Daily Tax Update - March 16, 2007

TREASURY AND IRS ISSUE FINAL DUAL CONSOLIDATED LOSS REGS:  The Treasury and IRS today finalized long awaited regulations governing dual consolidated losses.  Although the regulations do not change the "all-or-nothing" hair trigger for recapturing DCLs, they do respond favorably to a large number of taxpayer comments, including those that may mitigate the impact of the all-or-nothing rule.  For example, the regulations accept comments suggesting:

  • Expansion of the exceptions to foreign use of a DCL (which foreign use generally would prohibit a domestic use),
  • A shortening of the certification period to 5 years (from 15 years in the current regulations and 7 years in the proposed regulations),
  • Application of the reduced certification period to DCLs subject to the current regulations
  • A broadening of the combination rule applicable to separate units owned by the same consolidated group,
  • Adoption of an exception to the anti-mirror rule that applies when there is no foreign affiliate of the DRC,
  • Elimination of a SRLY rule from the proposed regulations,
  • Adoption of a limited books and records exception to the general rule that expenses of a domestic corporation are attributed to a foreign branch separate unit under reg. section 1.882-5,
  • A narrowing of the standard for rebutting that a triggering event has occurred in certain cases,
  • Clarification of the manner in which a rebuttal may be established, and
  • Clarification that the interest charge is deductible 

The rules also

  • Incorporate the reasonable cause standard of the proposed regulations (and interim guidance) for failing to make certain filings, as opposed to the section 9100 procedure of the current regulations,
  • Clarify when there is an indirect foreign use of a DCL,
  • Exempt RICs and REITs from the rules,
  • Reject a request that the rules be expanded to cover domestic reverse hybrid entities
  • Clarify the treatment of transparent entities, and
  • Refrain from incorporating an anti-foreign tax credit arbitrage rule

The regulations generally apply to dual consolidated losses incurred in taxable years beginning on or after April 18, 2007.  However taxpayers may apply the regulations, in their entirety, to DCLs incurred in taxable years beginning on or after January 1, 2007.  Special effective dates apply to the reasonable cause exception mentioned above, certain basis adjustments, and other matters.


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