CCA 200149023: U.S. subsidiary was not a dual resident corporation

Plain-English summary

A U.S. corporation's losses reduced the taxable income of its parent in a foreign country under permission from that country's tax authorities. Chief Counsel considered whether that made the U.S. company a dual resident corporation under § 1503(d). It concluded that it did not. The U.S. company had no duty to file or pay tax in the foreign country and was not taxed there on its worldwide income or as a resident. The foreign tax liability belonged to the parent, even though the parent used the U.S. company's losses.

Ruling snapshot

• Question: Did a foreign parent's use of a U.S. subsidiary's losses make the subsidiary a dual resident corporation?
• Outcome: Advice given: no, the U.S. subsidiary was not itself subject to foreign income tax.
• Key authorities: IRC § 1503(d)(2)(A); Treas. Reg. §§ 1.1503-2A(b), 1.1503-2(c).

Full text (IRS public release)

DEPARTMENT OF THE TREASURY
I N T E R N AL R E V E N U E S E R V I C E WASHINGTON, D.C. 20224
September 4, 2001
OFFICE OF
CHIEF COUNSEL

Number: 200149023
Release Date: 12/7/2001
TL-N-196-00/CC:INTL:4
UILC: 1503.04-04

INTERNAL REVENUE SERVICE NATIONAL OFFICE FIELD SERVICE ADVICE

MEMORANDUM FOR:

FROM: Michael H. Frankel, Senior Technical Reviewer
CC:INTL:4

SUBJECT:

This Chief Counsel Advice responds to your memorandum dated April 11, 2001. In accordance with I.R.C. § 6110(k)(3), this Chief Counsel Advice should not be cited as precedent.

LEGEND              X              =

Y
=

Country Z =

Years 1 - 3 =

ISSUE Whether X, a domestic corporation, was a dual resident corporation in Years 1 - 3, when it was not itself subject to Country Z tax, but where, rather, X’s losses reduced the amount of taxable income of Y, its Country Z parent that was subject to Country Z tax.

CONCLUSION X was not a dual resident corporation during Years 1 - 3.

FACTS X, a domestic corporation, was a member of a calendar year U.S. consolidated return group during Years 1 - 3. The stock of X and the other members of the consolidated return group was owned, indirectly, by a Country Z corporation, Y. X conducted business solely in the U.S. and had no contacts with nor made any filings in any foreign country. X had no liability to file a return or pay tax in Country Z. Normally, Country Z would not have recognized the existence of X, its assets or operations, for any purpose, as Country Z respected the U.S. corporate existence of X for all purposes. However, pursuant to permission of the Country Z tax authorities, Y included the X losses for Years 1 - 3 when reporting its taxable income for Country Z tax purposes. This permissive inclusion did not affect 2

the status of X for any Country Z purpose and did not subject X to the taxing jurisdiction of Country Z. The Country Z tax liability, if any, resulting from the election was the sole responsibility of Y.

LAW AND ANALYSIS Section 1503(d)(2)(A) provides that:

. . . [A] ‘dual consolidated loss’ means any net operating loss of a domestic corporation which is subject to an income tax of a foreign country on its income without regard to whether such income is from sources in or outside of such foreign country, or is subject to such a tax on a residence basis.

Section 1.1503-2A(b)(2) of the temporary regulations, in effect for taxable years beginning after 1986 and before October 1, 1992 (“Temporary Regulations”) provided:

The term “dual consolidated loss: means the net operating loss . . . of a domestic corporation incurred in a year in which the corporation is a dual resident corporation.

Section 1.1503-2A(b)(3) of the Temporary Regulations provided:
a domestic corporation shall be a dual resident corporation if the worldwide income of such corporation is subject to the income tax of a foreign country, or such corporation is subject to the income tax of a foreign country on a residence basis (and not on a source basis).

Section 1.1503-2(c)(5) of the regulations, in effect for taxable years beginning on or after October 1, 1992 (“Final Regulations”) provides:

The term “dual consolidated loss” means the net operating loss . . . of a domestic corporation incurred in a year in which the corporation is a dual resident corporation.

Section 1.1503-2(c)(2) of the Final Regulations provides:

A dual resident corporation is a domestic corporation that is subject to the income tax of a foreign country on its worldwide income or on a residence basis. A corporation is taxed on a residence basis if it is taxed as a resident under the laws of the foreign country. . . .

The Temporary Regulations and the Final Regulations exclude from the definition of “dual resident corporation” a U.S. corporation that is not itself subject to Country Z tax, where the losses of the U.S. corporation, instead, reduce the amount of its Country Z parent’s income that is subject to Country Z tax. In the instant case, X was not subject to Country Z tax in Years 1 - 3, as X had no liability to file a return in Country Z, nor was X taxed by Country Z on a worldwide or residence basis 3

during those years. X had no physical presence in Country Z, and no Country Z source income. Rather, Y was taxed on its ratable share of all of X’s income.

Please call Ken Allison at 202-622-3860 if you have any further questions.