Final Regulation_102144-04

Monday,
March 19, 2007

Part III

Department of the
Treasury
Internal Revenue Service

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26 CFR Parts 1 and 602
Dual Consolidated Loss Regulations; Final
Rule

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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
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:

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:

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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

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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

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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.

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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,

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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

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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.

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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

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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

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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

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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

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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

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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

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

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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

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12907

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

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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

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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).

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(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,

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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.

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(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.

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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

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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

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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

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12911

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.

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.

(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

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.

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(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

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(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.

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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

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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

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12913

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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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.
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.

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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.

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§ 1.1503–2A

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.

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:

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.

(6) Other Provisions

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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.

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[Removed]

■
■

§ 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.

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(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.

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(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.

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§ 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

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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

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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

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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

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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.

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§ 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

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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

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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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Federal Register / Vol. 72, No. 52 / Monday, March 19, 2007 / Rules and Regulations
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 12month period; or
(B) At any time the domestic owner’s
percentage interest in the separate unit

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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

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

(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)

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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

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§ 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

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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

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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

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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,

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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.

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§ 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

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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

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12923

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

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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

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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

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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

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12925

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

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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

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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

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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

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12927

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

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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

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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)

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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

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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

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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

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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).

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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.

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(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).

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(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

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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).

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§ 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:

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(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

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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

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§ 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

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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,

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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

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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

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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

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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 12month period. Accordingly, pursuant to
§ 1.1503(d)–3(c)(4)(iii), the exception to
foreign use provided under § 1.1503(d)–

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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

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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

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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

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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

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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

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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

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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),

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(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

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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

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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 ....................
Salary expense .................
Research and experimental expense .............
Interest expense ...............

$100x
($75x)

$160x
($75x)

($50x)
($25x)

($50x)
($25x)

($50x)

$10x

Income/(dual consolidated
loss) ...............................

(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

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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

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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.

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(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

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(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 ...............................................
Salary expense ............................................
Interest expense ..........................................

$100x
($75x)
($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).

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(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

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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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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.

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§ 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.

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(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

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12945

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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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

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(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:
■

1.1503(d)–5 ..............................
1.1503(d)–6 ..............................
*

*

BILLING CODE 4830–01–P

Par. 6. In § 602.101, paragraph (b) is
amended by adding entries in numerical
order to the table to read as follows:

■

*

OMB control numbers.

*
*
(b) * * *

*

*

CFR part or section where
identified and described

*
1.1503(d)–1
1.1503(d)–3
1.1503(d)–4

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OMB control
No.

*
*
*
*
..............................
1545–1946
..............................
1545–1946
..............................
1545–1646

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*

1545–1946
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]

Authority: 26 U.S.C. 7805.

§ 602.101

Current
OMB control
No.

CFR part or section where
identified and described

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