Timing-difference deductions will not by themselves cause foreign use of a dual consolidated loss

Plain-English summary

A U.S. parent planned entity-classification elections and transfers that would bring a foreign business into a combined separate unit for the dual consolidated loss rules. The parent expected that unit to generate losses that could include U.S. deductions from liabilities assumed in the transaction. Corresponding deductions under the foreign country's law had already been available to offset the foreign entity's income for periods when it was still treated as a foreign corporation for U.S. tax purposes. The IRS ruled that those timing-difference deductions, standing alone, would not constitute a foreign use of the U.S. dual consolidated loss under Treas. Reg. § 1.1503(d)-3(c)(7). The ruling was limited to that issue and did not approve the rest of the proposed transaction.

Ruling snapshot

• Question: Do deductions attributable to the represented timing-difference liabilities cause a foreign use of the combined separate unit's dual consolidated loss?
• Outcome: Approved (no foreign use solely from those deductions)
• Key authorities: IRC § 1503(d); Treas. Reg. §§ 1.1503(d)-1, 1.1503(d)-3(c)(7), and 1.1503(d)-6(d)

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202110015                                              Third Party Communication: None
 Release Date: 3/12/2021                                        Date of Communication: Not Applicable
 Index Number: 1503.04-00
                                                                Person To Contact:
 --------------                                                 --------------------------------,
 ------------------------                                       ID No. -----------------
 ---------------------                                          Telephone Number:
 ------------------------------------                           --------------------
                                                                Refer Reply To:
                                                                CC:INTL:B04
                                                                PLR-120013-20
                                                                Date:
                                                                December 14, 2020


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 LEGEND
 Parent             = -----------------------------------------------------------------------------------------------
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                      ------------------------
 Entity 1           = -----------------------------------------------------------------------------------------------
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 Entity 2           = -----------------------------------------------------------------------------------------------
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                      -----------------------
 Entity 3           = -----------------------------------------------------------------------------------------------
                      -----------------------------------------------------------------------------------------------
                      -----------------------
 a                  = ---------
 b                  = --
 Country A          = --------------
 Country B          = ------
 Date 1             = --------------------------
 Date 2             = ---------------------
 Date 3             = ---------------------
 Date 4             = -----------------

  Year 1             =     -----------------------------------------------------------------------------------------
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PLR-120013-20                                  2

Dear -------------:

This is in response to your letter dated August 7, 2020, and additional correspondence
dated October 8, 2020 and December 8, 2020, submitted on behalf of Parent by its
authorized representative, requesting a private letter ruling regarding the application of
the exception to foreign use described in Treas. Reg. § 1.1503(d)-3(c)(7).

The ruling contained in this letter is based upon information and representations
submitted by Parent and accompanied by penalties of perjury statements executed by
an appropriate party. While this office has not verified any of the material submitted in
support of the request for a ruling, it is subject to verification on examination.
Information submitted in the request is set forth below. Unless otherwise provided, all
Code and section references are to the Internal Revenue Code of 1986, as amended.

                                     Summary of Facts

Parent is a domestic corporation and the common parent of an affiliated group of
corporations that files a consolidated return for federal income tax purposes based on
the calendar year. Parent wholly owns Entity 1, a domestic limited liability company that
is disregarded as an entity separate from its owner for federal income tax purposes.
Entity 1 wholly owns Entity 2, a foreign corporation formed in Country A. Entity 2 owns a
equity interests of Entity 3, a foreign corporation formed in Country B. Parent owns the
remaining b equity interests of Entity 3.

Almost all of Entity 3’s assets are used or held for use in Entity 3’s trade or business
operations, and such trade or business assets are located in Country B. Entity 3 is
subject to Country B corporate income tax and files a Country B corporate income tax
return.

                                  Proposed Transaction

Parent intends to implement, or cause its affiliates to implement, the following steps
(collectively, the “Proposed Transaction”):

        Step 1. On Date 1, Parent will transfer to Entity 2 its rights and obligations with
        respect to the ownership of the b equity interests of Entity 3 in exchange for
        cash. In order to comply with the requirements of Country B law, and pursuant to
        a nominee agreement between Parent and Entity 2, Parent will retain legal title of
        the b equity interests of Entity 3.

        Step 2. Effective as of Date 2, Entity 1 will make an entity classification election
        to be treated as a corporation for federal income tax purposes.

        Step 3. Effective as of Date 3, Entity 3 will make an entity classification election
        to be treated as a disregarded entity for federal income tax purposes.
PLR-120013-20                                   3


      Step 4. On Date 4, Entity 2 will transfer to Entity 1 a equity interests of Entity 3
      and the rights and obligations with respect to the b equity interests of Entity 3
      (which were acquired in Step 1) in exchange for cash.

                                      Representations

Parent has made the following representations in connection with the requested ruling:

   a) Step 1 will be treated as the transfer of the benefits and burdens of the
      ownership of b equity interests of Entity 3 to Entity 2 in exchange for cash, and
      thus Entity 2 will be treated as the sole owner of all equity interests in Entity 3
      immediately after Step 1.

   b) As a result of Entity 1’s entity classification election in Step 2, Parent will be
      treated as contributing all of the assets and liabilities of Entity 1 to a domestic
      corporation in exchange for stock of the domestic corporation immediately before
      the close of the day before Date 2.

   c) As a result of Entity 3’s entity classification election in Step 3, Entity 3 will be
      treated as distributing all of its assets and liabilities to Entity 2 in liquidation of
      Entity 3 immediately before the close of the day before Date 3.

   d) As a result of Entity 2’s transfer of the equity interests of Entity 3 to Entity 1 in
      exchange for cash in Step 4, Entity 1 will be treated as acquiring all the assets of
      Entity 3 and assuming all of Entity 3’s liabilities. Entity 1’s adjusted basis in the
      assets acquired in Step 4 will not be determined in whole, or in part, by reference
      to the adjusted basis of such transferred assets in the hands of Entity 2.

   e) Beginning on Date 4, Entity 1’s interest in Entity 3 will be a Country B hybrid
      entity separate unit as defined in Treas. Reg. § 1.1503(d)-1(b)(4)(i)(B) (the “Entity
      3 HESU”) and Entity 3’s business operations in Country B will be a foreign
      branch separate unit for purposes of Treas. Reg. § 1.1503(d)-1(b)(4)(i)(A) (the
      “Entity 3 FBSU”). The Entity 3 HESU and the Entity 3 FBSU will become part of
      Parent’s existing Country B combined separate unit (as defined in Treas. Reg. §
      1.1503(d)-1(b)(4)(ii)) beginning on Date 4.

   f) Parent anticipates that, in Year 1 (and in certain future years), its Country B
      combined separate unit will incur a dual consolidated loss (“DCL”) as defined in
      Treas. Reg. § 1.1503(d)-1(b)(5)(ii) (any such DCL, a “Country B DCL”). Parent
      intends to file a domestic use election and agreement under Treas. Reg.
      § 1.1503(d)-6(d) with respect to any such Country B DCL if the domestic use
      election and agreement is available (for example, if a foreign use (as described in
      Treas. Reg. § 1.1503(d)-3) of the DCL has not occurred).
PLR-120013-20                                  4

   g) Parent anticipates that certain Country B DCLs will be composed of U.S. tax
      items of deduction or loss attributable to one or more liabilities assumed by Entity
      1 in Step 4, and that (i) all or a portion of such U.S. tax items of deduction or loss
      will correspond to items of deduction or loss under Country B income tax law
      attributable to such liabilities, and (ii) all or a portion of such Country B income
      tax items were made available under the income tax laws of Country B to offset
      or reduce, directly or indirectly, an item that is recognized as income or gain of
      Entity 3 under Country B income tax law for a taxable year that includes a day on
      which, for federal income tax purposes, Entity 3 was classified as a foreign
      corporation (such liabilities, “Timing Difference Liabilities”).

   h) The Timing Difference Liabilities were incurred in the ordinary course of Entity 3’s
      trade or business.

   i) The Timing Difference Liabilities have not created, and will not create, items of
      deduction or loss under the tax laws of any country other than Country B and the
      United States.

                                           Ruling

Based solely on the information submitted, and on the representations set forth above,
we rule as follows:

       No foreign use is considered to occur with respect to a Country B DCL solely as
       a result of an item of deduction or loss attributable to the Timing Difference
       Liabilities. Treas. Reg. § 1.1503(d)-3(c)(7).

                                          Caveats

No opinion is expressed as to the tax treatment of the Proposed Transaction under
other provisions of the Code and regulations, and no opinion is expressed about the tax
treatment of any conditions existing at the time of, or effects resulting from, the
Proposed Transaction that are not specifically covered by this ruling.

                                 Procedural Statements

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that
it may not be used or cited as precedent

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
PLR-120013-20                               5


attaching a statement to their return that provides the date and control number of the
letter ruling.

                                         Sincerely,

                                         /s/ Kenneth Jeruchim

                                         Kenneth A. Jeruchim
                                         Senior Technical Reviewer, Branch 4
                                         (International)




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