United States Tax Alert - 29 June 2012
IRS issues final and proposed regulations on treatment of overall foreign and domestic losses and high tax kickout
By Gretchen Sierra, Seth Goldstein, Irwin Halpern and Meyer Jacobson
On 21/22 June 2012, the U.S. Internal Revenue Service (IRS) and Treasury Department issued final and proposed regulations providing rules for overall foreign losses (OFLs), separate limitation losses (SLLs) and overall domestic losses (ODLs) under §§904(f) and (g) and the high tax kickout under §904(d)(2)(F).
Section 904(g) was enacted in 2004, applicable for ODLs incurred in taxable years beginning after 31 December 2006. On 21 December 2007, the IRS issued proposed and temporary §904(g) regulations (T.D. 9371) that sunset on 20 December 2010. These regulations contained ordering rules for NOLs, SLL and ODL allocation, as well as SLL account, OFL account and ODL account recapture. Consolidated return regulations provide guidance regarding OFL, SLL and ODL accounts in a consolidated group, the combination of accounts when a member joins the group and the apportionment of accounts when a member leaves a group.
The final regulations generally follow the temporary regulations without significant changes, but add coordination rules with respect to §904(b) (dealing with U.S. capital losses and foreign capital gain) and minor modifications to the provisions concerning §904(f)(3) (dispositions). The final regulations are applicable to taxable years beginning on or after 1 January 2012. Taxpayers may choose to apply the regulations to taxable years beginning after 21 December 2007.
The proposed regulations provide that the high tax kickout under §904(d)(2)(F) is applied without regard to any adjustments under §904(b) (dealing with U.S. capital loss and foreign capital gain and capital gain rate differentials), §904(f) (recapture of OFL accounts) and §904(g) (recapture of ODL accounts).
The proposed regulations also provide ordering rules under §904(f)(3) for the disposition of property predominantly used in a foreign trade or business in taxable and non-taxable transactions. The ordering rules are as follows:
- Carryover NOLs and net capital losses;
- Section 904(b) adjustment;
- Allocate SLLs against other foreign baskets and then against U.S. source income;
- Allocate U.S. source losses;
- Recapture OFL accounts (limited to foreign source income and gain on dispositions under §904(f)(3) in which gain would otherwise be recognized);
- Recapture SLL accounts;
- Recapture ODL accounts;
- Dispositions under §904(f)(3) in which gain would not otherwise be recognized.