Reg-106879-00

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Federal Register / Vol. 68, No. 146 / Wednesday, July 30, 2003 / Rules and Regulations
certain agreements in such cases. This
document also makes clarifying and
conforming changes to the current
regulations.
DATES: Effective Dates: These
regulations are effective January 1, 2002.
FOR FURTHER INFORMATION CONTACT:
Kenneth D. Allison or Kathryn T.
Holman, (202) 622–3860 (not a toll-free
number).
SUPPLEMENTARY INFORMATION:

DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Parts 1 and 602
[TD 9084]
RIN 1545–AY27

Dual Consolidated Loss Recapture
Events
Internal Revenue Service (IRS),
Treasury.
ACTION: Final regulations.
AGENCY:

This document contains final
regulations under section 1503(d)
regarding the events that require the
recapture of dual consolidated losses.
These regulations are issued to facilitate
compliance by taxpayers with the dual
consolidated loss provisions. The
regulations generally provide that
certain events will not trigger recapture
of a dual consolidated loss or payment
of the associated interest charge. The
regulations provide for the filing of

SUMMARY:

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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–
1583. Responses to this collection of
information are required to obtain the
benefit of avoiding entering into a
closing agreement with the IRS.
An agency may not conduct or
sponsor, and a person is not required to
respond to, a collection of information
unless it displays a valid control
number assigned by the Office of
Management and Budget.
The estimated annual burden per
recordkeeper varies from 1 to 3 hours,
depending on individual circumstances,
with an estimated average of 2 hours.
Comments concerning the accuracy of
this burden estimate and suggestions for
reducing this burden should be sent to
the Internal Revenue Service, Attn: IRS
Reports Clearance Officer,
W:CAR:MP:T:T:SP, Washington, DC
20224, and to the Office of Management
and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of
Information and Regulatory Affairs,
Washington, DC 20503.
Books or records relating to a
collection of information must be
retained as long as their contents might
become material in the administration
of any internal revenue law. Generally,
tax returns and tax return information
are confidential, as required by 26
U.S.C. 6103.
Background
Final regulations implementing
section 1503(d) were adopted by TD
8434 (1992–C.B. 240), on September 9,
1992, and published in the Federal
Register at 57 FR 41079 (REG–106879–
00). On August 1, 2002, proposed
regulations amending the final
regulations, to reduce administrative
burdens in certain cases, were
published in the Federal Register at 67
FR 49892. Three written comments were
received. No public hearing was
requested or held. After consideration of

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the comments, these final regulations
are adopted by this Treasury decision.
The changes and clarifications made in
the final regulations in response to the
comments received are discussed below.
Explanation of Provisions and
Summary of Comments
Section 1503(d) generally provides
that a ‘‘dual consolidated loss’’ of a
domestic corporation cannot offset the
taxable income of any other member of
the corporation’s consolidated group.
The statute, however, authorizes the
issuance of regulations permitting the
use of a dual consolidated loss to offset
the income of a domestic affiliate if the
loss does not offset the income of a
foreign corporation under foreign law.
Section 1.1503–2(g)(2)(i) currently
permits a taxpayer to elect to use a dual
consolidated loss of a dual resident
corporation or separate unit to offset the
income of a domestic affiliate by filing
an agreement ((g)(2)(i) agreement) under
which the taxpayer certifies that the
dual consolidated loss has not been, and
will not be, used to offset the income of
another person under the laws of a
foreign country. Section 1.1503–
2(g)(2)(iii) provides that, in the year of
a ‘‘triggering event,’’ the taxpayer must
recapture and report as gross income the
amount of a dual consolidated loss that
is subject to the (g)(2)(i) agreement and
must pay the interest charge required by
paragraph (g)(2)(vii). Section 1.1503–
2(g)(2)(iv)(B), however, provides that
specified acquisitions are not
considered to be triggering events if
certain conditions are satisfied. In
particular, the parties to the acquisition
must enter into a closing agreement
with the IRS under section 7121, and
the acquiring corporation or
consolidated group must file a new
(g)(2)(i) agreement with
The proposed regulations provided
that a triggering event generally does not
occur in two types of acquisitions,
without any requirement to enter into a
closing agreement or file a new (g)(2)(i)
agreement: (1) When an unaffiliated
dual resident corporation or unaffiliated
domestic owner that filed a (g)(2)(i)
agreement becomes a member of a
consolidated group; and (2) when a dual
resident corporation, or domestic
owner, that is a member of a
consolidated group that filed a (g)(2)(i)
agreement (the acquired group) becomes
a member of another consolidated group
(the acquiring group) in an acquisition,
so long as each member of the acquired
group that is an includible corporation
under section 1504(b) is included
immediately after the acquisition in a
consolidated U.S. income tax return
filed by the acquiring group. Instead, in

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Federal Register / Vol. 68, No. 146 / Wednesday, July 30, 2003 / Rules and Regulations
such cases, the proposed regulations
required the filing of an information
statement, whereby taxpayers would
provide the IRS with most of the
information that otherwise would have
been provided in a new (g)(2)(i)
agreement.
The proposed regulations were
intended to relieve the burden of
entering into a closing agreement in
circumstances where the several
liability imposed by § 1.1502–6, in
combination with the original (g)(2)(i)
agreement, would provide for liability
by the acquiring group sufficiently
comparable to that provided by a
closing agreement. A commentator, who
raised questions regarding comparable
liability under § 1.1502–6 in such cases,
in particular with respect to the interest
charge, recommended that the
regulations should retain the existing
requirement for the acquiring
corporation or consolidated group to
enter into a new (g)(2)(i) agreement with
respect to the dual consolidated loss.
Although the IRS and Treasury believe
that § 1.1502–6 provides an
independent assurance of several
liability, the recommendation to retain
the existing requirement for a new
(g)(2)(i) agreement has been adopted in
these final regulations. The IRS and
Treasury have concluded that the
intended reduction in administrative
burden can be accomplished through
the elimination of the requirement to
enter into a closing agreement in the
cases specified in the proposed
regulations. Moreover, with the
retention of the requirement to file a
new (g)(2)(i) agreement, the requirement
in the proposed regulations to file a
separate information statement
containing essentially the same
information has been eliminated.
Additional changes have been made to
clarify the nature of the new (g)(2)(i)
agreement.
The commentators also suggested that
any affiliated dual resident corporation
or affiliated domestic owner should be
permitted to join the acquiring group
without causing a triggering event,
regardless of whether all members of the
consolidated group that filed the
original (g)(2)(i) agreement also join the
acquiring group, provided that the
acquiring group files a new (g)(2)(i)
agreement. This suggestion has not been
adopted in these final regulations. The
final regulations contain a modified
description of the types of transactions
for which a closing agreement no longer
is required, to make clear that all
members of an acquired group (or their
successors-in-interest) must be members
of the acquiring group immediately after
the acquisition (i.e., that no member of

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the acquired group, or its successor-ininterest, is excluded from the acquiring
group due to any applicable restriction
such as section 1504(a)(3) or section
1504(c)). However, the IRS and Treasury
are continuing to consider this
suggestion as well as other alternatives
for further reducing the administrative
and compliance burdens under the
section 1503(d) regulations, and invite
additional comments in this regard.
In order to accomplish the intended
reduction in administrative burdens
promptly, the final regulations are
applicable with respect to transactions
otherwise constituting triggering events
occurring on or after January 1, 2002.
Special Analyses
It has been determined that this
Treasury decision is not a significant
regulatory action as defined in
Executive Order 12866. Therefore, a
regulatory assessment is not required. It
also has been determined that section
553(b) of the Administrative Procedure
Act (5 U.S.C. chapter 5) does not apply
to these regulations. It is hereby
certified that these regulations do not
have a significant economic impact on
a substantial number of small entities.
This certification is based on the fact
that these regulations will primarily
affect affiliated groups of corporations
that also have a foreign affiliate, which
tend to be larger businesses. Moreover,
the number of taxpayers affected and
the average burden are minimal.
Therefore, a Regulatory Flexibility
Analysis is not required. Pursuant to
section 7805(f) of the Internal Revenue
Code, the proposed regulations
preceding these regulations were
submitted to the Chief Counsel for
Advocacy of the Small Business
Administration for comment on their
impact on small business.
Drafting Information
The principal authors of these
regulations are Kenneth D. Allison and
Kathryn T. Holman of the Office of
Associate Chief Counsel (International).
However, other personnel from the IRS
and Treasury Department participated
in their development.
List of Subjects
26 CFR Part 1
Income taxes, Reporting and
recordkeeping requirements.
26 CFR Part 602
Reporting and recordkeeping
requirements.

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44617

Adoption of Amendments to the
Regulations
Accordingly, 26 CFR parts 1 and 602
are amended as follows:

■

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

■

Authority: 26 U.S.C. 7805 * * *
Section 1.1503–2 also issued under 26
U.S.C. 1502 * * *

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

§ 1.1503–2

*

Dual consolidated loss.

*
*
*
*
(g) * * *
(2) * * *
(iv) * * *
(B) * * * (1) If all the requirements of
paragraph (g)(2)(iv)(B)(3) of this section
are met, the following events shall not
constitute triggering events requiring the
recapture of the dual consolidated loss
under paragraph (g)(2)(vii) of this
section:
(i) An affiliated dual resident
corporation or affiliated domestic owner
becomes an unaffiliated domestic
corporation or a member of a new
consolidated group (other than in a
transaction described in paragraph
(g)(2)(iv)(B)(2)(ii) of this section);
*
*
*
*
*
(2) If the requirements of paragraph
(g)(2)(iv)(B)(3)(iii) of this section are
met, the following events shall not
constitute triggering events requiring the
recapture of the dual consolidated loss
under paragraph (g)(2)(vii) of this
section—
(i) An unaffiliated dual resident
corporation or unaffiliated domestic

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44618

Federal Register / Vol. 68, No. 146 / Wednesday, July 30, 2003 / Rules and Regulations

owner becomes a member of a
consolidated group;
(ii) A consolidated group that filed an
agreement under this paragraph (g)(2)
ceases to exist as a result of a
transaction described in § 1.1502–
13(j)(5)(i) (other than a transaction in
which any member of the terminating
group, or the successor-in-interest of
such member, is not a member of the
surviving group immediately after the
terminating group ceases to exist).
(3) If the following requirements (as
applicable) are satisfied, the events
listed in paragraphs (g)(2)(iv)(B)(1) and
(2) of this section shall not constitute
triggering events requiring recapture
under paragraph (g)(2)(vii) of this
section.
*
*
*
*
*
(iii) The unaffiliated domestic
corporation or new consolidated group
must file, with its timely filed income
tax return for the taxable year in which
the event described in paragraph
(g)(2)(iv)(B)(1) or (2) of this section
occurs, an agreement described in
paragraph (g)(2)(i) of this section (new
(g)(2)(i) agreement), whereby it assumes
the same obligations with respect to the
dual consolidated loss as the
corporation or consolidated group that
filed the original (g)(2)(i) agreement
with respect to that loss. The new
(g)(2)(i) agreement must be signed under
penalties of perjury by the person who
signs the return and must include a
reference to this paragraph
(g)(2)(iv)(B)(3)(iii).
*
*
*
*
*
(D) Example. The following example
illustrates the application of paragraph
(g)(2)(iv)(B)(2)(ii) of this section:

(iii) Subsequent event. A triggering event
occurs on December 31, Year 3, that requires
recapture by the D Group of the dual
consolidated loss that DRC incurred in Year
1, as well as the payment of an interest
charge, as provided in paragraph (g)(2)(vii) of
this section. Each member of the D Group,
including DRC and the other former members
of the C Group, is severally liable for the
additional tax (and the interest charge) due
upon the recapture of the dual consolidated
loss of DRC.

Example. (i) Facts. C is the common
parent of a consolidated group (the C Group)
that includes DRC, a domestic corporation.
DRC is a dual resident corporation and incurs
a dual consolidated loss in its taxable year
ending December 31, Year 1. The C Group
elects to be bound by the provisions of this
paragraph (g)(2) with respect to the Year 1
dual consolidated loss. No member of the C
Group incurs a dual consolidated loss in Year
2. On December 31, Year 2, stock of C is
acquired by D in a transaction described in
§ 1.1502–13(j)(5)(i). As a result of the
acquisition, all the C Group members,
including DRC, become members of a
consolidated group of which D is the
common parent (the D Group).
(ii) Acquisition not a triggering event.
Under paragraph (g)(2)(iv)(B)(2)(ii) of this
section, the acquisition by D of the C Group
is not an event requiring the recapture of the
Year 1 dual consolidated loss of DRC, or the
payment of an interest charge, as described
in paragraph (g)(2)(vii) of this section,
provided that the D Group files the new
(g)(2)(i) agreement described in paragraph
(g)(2)(iv)(B)(3)(iii) of this section.

Robert E. Wenzel,
Deputy Commissioner for Services and
Enforcement.
Approved: July 17, 2003.
Pamela F. Olson,
Assistant Secretary of the Treasury.
[FR Doc. 03–19366 Filed 7–29–03; 8:45 am]

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*

*
*
*
*
(h) * * *
(1) * * * Paragraph (g)(2)(iv)(B)(2) of
this section shall apply with respect to
transactions otherwise constituting
triggering events occurring on or after
January 1, 2002.
*
*
*
*
*
PART 602—OMB CONTROL NUMBERS
UNDER THE PAPERWORK
REDUCTION ACT
3. The authority citation for part 602
continues to read as follows:

■

Authority: 26 U.S.C. 7805.

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

■

§ 602.601

*

OMB Control numbers.

*
*
(b) * * *

*

*
Current
OMB control
No.

CFR part or section where
identified and described

*
*
*
*
*
1.1503–2 ...................................
1545–1583
*

*

*

*

*

BILLING CODE 4830–01–P

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