Daily Tax Update - March 10, 2006

IRS and Treasury adopt temporary loss duplication rules as a final Regulation, but continue to study the issues:
On March 9, 2006, the IRS and Treasury adopted the temporary regulations regarding the consolidation return loss duplication rules as final regulations.

  • The loss disallowance rules were promulgated by the IRS and Treasury in 1991 to address the circumvention of General Utilities repeal and the duplication of loss. On July 6, 2001, the Court of Federal Claims in Rite Aid Corp. v. United States, 255 F.3d 1357 (Fed. Cir. 2001) held that the duplicated loss provisions of the loss disallowance rules were an invalid exercise of regulatory authority. In response, the IRS and Treasury issued two new temporary regulations to replace the prior loss disallowance rules: (i) section 1.337-2T (addressing General Utilities repeal) and (ii) section 1.1502-35T (addressing loss duplication).
  • Section 1.337-2T was adopted as final regulation section 1.337(d)-2 on March 3, 2005. The preamble to the final regulations states that the IRS and Treasury are continuing to study the issues raised by both section 1.337-2T and section 1.1502-35T. The preamble states that the IRS and Treasury intend to publish proposed regulations "in the near term" addressing both circumvention of General Utilities repeal and loss duplication in a single integrated regulation.
  • However, until new regulations are published as final or temporary regulations, the section 1.1502-35T loss duplication rules are adopted as final regulation section 1.1502-35. The final regulations do not change the substantive rules of the temporary regulations, but do modify certain examples to reflect the enactment of section 362(e)(2).
  • For additional information, contact Mark J. Silverman via email or Lisa M. Zarlenga via email.

IRS and Treasury Issue temporary Regulations regarding IRS designation of agent for consolidated group with foreign common parent:
On March 9, 2006, the IRS and Treasury issued temporary regulations under section 1502 that allow the IRS to designate a domestic member of a consolidated group as a substitute agent where a foreign entity is the common parent of the group.

  • Generally, section 1504(b)(3) excludes foreign corporations from the definition of "includible corporation" in the consolidated return regulations and therefore precludes a foreign entity from being the common parent of a consolidated group. However, in certain circumstances, a foreign entity may be treated as a domestic corporation as a result of section 7874 or, in the case of a foreign insurance company, an election under section 953(d).
  • Under section 1.1502-77(a)(1)(i), the common parent for a consolidated return year is generally the sole agent for the group. The preamble to the temporary regulations states that the IRS and Treasury believe that it may not always be practical or efficient for tax administration to have a foreign entity act as the agent for the group.
  • The regulations provide that where a foreign entity is the common parent because it is treated as a domestic corporation as a result of section 7874 or section 953(d), the IRS may designate a domestic member of the group to be the Domestic Substitute Agent and act as the sole agent for the group.
  • The regulations state that the IRS must communicate the designation by mail or by faxed transmission. The regulations also specify that the designation becomes effective 14 days after receipt of notification by mail and 4 days after communication by fax.
  • For additional information, contact Mark J. Silverman via email or Lisa M. Zarlenga via email.
  • The regulations can be accessed here.  

INTERNAL REVENUE SERVICE - CIRCULAR 230 DISCLOSURE:
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