Final regulations on dual consolidated loss.

The IRS issued final regulations on the dual consolidated loss provisions September of last year. The regulations replaced proposed and temporary regulations issued in September 1989.

Before section 1503(d) was enacted, multinational corporations attempted to take double deduc-. tions by establishing corporate entities that were residents of both the United States and a foreign jurisdiction. These entities typically generated losses through interest expense deductions. When the losses were consolidated, they offset income from affiliates in both jurisdictions.

In response to this "double dipping," section 1503(d) disallows the use of dual resident corporations' losses to offset any affiliated U.S. corporation's income. The regulations also broaden the definition of dual resident corporation to include certain partnerships and branches of domestic corporations that are "separate units."

The final regulations amend the temporary regulations' exceptions to the general rule disallowing the use of dual consolidated losses by adopting a "use" approach. Taxpayers are permitted to use a dual resident corporation's or a separate unit's dual consolidated loss if they certify the loss has not been (and will not be) used to offset another entity's income under the laws of a foreign country.

If this provision is violated, the taxpayer must recapture and report as gross income that portion of the loss used to offset the income of another entity under the foreign laws. An interest charge also will be imposed.

However, the final regulations continue to deny the use of dual consolidated losses where the relevant foreign jurisdiction adopts anti-abuse legislation.

Observation: By adopting the use rule, the final regulations do not penalize taxpayers with dual consolidated losses--provided the losses are not used in a foreign jurisdiction. However, the final regulations continue to penalize taxpayers if the relevant foreign jurisdiction restricts the use of dual consolidated losses.

Edited by Andrew R. Biebl, CPA, Biebl, Ranweiler & Co., New Ulm, Minnesota (small business); Robert Willens, CPA, senior vice president at Lehman Brothers, New York City (corporate); Marianne Burge, CPA, director of international tax services, Kenneth Kral, CPA, international tax partner, and William Abrams, CPA, senior associate, at Price Waterhouse, New York City (international).