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Dual resident company regulations: the mirror legislation provision.

The Tax Court ruled in British Car Auctions, Inc. v The United States that the "minor legislation" provision in U.S. Treasury regulations section 1.1503-2A(c)(ii)(B) was valid. A dual resident corporation's losses cannot reduce a U.S. corporation's income, even when the losses cannot be used in another other country because the country's legislation is similar to internal Revenue Code section 1503(d).

Section 1503(d) disallows the use of a "dual consolidated loss" to reduce the taxable income of any member of a U.S. consolidated group. A dual consolidated loss is a net operating loss of a U.S. corporation that is either subject to tax on a worldwide basis or is taxed as a resident in a foreign country. Such companies are referred to as dual resident companies because they are incorporated in one of the states and they simultaneously meet the criteria for residency in another country. Before this provision was enacted, it was possible to "double dip" losses of a dual resident corporation by using the losses to offset the incomes of both the foreign affiliated group and a U.S. affiliated group.

Section 1503(d) includes a stand-alone exception when the loss of the dual resident company does not offset the income of any other foreign company. However, a provision known as the mirror legislation provision prevents the use of the standalone exception when the foreign country has legislation similar to, or "mirroring," section 1503(d).

In British Car Auctions, two members of an affiliated group, both dual residents in the United States and the United Kingdom, incurred losses that the taxpayer attempted to carry back to a prior taxable year for the U.S. consolidated group. The losses could not offset income of any other U.K. entity, due to a U.K. provision that mirrored section 1503(d). Such losses clearly fell within the mirror legislation provision; however, the taxpayer argued that the provision was invalid because it was inconsistent with the underlying purpose of section 1503(d) - to prevent double dipping.

The Tax Court said the law was not intended to create a blanket exception for dual resident companies whose losses could not be used in the foreign country, and it ruled against the taxpayer. The court also said the 1986 Tax Reform Act, in contemplation of enactment of foreign legislation, not intend for the standalone exception to cause the termination of double-dipping to always benefit the foreign country.

Observation: The mirror legislation provision can render useless a dual resident company's losses in both countries, nonetheless, the court found it to be a proper exercise of regulatory authority. As a result, taxpayers have a significant incentive to structure (or restructure) entities so they are resident in only one jurisdiction that has dual resident company legislation.
COPYRIGHT 1996 American Institute of CPA's
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Article Details
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Author:Young, Sophie
Publication:Journal of Accountancy
Article Type:Brief Article
Date:Aug 1, 1996
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