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 ad- dition, DE3Y, rather than DE1X, is the obli- gor on the third-party loan and therefore in- curs the interest expense on such loan. Fi- xxxxx, DE3Y on-lends the loan proceeds from the third-party loan to DE1X, and DE1X pays interest to DE3Y on such loan that is gen- erally disregarded for U.S. tax purposes.
(B) Pursuant to § 1.1503(d)–5(c)(1)(ii), for purposes of calculating income or a dual con- solidated loss, DE3Y and DE1X do not take into account interest income or interest ex- pense, 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 attrib- utable to the interest in DE3Y. Thus, in year 1, there is a dual consolidated loss attrib- utable 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 addi- tion, such interest has the effect of making an item of deduction or loss composing the dual consolidated loss attributable to P’s in- terest in DE3Y available for a foreign use. This is the case because it may reduce or off- set items of deduction or loss composing the dual consolidated loss for foreign tax pur- poses, and creates another deduction or loss that may reduce or offset income of DE1X for foreign tax purposes that, under U.S. tax principles, is treated as income of FRHX, a foreign corporation. Moreover, because the disregarded item is incurred or taken into account as interest for foreign tax purposes, it is deemed to have been incurred or taken into account with a principal purpose of avoiding the provisions of section 1503(d). Ac- cordingly, 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).
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 gen- erated by FPX is a foreign use pursuant to § 1.1503(d)–3(a). This is the case because the items constituting such income are consid- ered 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 indi- rectly through another partnership.
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 legisla- tion 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 domes- tic use election can be made for such loss.
Alternative facts. The facts are the same as in paragraph (i) of this Example 2, except that P’s Country X business oper- ations 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 con- vention. Thus, the Country X business oper- ations do not constitute a foreign branch separate unit, and the year 1 loss is not sub- ject to the dual consolidated loss rules. If P instead carried on its Country X business op- erations 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 for- eign branch separate unit. Thus, in such a case the year 1 loss would be subject to the dual consolidated loss rules.
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 chap- ter, the transaction is treated as if P sold 5 percent of its interest in each of DE1X’s as- sets to F, and then immediately thereafter P and F transferred their interests in the as- sets of DE1X to a partnership in exchange for an ownership interest therein. The sale of the 5 percent interest in DE1X generally re- sults in a foreign use triggering event be- cause 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 avail- ability does not result in a foreign use. In ad- dition, pursuant to § 1.1503(d)–6(f)(1) and (3), the deemed transfers pursuant to Rev. Rul. 99–5 as a result of the sale are not treated as triggering events described in § 1.1503(d)– 6(e)(1)(iv) or (v).
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 elec- tion, 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 for- eign 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) be- cause, 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 off- set 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).
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 re- turn 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 ex- ception does not apply because there is also a foreign use of the dual consolidated loss as a result of FSX and HPSX filing a xxxxxxx- dated return under Country X law.
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 xxxxxxx- dated 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 leg- islation 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 offset- ting the income of FSX through the Country X consolidation regime).
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 for- eign use of the dual consolidated loss attrib- utable to the Country X separate unit and a domestic use election cannot be made for such loss. This is the case even though, pur- suant 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 for- eign 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 elec- tion 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 as- sets and subsequent liquidation of dual resident corporation. (i) Facts. P owns DRCX, a mem- ber 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 sub- ject 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 af- filiate) on the group’s U.S. income tax re- turn. 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.
Alternative facts. Assume the same facts as in paragraph (i) of this Example 21, except S transfers its assets to DC, a domes- tic corporation that is not a member of the P consolidated group, in a transaction de- scribed 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 elimi- nated 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. How- ever, because the transferee is a domestic corporation and the Country X separate unit is a separate unit in the hands of DC imme- diately 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 elimi- nated 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 at- tributable 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 attrib- utable to the Country X separate unit.
