Par. 2. Section 1.1502-13, as proposed to be amended at 88 FR 52057 (August 7, 2023) and at 88 FR 78134 (November 14, 2023), is further amended by: 1. In paragraph (a)(6)(ii) in the table revising the entry “(G) Miscellaneous operating rules”. 2. In paragraph (c)(5), adding the language “ See paragraph (j)(10) of this section for rules regarding the special status of a section 1503(d) member.” after the last sentence. 3. Redesignating paragraph (j)(10) as paragraph (j)(15). 4. Adding new paragraph (j)(10). 5. Adding and reserving paragraphs (j)(11) through (14). 6. Adding paragraphs (j)(15)(x) and (xi), and (l)(11). The additions and revision read as follows:
(a) * * *
(6) * * *
(ii) * * *
| Rule | General location | Paragraph | Example |
|---|---|---|---|
| * * * * * * * | |||
| (G) Miscellaneous operating rules. | § 1.1502-13(j)(15) | (i) | Example 1. Intercompany sale followed by section 351 transfer to member. |
| (ii) | Example 2. Intercompany sale of member stock followed by recapitalization. | ||
| (iii) | Example 3. Back-to-back intercompany transactions—matching. | ||
| (iv) | Example 4. Back-to-back intercompany transactions—acceleration. | ||
| (v) | Example 5. Successor group. | ||
| (vi) | Example 6. Liquidation—80% distributee. | ||
| (vii) | Example 7. Liquidation—no 80% distributee. | ||
| (viii) | Example 8. Loan by section 987 QBU. | ||
| (ix) | Example 9. Sale of property by section 987 QBU. | ||
| (x) | Example 10. Interest on intercompany obligation. | ||
| (xi) | Example 11. Loss of a section 1503(d) member. |
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(j) * * *
(10) Dual consolidated loss rules —(i) Scope. The rules of this paragraph (j)(10) apply to an intercompany transaction if either party to the transaction is a section 1503(d) member. A section 1503(d) member is a member that is—
(A) An affiliated dual resident corporation (as defined in § 1.1503(d)-1(b)(10)); or
(B) An affiliated domestic owner (as defined in § 1.1503(d)-1(b)(10)) acting through a separate unit (as defined in § 1.1503(d)-1(b)(4)) that is not regarded as separate from the domestic owner for Federal income tax purposes.
(ii) Ordering rule for the section 1503(d) member. In determining when the section 1503(d) member's intercompany (or corresponding) item is taken into account, the dual consolidated loss rules under section 1503(d) and the regulations thereunder (the dual consolidated loss rules ) do not apply to the relevant item until that item would otherwise be taken into account under paragraph (c) or (d) of this section.
(iii) Status as a section 1503(d) member. A section 1503(d) member has special status under paragraph (c)(5) of this section with respect to its intercompany (or corresponding) items for purposes of applying the dual consolidated loss rules to those items. Therefore, for purposes of applying the dual consolidated loss rules, paragraph (c)(1)(i) of this section does not apply to redetermine the attributes of the section 1503(d) member's intercompany (or corresponding) items.
(iv) Application of the matching rule to the counterparty member. The special status of a section 1503(d) member does not affect the application of the matching rule in paragraph (c) of this section (or under paragraph (d) of this section, to the extent the matching rule principles are applicable) to the counterparty member in an intercompany transaction. For example, assume S sells depreciable property to B (a section 1503(d) member) at a gain, and the property is also subject to depreciation in the hands of B. For purposes of taking into account S's items, the matching rule applies as if B were not a section 1503(d) member. Therefore, even if B's annual depreciation deduction on the acquired property is limited under the dual consolidated loss rules and not currently deductible, S nevertheless takes into account a portion of its intercompany gain pursuant to the matching rule every year as if B were entitled to deduct the additional depreciation resulting from the intercompany sale.
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(15) * * *
(x) Example 10. Interest on intercompany obligation —(A) Facts. S lends money to B, an affiliated dual resident corporation (a section 1503(d) member), with $10 of interest due annually for Year 1 through Year 5. For the years at issue, B has a dual consolidated loss (within the meaning of § 1.1503(d)-1(b)(5)(i)) with respect to which it makes a domestic use election (within the meaning of § 1.1503(d)-6(d)).
(B) Analysis —( 1 ) Interest expense deduction of the section 1503(d) member. For each year at issue, B has $10 of interest expense deduction. Under paragraph (j)(10)(ii) of this section, the matching rule in paragraph (c) of this section applies first (before the dual consolidated loss rules) to determine if B's deduction is taken into account. Pursuant to paragraph (c)(2)(i) of this section, B would take its $10 of interest deduction into account annually. Therefore, the amount of B's dual consolidated loss in each year reflects the $10 of interest expense.
( 2 ) Interest income of the counterparty member. For each year at issue, S has $10 of interest income. Although B has a dual consolidated loss for each year at issue, B makes a domestic use election and deducts the $10 of interest expense annually. Under the matching rule in paragraph (c) of this section, for each year, S takes into account its $10 of interest income to match B's $10 of interest deduction.
(C) Treatment for counterparty member when deduction is deferred. The facts are the same as in paragraph (j)(15)(x)(A) of this section, except that for the years at issue, B's interest expense deduction would be limited under the domestic use limitation rule of § 1.1503(d)-4(b) (and no exception under § 1.1503(d)-6 applies) and is not currently deductible for the years at issue. Under paragraph (j)(10)(iv) of this section, the matching rule applies to S (the counterparty member) as if B did not have section 1503(d) member status. Therefore, for the purpose of determining S's income inclusion, B is treated as deducting $10 of interest expense per year. Thus, S's interest income is not redetermined to be deferred, even though B's interest expense deduction is deferred under the dual consolidated loss rules.
(D) Treatment for counterparty member when a dual consolidated loss is recaptured. The facts are the same as in paragraph (j)(15)(x)(A) of this section, with B making a domestic use election (within the meaning of § 1.1503(d)-6(d)) in Year 1 and deducting $10 of interest expense in Year 1. Then in Year 2, B is required under § 1.1503(d)-6(e) to recapture and report as ordinary income $10 (plus applicable interest) with respect to the $10 of interest expense incurred in Year 1. Because the matching rule applies to S (the counterparty member) as if B did not have its section 1503(d) member status, the recapture of B's Year 1 dual consolidated loss will not affect the treatment of S's intercompany interest income. See paragraph (j)(10)(iv) of this section.
(E) Intercompany obligation involving an affiliated domestic owner. The facts are the same as in paragraph (j)(15)(x)(A) of this section, except that B is an affiliated domestic owner with respect to a directly owned foreign branch separate unit, S lends money to this separate unit of B, and the $10 of interest expense, when it is taken into account under the section 1503(d) rules, would be attributable to B's foreign branch separate unit for the years at issue. The analysis and treatment of S's intercompany item and B's corresponding item (attributable to the separate unit) are the same as in paragraphs (j)(15)(x)(B), (C), and (D) of this section. However, if B does not act through its separate unit in entering the intercompany loan with S, the rules of paragraph (j)(10) of this section do not apply. See paragraph (j)(10)(i) of this section.
(xi) Example 11. Loss of a section 1503(d) member —(A) Facts. S is an affiliated dual resident corporation (a section 1503(d) member). S owns inventory with a basis of $100. In Year 1, S sells the inventory to B for $60. In Year 3, B sells the inventory to X for $110. For the years at issue, S's $40 of loss is subject to the domestic use limitation rule of § 1.1503(d)-4(b) (and no exception under § 1.1503(d)-6 applies) and would not be currently deductible.
(B) Analysis —( 1 ) Year 1 and Year 2: timing. S recognizes $40 of loss on the intercompany inventory sale to B. Pursuant to the ordering rule in paragraph (j)(10)(ii) of this section, in each year, the matching rule in paragraph (c) of this section applies first to determine whether S's loss is taken into account. In Year 1 and Year 2, because the $40 of loss is deferred under the matching rule, no amount of loss from the sale is subject to the dual consolidated loss rules in those years.
( 2 ) Year 3: timing and attributes. In Year 3, B sells the inventory to X for $110, for a $50 gain. Consequently, under the matching rule (disregarding the application of section 1503(d)), S's $40 of loss would be taken into account in that year. Since S's item would otherwise be taken into account, the section 1503(d) rules are applicable to the $40 loss in Year 3, and the loss would be subject to the domestic use limitation under § 1.1503(d)-4(b) and would not be currently deductible. The application of § 1.1503(d)-4(b) to limit S's loss is not subject to redetermination under paragraph (c)(1)(i) of this section, because S has special status. See paragraph (j)(10)(iii) of this section. Moreover, B's gain is taken into account in Year 3, without regard to S's status as a section 1503(d) member. See paragraph (j)(10)(iv) of this section.
(C) Intercompany transaction involving a separate unit of an affiliated domestic owner. The facts are the same as in paragraph (j)(15)(xi)(A) of this section, except that S is an affiliated domestic owner with respect to a directly owned foreign branch separate unit, and S acts through the foreign branch separate unit in selling the inventory to B such that the loss on the inventory, when it is taken into account under the section 1503(d) rules, would be attributable to S's foreign branch separate unit. The analysis and treatment of S's intercompany item (attributable to the foreign branch separate unit) and B's corresponding item are the same as in paragraphs (j)(15)(xi)(B)( 1 ) and ( 2 ) of this section.
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(l) * * *
(11) Applicability date. Paragraph (j)(10) of this section applies to taxable years for which the original Federal income tax return is due (without extensions) after [DATE OF PUBLICATION OF THE FINAL REGULATIONS IN THE FEDERAL REGISTER ]. However, taxpayers may choose to apply these provisions to an earlier taxable year, if the period for the assessment of tax for that taxable year has not expired, provided the taxpayer and all members of its consolidated group apply these provisions consistently for that taxable year and each subsequent taxable year.
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