

§ 602.101 OMB control numbers. 

* * * * * 

(b) * * * 

CFR part or section where 

identified and described 

Current 

OMB control 

No. 

* * * * * 

1.1503(d)–1 .............................. 1545–1946 

1.1503(d)–3 .............................. 1545–1946 

1.1503(d)–4 .............................. 1545–1646 

CFR part or section where 

identified and described 

Current 

OMB control 

No. 

1.1503(d)–5 .............................. 1545–1946 

1.1503(d)–6 .............................. 1545–1946 

* * * * * 

Approved: February 27, 2007. 

Kevin M. Brown, 

Deputy Commissioner for Services and 

Enforcement. 

Eric Solomon, 

Assistant Secretary of the Treasury (Tax 

Policy). 

[FR Doc. E7–4618 Filed 3–16–07; 8:45 am] 

BILLING CODE 4830–01–P 


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