Bulletin No. 2024–35

HIGHLIGHTS

OF THIS ISSUE





Bulletin No. 2024–35

August 26, 2024

These synopses are intended only as aids to the reader in

identifying the subject matter covered. They may not be

relied upon as authoritative interpretations.

ESTATE TAX

Rev. Rul. 2024-16, page 534.

Special Use Value: Farms: Interest Rates. The 2024 interest

rates to be used in computing the special use value of farm

real property for which an election is made under section

2032A of the Code are listed for estate of decedents.

EXEMPT ORGANIZATIONS

Announcement 2024-32, page 535.

Revocation of IRC 501(c)(3) Organizations for failure to meet

the code section requirements. Contributions made to the

Finding Lists begin on page ii.

organizations by individual donors are no longer deductible

under IRC 170(b)(1)(A).

INCOME TAX

REG-105128-23, page 536.

Section 1503(d) and the regulations thereunder determine

the deductibility of certain losses of a domestic corporation.

The proposed regulations provide rules that would refine certain computations and would also address the application of

section 1503(d) to certain foreign taxes that are intended to

ensure that multinational enterprises pay a minimum level of

tax. The proposed regulations also contain rules regarding

certain disregarded payments of domestic corporations that

give rise to losses for foreign tax purposes.

The IRS Mission

Provide America’s taxpayers top-quality service by helping

them understand and meet their tax responsibilities and

enforce the law with integrity and fairness to all.

Introduction

The Internal Revenue Bulletin is the authoritative instrument

of the Commissioner of Internal Revenue for announcing official rulings and procedures of the Internal Revenue Service

and for publishing Treasury Decisions, Executive Orders, Tax

Conventions, legislation, court decisions, and other items of

general interest. It is published weekly.

It is the policy of the Service to publish in the Bulletin all substantive rulings necessary to promote a uniform application

of the tax laws, including all rulings that supersede, revoke,

modify, or amend any of those previously published in the

Bulletin. All published rulings apply retroactively unless otherwise indicated. Procedures relating solely to matters of internal management are not published; however, statements of

internal practices and procedures that affect the rights and

duties of taxpayers are published.

Revenue rulings represent the conclusions of the Service

on the application of the law to the pivotal facts stated in

the revenue ruling. In those based on positions taken in rulings to taxpayers or technical advice to Service field offices,

identifying details and information of a confidential nature are

deleted to prevent unwarranted invasions of privacy and to

comply with statutory requirements.

Rulings and procedures reported in the Bulletin do not have the

force and effect of Treasury Department Regulations, but they

may be used as precedents. Unpublished rulings will not be

relied on, used, or cited as precedents by Service personnel in

the disposition of other cases. In applying published rulings and

procedures, the effect of subsequent legislation, regulations,

court decisions, rulings, and procedures must be considered,

and Service personnel and others concerned are cautioned

against reaching the same conclusions in other cases unless

the facts and circumstances are substantially the same.

The Bulletin is divided into four parts as follows:

Part I.—1986 Code.

This part includes rulings and decisions based on provisions

of the Internal Revenue Code of 1986.

Part II.—Treaties and Tax Legislation.

This part is divided into two subparts as follows: Subpart A,

Tax Conventions and Other Related Items, and Subpart B,

Legislation and Related Committee Reports.

Part III.—Administrative, Procedural, and Miscellaneous.

To the extent practicable, pertinent cross references to these

subjects are contained in the other Parts and Subparts. Also

included in this part are Bank Secrecy Act Administrative

Rulings. Bank Secrecy Act Administrative Rulings are issued

by the Department of the Treasury’s Office of the Assistant

Secretary (Enforcement).

Part IV.—Items of General Interest.

This part includes notices of proposed rulemakings, disbarment and suspension lists, and announcements.

The last Bulletin for each month includes a cumulative index

for the matters published during the preceding months. These

monthly indexes are cumulated on a semiannual basis, and are

published in the last Bulletin of each semiannual period.

The contents of this publication are not copyrighted and may be reprinted freely. A citation of the Internal Revenue Bulletin as the source would be appropriate.

August 26, 2024 

Bulletin No. 2024–35

Part I

Section 2032A.—Valuation

of Certain Farm, Etc.,

Real Property

26 CFR 20.2032A-4: Method of valuing farm real

property.

Rev. Rul. 2024-16

This revenue ruling contains a list of

the average annual effective interest rates

on new loans under the Farm Credit System. This revenue ruling also contains a

list of the states within each Farm Credit

System Bank Territory.

Under § 2032A(e)(7)(A)(ii) of the

Internal Revenue Code, rates on new

Farm Credit System Bank loans are

used in computing the special use

value of real property used as a farm

for which an election is made under

§ 2032A. The rates in Table 1 of this

revenue ruling may be used by estates

that value farmland under § 2032A as

of a date in 2024.

Average annual effective interest

rates, calculated in accordance with

§ 2032A(e)(7)(A) and § 20.2032A-4(e)

of the Estate Tax Regulations, to be used

under § 2032A(e)(7)(A)(ii), are set forth

in the accompanying Table of Interest

Rates (Table 1). The states within each

Farm Credit System Bank Territory are

set forth in the accompanying Table of

Farm Credit System Bank Territories

(Table 2).

Rev. Rul. 81-170, 1981-1 C.B. 454,

contains an illustrative computation of

an average annual effective interest rate.

The rates applicable for valuation in 2023

are in Rev. Rul. 2023-15, 2023-34 I.R.B.

559. For rate information for years prior

to 2023, see Rev. Rul. 2022-16, 2022-35

I.R.B. 171, and other revenue rulings that

are referenced therein.

DRAFTING INFORMATION

The principal author of this revenue

ruling is Lane Damazo of the Office of the

Associate Chief Counsel (Passthroughs

and Special Industries). For further information regarding this revenue ruling, contact Lane Damazo at (202) 317-4628 (not

a toll-free call).

REV. RUL. 2024-16 TABLE 1

TABLE OF INTEREST RATES

(Year of Valuation 2024)

Farm Credit System Bank Servicing State in

Which Property is Located

Rate

AgFirst, FCB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

AgriBank, FCB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CoBank, ACB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Texas, FCB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5.78

5.27

5.30

5.70

REV. RUL. 2024-16 TABLE 2

TABLE OF FARM CREDIT SYSTEM BANK TERRITORIES

Farm Credit System Bank

Location of Property

AgFirst, FCB ������������������������������������

Delaware, District of Columbia, Florida, Georgia,

­Maryland, North Carolina, Pennsylvania, South Carolina,

Virginia, West Virginia.

Arkansas, Illinois, Indiana, Iowa, Kentucky, Michigan,

Minnesota, Missouri, Nebraska, North Dakota, Ohio,

South Dakota, Tennessee, Wisconsin, Wyoming.

Alaska, Arizona, California, Colorado, Connecticut,

Hawaii, Idaho, Kansas, Maine, Massachusetts, Montana,

New Hampshire, New Jersey, New Mexico, New York,

Nevada, Oklahoma, Oregon, Rhode Island, Utah, Vermont,

Washington.

Alabama, Louisiana, Mississippi, Texas.

AgriBank, FCB ��������������������������������

CoBank, ACB ����������������������������������

Texas, FCB ���������������������������������������

August 26, 2024

534

Bulletin No. 2024–35

Part IV

Announcement 2024-32

Deletions From Cumulative

List of Organizations,

Contributions to Which are

Deductible Under Section

170 of the Code

Table of Contents

The Internal Revenue Service has revoked

its determination that the organizations

listed below qualify as organizations

described in sections 501(c)(3) and 170(c)

(2) of the Internal Revenue Code of 1986.

Generally, the IRS will not disallow

deductions for contributions made to a

listed organization on or before the date

of announcement in the Internal Revenue

Bulletin that an organization no longer

qualifies. However, the IRS is not precluded from disallowing a deduction for

any contributions made after an organization ceases to qualify under section 170(c)

(2) if the organization has not timely filed

a suit for declaratory judgment under section 7428 and if the contributor (1) had

knowledge of the revocation of the ruling

or determination letter, (2) was aware that

such revocation was imminent, or (3) was

in part responsible for or was aware of the

activities or omissions of the organization

that brought about this revocation.

Name Of Organization

Covenant of Blessing International Church Inc.

Willits-Robinson Preservation Foundation

Lil Bit of Love Rescue

National Christian Information Center Inc

Bulletin No. 2024–35

If on the other hand a suit for declaratory

judgment has been timely filed, contributions from individuals and organizations described in section 170(c)(2) that

are otherwise allowable will continue

to be deductible. Protection under section 7428(c) would begin on August 26,

2024, and would end on the date the court

first determines the organization is not

described in section 170(c)(2) as more

particularly set for in section 7428(c)(1).

For individual contributors, the maximum

deduction protected is $1,000, with a husband and wife treated as one contributor.

This benefit is not extended to any individual, in whole or in part, for the acts or

omissions of the organization that were

the basis for revocation.

Effective Date of Revocation

1/1/2019

7/1/2016

1/1/2018

1/01/2019

535

Location

Indianapolis, IN

Highland Park, IL

Maricopa, AZ

Valley Center, CA

August 26, 2024

Notice of Proposed

Rulemaking

REG-105128-23

Rules Regarding Dual

Consolidated Losses and

the Treatment of Certain

Disregarded Payments

AGENCY: Internal Revenue Service

(IRS), Treasury.

ACTION: Notice of proposed rulemaking.

SUMMARY: This document contains

proposed regulations that address certain

issues arising under the dual consolidated

loss rules, including the effect of intercompany transactions and items arising

from stock ownership in calculating a

dual consolidated loss. The proposed regulations also address the application of the

dual consolidated loss rules to certain foreign taxes that are intended to ensure that

multinational enterprises pay a minimum

level of tax, including exceptions to the

application of the dual consolidated loss

rules with respect to such foreign taxes.

Finally, the proposed regulations include

rules regarding certain disregarded payments that give rise to losses for foreign

tax purposes.

DATES: Written or electronic comments

and requests for a public hearing must be

received by October 7, 2024.

ADDRESSES: Commenters are strongly

encouraged to submit public comments

electronically via the Federal eRulemaking Portal at https://www.regulations

(indicate IRS and REG-105128-23) by

following the online instructions for submitting comments. Requests for a public

hearing must be submitted as prescribed

in the “Comments and Requests for a

Public Hearing” section. Once submitted

to the Federal eRulemaking Portal, comments cannot be edited or withdrawn. The

Department of the Treasury (Treasury

Department) and the IRS will publish for

public availability any comments submitted to the IRS’s public docket. Send paper

submissions to: CC:PA:01:PR (REG105128-23), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin

Station, Washington, DC 20044.

FOR FURTHER INFORMATION

CONTACT: Concerning the proposed

regulations generally, Andrew L. Wigmore at (202) 317-5443; concerning the

proposed regulations regarding intercompany transactions, Julie Wang at (202)

317-6975; concerning submissions of

comments or requests for a public hearing, Publications and Regulations Section

at (202) 317-6901 (not toll-free numbers)

or by email at publichearings@irs.gov

(preferred).

SUPPLEMENTARY INFORMATION:

Background

I. The Dual Consolidated Loss Rules

A. In general

Section 1503(d) was enacted in

response to concerns that taxpayers were

isolating expenses in dual resident corporations to enable two profitable companies, subject to tax in two different

jurisdictions, to use the dual resident corporation’s losses. See S. Rep. No. 99-313,

99th Cong., 2nd Sess., at 419-421 (1986).

Section 1503(d) and the regulations thereunder are intended to prevent this result

and to neutralize other types of “double-deduction outcomes,” that is, where

the same economic loss could be used to

offset or reduce both income subject to

U.S. tax (but not a foreign jurisdiction’s

tax) and income subject to the foreign

jurisdiction’s tax (but not U.S. tax). See

id. and TD 9315 (72 FR 12902).

Section 1503(d)(1) generally provides

that a dual consolidated loss of a domestic corporation cannot reduce the taxable

income of a domestic affiliate (a “domestic use”). See also §§1.1503(d)-2 and

1.1503(d)-4(b). Except as provided in regulations under section 1503(d)(2)(B), section

1503(d)(2)(A) defines a dual consolidated

loss as any net operating loss of a domestic

corporation which is subject to an income

tax of a foreign country 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

1503(d)(3) provides regulatory authority to

treat any loss of a separate unit of a domestic corporation as a dual consolidated loss.1

Accordingly, §1.1503(d)-1(b)(5) defines

a dual consolidated loss as a net operating

loss of a dual resident corporation or the net

loss of a domestic corporation attributable

to a separate unit.

A dual resident corporation is generally defined as a domestic corporation

that is subject to an income tax of a foreign country on its worldwide income or

on a residence basis. See §1.1503(d)-1(b)

(2)(i). A separate unit is generally defined

as either a foreign branch (defined in

§1.1503(d)-1(b)) or an interest in a hybrid

entity2 that is carried on or owned, as applicable, directly or indirectly, by a domestic

corporation (a “domestic owner” of the

separate unit). See §1.1503(d)-1(b)(4)(i).

An affiliated dual resident corporation and

an affiliated domestic owner are defined as

a dual resident corporation and a domestic

owner, respectively, that is a member of

a consolidated group. See §1.1503(d)-1(b)

(10).

Pursuant to section 1503(d)(2)(B), the

dual consolidated loss regulations provide certain exceptions to the general

prohibition against the domestic use of a

dual consolidated loss. For example, the

domestic use limitation does not apply

if, pursuant to a “domestic use election,”

the taxpayer certifies that there has not

been and will not be a “foreign use” of

the dual consolidated loss during a certification period.3 See §1.1503(d)-6(d).

Although the term “separate unit” is not defined in the statute, the legislative history to section 1503(d)(3) provides one example: a foreign branch the losses of which are, under foreign

law, able to offset income of an affiliated foreign corporation. See H.R. Rep. No. 100-795, 100th Cong., 2d Sess., at 292-93 (1988).

2

Hybrid entity means an entity that is not taxable as an association for U.S. tax purposes but is subject to an income tax of a foreign country as a corporation (or otherwise at the entity level)

either on its worldwide income or on a residence basis. §1.1503(d)-1(b)(3).

3

Section 1.1503(d)-6(b) (involving certain elective agreements between the United States and a foreign country) and §1.1503(d)-6(c) (if it can be demonstrated that there is no possibility of

a foreign use) also provide exceptions to the prohibition on domestic use.

1

August 26, 2024

536

Bulletin No. 2024–35

If a foreign use or other triggering event

occurs during the certification period, the

dual consolidated loss must be recaptured,

and an interest charge is imposed on the

recaptured amount. See §1.1503(d)-6(e)

(1). In general, a foreign use occurs when

any portion of the dual consolidated loss

is made available under the income tax

laws of a foreign country to offset or

reduce, directly or indirectly, the income

of a foreign corporation or the direct or

indirect owner of a hybrid entity that is

not a separate unit. See §1.1503(d)-3(a)

(1). Other triggering events include certain transfers of the interests in or assets

of a separate unit, as well as the failure to

satisfy various certification requirements.

See §1.1503(d)-6(e).

B. Computing income or dual

consolidated loss

In general, the income or dual consolidated loss of a dual resident corporation

for a taxable year is computed based on

the dual resident corporation’s items of

income, gain, deduction, and loss for

the taxable year. See §1.1503(d)-5(b)(1).

Similarly, the income or dual consolidated loss of a separate unit is generally

computed as if the separate unit were a

domestic corporation and based solely on

the items of income, gain, deduction, and

loss of the domestic owner of the separate

unit that are attributable to the separate

unit. See §1.1503(d)-5(c)(1). If the dual

resident corporation or domestic owner is

a member of a consolidated group, then

the computations are made in accordance

with rules under section 1502 regarding

the computation of consolidated taxable

income. See §1.1503(d)-5(b)(1) and (c)

(1).

The income or dual consolidated loss

of a dual resident corporation or separate

unit does not, however, include items

attributable to an interest in a “transparent

entity.” See §1.1503(d)-5(b)(2)(iii), (c)(1)

(i) and (iii). A transparent entity is an entity

that (i) is not taxable as an association for

U.S. tax purposes, (ii) is not subject to

income tax in a foreign country as a corporation either on its worldwide income

or on a residence basis, and (iii) is not a

pass-through entity under the laws of the

foreign country under which the relevant

separate unit or dual resident corporation

Bulletin No. 2024–35

is subject to tax. See §1.1503(d)-1(b)(16)

(i). A domestic limited liability company

that, for U.S. tax purposes, is either disregarded as an entity separate from its owner

or classified as a partnership is an example

of a business entity that may be a transparent entity if the foreign jurisdiction

does not view it as a pass-through entity.

Because it is unlikely that items attributable to an interest in a transparent entity

are taken into account by the jurisdiction

in which the dual resident corporation or

separate unit is subject to tax, such items

should not affect the calculation or use of

a dual consolidated loss. See TD 9315 (72

FR 12902, 12904-05).

For purposes of attributing items to a

separate unit, only items of the domestic owner of the separate unit that are

regarded for U.S. tax purposes are taken

into account. See §1.1503(d)-5(c)(1)(ii).

Thus, items related to disregarded transactions – irrespective of whether such

items are regarded and taken into account

for foreign tax or accounting purposes –

are not taken into account for purposes

of determining the amount of income or

dual consolidated loss of the separate unit.

See id.; see also §§1.1503(d)-7(c)(6)(iii),

1.1503(d)-7(c)(23), and 1.1503(d)-7(c)

(24) for examples illustrating this treatment for various types of disregarded payments.

In the case of a foreign branch separate unit (as defined in §1.1503(d)-1(b)

(4)(i)(A)), items of the domestic owner

generally are attributable to the separate

unit based on rules under section 864

and §1.882-5 (by treating the domestic

owner as a foreign corporation and the

foreign branch separate unit as a trade or

business within the United States). See

§1.1503(d)-5(c)(2).

In the case of a hybrid entity separate

unit (as defined in §1.1503(d)-1(b)(4)(i)

(B)), items of a domestic owner generally are attributable to the separate unit

to the extent they are reflected on the

books and records of the hybrid entity.

See §1.1503(d)-5(c)(3)(i). These items

reflected on the books and records must,

however, be adjusted to conform to U.S.

tax principles. Id.

Pursuant to a special rule, any amount

included in income of a domestic owner

arising from the ownership of stock in a

foreign corporation through a separate

537

unit (for example, a subpart F inclusion)

is attributable to the separate unit if an

actual dividend from such foreign corporation would have been so attributed.

See §1.1503(d)-5(c)(4)(iv); see also

§1.1503(d)-7(c)(24) for an example illustrating the application of §1.1503(d)-5(c)

(4)(iv).

In general, these rules are intended

to attribute items existing for U.S. tax

purposes to a separate unit to the extent

that it is likely that the relevant foreign

country would take into account the item

(assuming the item is recognized) for tax

purposes, with such approach serving as

a proxy for determining whether a double-deduction outcome could result. See

TD 9315 (72 FR 12902, 12908).

C. Made available standard and all or

nothing principle

A foreign use may occur if any portion

of a dual consolidated loss is made available to offset income, even if there are no

items of income to actually offset in that

taxable year. See §1.1503(d)-3(b). This

“made available” standard was adopted

because of the administrative complexity

that would result from having a foreign

use occur only when the dual consolidated

loss actually offsets income. See REG102144-04 (70 FR 29868, 29872-73).

For example, if a portion of a dual consolidated loss is made available to be used

by another person, and that person already

has a loss before accounting for the dual

consolidated loss, then a portion of the

dual consolidated loss could become

part of a loss carryover, which could be

available to be carried forward or carried

back to offset income in different taxable

years. Departing from the made available

standard would require that the portion of

the loss carryforward or carryback that

was taken into account in computing the

dual consolidated loss be identified and

tracked, which would require detailed

ordering rules for determining when such

losses were used and an understanding of

the timing and base differences between

the United States and the foreign jurisdiction. See id.

In general, any amount of the dual

consolidated loss being put to a foreign

use would cause the entire amount of

the dual consolidated loss to be recap-

August 26, 2024

tured and reported as income. See

§1.1503(d)-6(e)(1). This “all or nothing”

principle was adopted because, like the

made available standard, departing from

it would have led to significant administrative complexity and the need for

detailed ordering rules. See TD 9315 (72

FR 12902, 12910-11). For example, to

depart from this standard and determine

the amount of recapture on actual foreign

use, taxpayers and the IRS would need

to undertake a complex analysis of foreign law and distinguish a permanent (or

base) difference from a timing difference,

to ensure that the portion of the dual consolidated loss that is not recaptured will

not be available for a foreign use at some

point in the future. See id.

does not cause a foreign law to be treated

as mirror legislation (if, for example, the

dual consolidated loss could nevertheless

be put to a foreign use).

The mirror legislation rule is intended

to prevent foreign jurisdictions from

enacting legislation that gives taxpayers

no choice but to use a dual consolidated

loss to offset an affiliate’s income in the

United States. See REG-102144-04 (70

FR 29868, 29873-74). A lack of choice is

contrary to the approach in the dual consolidated loss rules providing taxpayers

the option of putting a dual consolidated

loss to either a domestic use or a foreign

use (but not both). See id.

D. Mirror legislation rule

Section 1503(d)(2)(A) defines a dual

consolidated loss as 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.

The exception to the definition of a dual

consolidated loss under section 1503(d)

(2)(B) similarly references “foreign

income tax law.” The legislative history

to section 1503(d) references foreign

taxes on income without further discussion of the characteristics of a foreign

income tax. See, for example, S. Rep. No.

99-313, 99th Cong., 2nd Sess., at 419421 (1986). Similarly, the regulations

only reference a foreign income tax when

setting forth many dual consolidated loss

rules. See, for example, §§1.1503(d)-(1)

(b)(2) (dual resident corporation definition), 1.1503(d)-(1)(b)(3) (hybrid entity

definition), 1.1503(d)-(1)(b)(16) (transparent entity definition) and 1.1503(d)(3)(a)(1) (foreign use definition). Thus,

the dual consolidated loss rules neither

define the term “income tax” nor describe

the characteristics that distinguish an

income tax from another type of tax.

A foreign use of a dual consolidated

loss may also be deemed to occur pursuant to the “mirror legislation” rule if the

foreign income tax laws would deny any

opportunity for the foreign use of the dual

consolidated loss in the year in which

the dual consolidated loss is incurred

(assuming the foreign country recognized

the loss in the same year), provided that

the foreign use of the loss is denied under

such laws for any of the following reasons: (i) the dual resident corporation or

separate unit that incurred the loss is subject to income taxation by another country (for example, the United States) on

its worldwide income or on a residence

basis; (ii) the loss may be available to offset income (other than income of the dual

resident corporation or separate unit)

under the laws of another country (for

example, the United States); or (iii) the

deductibility of any portion of a deduction or loss taken into account in computing the dual consolidated loss depends on

whether such amount is deductible under

the laws of another country (for example,

the United States). See §1.1503(d)-3(e).

Thus, in order for the rule to apply,

two requirements must be satisfied: the

income tax laws of the foreign country

must deny any opportunity for a foreign

use, and the reason for such denial must

be described in one of the three enumerated paragraphs in §1.1503(d)-3(e)(1). In

other words, being described in one of

the three enumerated paragraphs alone

August 26, 2024

E. Foreign income tax

II. The Intercompany Transaction

Regulations and the Matching Rule

The regulations under §1.1502-13 (the

“intercompany transaction regulations”)

provide rules for taking into account

items of income, gain, deduction, and

538

loss of consolidated group members from

intercompany transactions (as defined in

§1.1502-13(b)(1)(i)). Their purpose is to

provide rules to clearly reflect the taxable

income (and tax liability) of the group

as a whole by preventing intercompany

transactions from creating, accelerating,

avoiding, or deferring consolidated taxable income (or consolidated tax liability).

This is accomplished by treating the selling member (“S”) and the buying member (“B”) as separate entities for some

purposes, but as divisions of a single corporation for other purposes. S’s income,

gain, deduction, or loss arising from an

intercompany transaction is an intercompany item, and B’s income, gain, deduction, or loss arising from an intercompany

transaction, or from property acquired in

an intercompany transaction, is the corresponding item. The amount and location of S’s intercompany items and B’s

corresponding items are determined on

a separate entity basis (“separate entity

treatment”). The timing, character, source,

and other attributes of the intercompany

items and corresponding items, although

initially determined on a separate entity

basis, generally are redetermined under

the intercompany transaction regulations to produce the effect of transactions

between divisions of a single corporation

(“single entity treatment”).

One of the principal rules within the

intercompany transaction regulations that

implements single entity treatment is the

matching rule of §1.1502-13(c). Section

1.1502-13(c)(1) requires the attributes

of the intercompany and corresponding

items to be redetermined to the extent necessary to achieve the same overall effect

as if the members were divisions of a single corporation.

Under the matching rule, although

treated as divisions of a single corporation, S and B are treated as engaging in

their actual transaction and owning any

actual property involved in the transaction

(rather than treating the transaction as not

occurring). Accordingly, under §1.150213(c), the existence of the intercompany

transaction and the intercompany items

generally is not disregarded. Although

treated in the same manner as divisions of

a single corporation, S and B are treated

as having any special status that they have

under the Code or regulations.

Bulletin No. 2024–35

Section 1.1502-13(c)(4) provides rules

for allocating and redetermining attributes

under the matching rule. To the extent that

B’s corresponding item matches S’s intercompany item in amount, the attributes

of B’s corresponding item generally will

control S’s offsetting intercompany item.

The symmetry that is ordinarily required

under the matching rule by conforming

the source, character, and other attributes

of one member’s items to the other member’s items is expressly overridden when

either S or B has a “special status.” Section 1.1502-13(c)(5) provides that, when

the attributes otherwise determined under

§1.1502-13(c)(1)(i) for a member’s item

are permitted or not permitted under the

Code or regulations because of a member’s special status, the attributes required

by the Code or regulations apply to that

member’s items, but not to the items of

another member. The special status rule

lists examples of members with special

status, including banks, life insurance

companies, and a member carrying forward a loss subject to limitation under the

separate return limitation year (“SRLY”)

rules.

III. Sections 301.7701-1 Through

301.7701-3 – Classification of Business

Entities

Sections

301.7701-1

through

301.7701-3 classify a business entity with

two or more members as either a corporation or a partnership, and a business entity

with a single owner as either a corporation or disregarded as an entity separate

from its owner (“disregarded entity”).

Certain business entities with a single

owner are classified as disregarded entities by default or through an election. See

§301.7701-3(a) through (c).

IV. Pillar Two

A. GloBE Model Rules

On December 20, 2021, the OECD/

G20 Inclusive Framework on BEPS published model rules (the “GloBE Model

Rules”4) to assist in the implementation of

a reform to the international tax system.

See OECD/G20, Tax Challenges Arising

from the Digitalisation of the Economy

Global Anti-Base Erosion Model Rules

(Pillar Two). The GloBE Model Rules

create a coordinated system of minimum

taxation intended to ensure that certain

large Multinational Enterprise Groups

(“MNE Groups”) pay a minimum level

of tax based on the income, adjusted for

certain items, arising in each of the jurisdictions where they operate.5

Under the GloBE Model Rules, an

in-scope MNE Group must compute the

GloBE Income or Loss of each of its

Constituent Entities.6 The computation of

GloBE Income or Loss generally begins

with the net income or loss of a Constituent Entity determined using the accounting standard used in preparing the Consolidated Financial Statements and without

any consolidation adjustments that would

eliminate income or expense attributable

to intra-group transactions. To reflect

GloBE policy outcomes, this amount is

then adjusted for specific items to determine the Constituent Entity’s GloBE

Income or Loss.7

The MNE Group must then calculate

its Effective Tax Rate (“ETR”) for each

jurisdiction in which it operates. The

ETR of a jurisdiction equals (i) the sum

of Adjusted Covered Taxes of each Constituent Entity located in the jurisdiction,

divided by (ii) the Net GloBE Income of

the jurisdiction for the Fiscal Year. The

Net GloBE Income of the jurisdiction is

determined by aggregating the GloBE

Income or Loss of all Constituent Entities of the MNE Group located in the

same jurisdiction.8 This “jurisdictional

blending” is mandatory and is intended to

avoid distortions arising from tax consolidation and similar regimes and shifting

income and taxes between Constituent

Entities located in the same jurisdiction.

See OECD (2024), Tax Challenges Arising from the Digitalisation of the Economy – Consolidated Commentary to the

Global Anti-Base Erosion Model Rules

(2023); Inclusive Framework on BEPS,

OECD Base Erosion and Profit Shifting

Project, April 2024, OECD Publishing,

Paris (“GloBE Model Rules Consolidated

Commentary”), Article 5.1.1, Paragraph

4. If the ETR in that jurisdiction would be

below the 15% Minimum Rate, a top-up

tax may be imposed and collected under

a Qualified Domestic Minimum Top-up

Tax (“QDMTT”), an IIR (the income

inclusion rule), or a UTPR (commonly

referred to as the undertaxed profits rule)

to the extent necessary to ensure that the

MNE Group’s Excess Profits in the jurisdiction is taxed at the Minimum Rate.

Certain countries have enacted, and others have proposed, legislation to implement taxes based on the GloBE Model

Rules for fiscal years beginning as early

as December 31, 2023.9

On December 20, 2022, the OECD/

G20 Inclusive Framework on BEPS published the Safe Harbours and Penalty

Relief document, which includes guidelines on aspects of the design and operation of a Transitional CbCR Safe Harbour

to the GloBE Model Rules. See OECD

(2022), Safe Harbours and Penalty Relief:

Global Anti-Base Erosion Rules (Pillar

Two), December 2022, OECD/G20 Inclu-

As the context requires, references to the GloBE Model Rules include references to a foreign jurisdiction’s legislation implementing the GloBE Model Rules.

Capitalized terms used in this part IV of the Background section and parts I.D of the Explanation of Provisions section of this preamble, but not defined herein, have the meanings ascribed

to such terms under the GloBE Model Rules.

6

Constituent Entities include legal persons (other than a natural person), arrangements that prepare separate financial accounts (such as a partnership or trust), or a Permanent Establishment.

7

In addition to adjustments to reflect common differences between the applicable financial accounting standard and the local income tax rules, the computation of a Low-Tax Entity’s GloBE

Income or Loss excludes any expense attributable to an Intragroup Financing Arrangement that can reasonably be anticipated to increase the expenses of the Low-Tax Entity without resulting

in a commensurate increase in the taxable income of the High-Tax Counterparty.

8

However, a Stateless Constituent Entity (such as a Reverse Hybrid Entity) is treated as a single Constituent Entity located in a separate and unspecified jurisdiction; the GloBE Income or

Loss of a Reverse Hybrid Entity is not aggregated with that of any other Constituent Entity.

9

The UTPR will generally be effective for Fiscal Years beginning on or after December 31, 2024. Under the European Union (EU) Directive requiring the adoption of the GloBE Model Rules,

EU Member States will apply the UTPR for years beginning on or after December 31, 2023, but only in limited circumstances. See Council Directive 2022/2523, art. 50, 2022 OJ (L 328) 1, 55.

4

5

Bulletin No. 2024–35

539

August 26, 2024

sive Framework on BEPS, OECD, Paris.10

The Transitional CbCR Safe Harbour is

designed to ameliorate the compliance

burden of undertaking full GloBE calculations during the Transition Period11 by

limiting the circumstances in which an

MNE will be required to perform such

calculations to a smaller number of higher-risk jurisdictions. An MNE Group uses

its Qualified CbC Report and financial

accounting data to determine if its operations in a jurisdiction qualify for the

Transitional CbCR Safe Harbour and, if

such operations qualify, the jurisdiction is

effectively excluded from the scope of the

GloBE Model Rules. Specifically, under

the Transitional CbCR Safe Harbour, the

Jurisdictional Top-up Tax in a jurisdiction

for a Fiscal Year beginning on or before

December 31, 202612 is deemed to be zero

if (i) the MNE Group reports Total Revenue of less than EUR 10 million and Profit

(Loss) before Income Tax of less than EUR

1 million in the jurisdiction on its Qualified CbC Report for the Fiscal Year, (ii) the

MNE Group has a Simplified ETR that is

equal to or greater than the Transition Rate

in the jurisdiction for the Fiscal Year, or

(iii) the MNE Group’s Profit (Loss) before

Income Tax in such jurisdiction is equal to

or less than the Substance-based Income

Exclusion amount, for Constituent Entities resident in that jurisdiction under the

Qualified CbC Report, as calculated under

the GloBE Model Rules. Expenses and

losses are relevant in determining whether

each of these three tests is satisfied.

B. Notice 2023-80

On December 11, 2023, the Treasury

Department and the IRS released Notice

2023-80, which, among other things,

described the interaction of the dual consolidated loss rules with the GloBE Model

Rules. The notice explains that in certain

cases, the aggregation of GloBE Income

or Loss of Constituent Entities in the same

jurisdiction in calculating the ETR can be

viewed as giving rise to double-deduction

outcomes that the dual consolidated loss

rules were intended to address. Moreover,

the notice recognizes that these concerns

could exist with respect to a dual consolidated loss incurred in a taxable year

ending before the effective date of foreign legislation implementing the GloBE

Model Rules, for example, due to certain

timing differences. The notice also recognizes that certain features of the GloBE

Model Rules may differ from traditional

foreign income tax systems. For example,

the GloBE Model Rules do not include

a mechanism that would permit taxpayers to forgo the aggregation of GloBE

Income and GloBE Losses, and in some

cases where the ETR in the jurisdiction

is or would otherwise be at or above the

Minimum Rate, a loss may not reduce the

amount of a Jurisdictional Top-up Tax.

The notice announces limited guidance

that would be proposed for certain “legacy DCLs,” which in general are dual consolidated losses that a taxpayer incurred

before the effective date of the GloBE

Model Rules.13 Under that guidance, a foreign use does not occur with respect to a

legacy DCL solely because all or a portion

of the deductions or losses that comprise

the legacy DCL are taken into account

under the GloBE Model Rules, subject to

an anti-abuse rule. Where a taxpayer uses

a fiscal year for tax purposes that ends

after 2023, the foreign use exception is

conditioned on the relevant MNE Group

using the same fiscal year when applying

the GloBE Model Rules. This condition

ensures that the legacy DCL rule applies

only to the extent of book-tax timing

differences, and not due to a mismatch

between the U.S. taxable year and fiscal

year used under the GloBE Model Rules.

Finally, the notice states that the Treasury Department and the IRS are studying

the interaction of the dual consolidated

loss rules and the GloBE Model Rules

and the notice requests comments on

the interaction of the dual consolidated

loss rules with the GloBE Model Rules,

including Article 3.2.7 (relating to Intragroup Financing Arrangements), which

is intended to prevent certain avoidance

transactions involving arbitrage. The

notice also states that the Treasury Department and the IRS are studying the interaction of the GloBE Model Rules with the

anti-hybrid rules under sections 245A(e)

and 267A.

C. Administrative Guidance addressing

Hybrid Arbitrage Arrangements

On December 15, 2023, the OECD/

G20 Inclusive Framework on BEPS published additional Administrative Guidance

on the GloBE Model Rules (“December

2023 Administrative Guidance”). See

OECD (2023), Tax Challenges Arising

from the Digitalisation of the Economy

– Administrative Guidance on the Global

Anti-Base Erosion Model Rules (Pillar

Two), December 2023, OECD/G20 Inclusive Framework on BEPS, OECD, Paris.14

Among other issues, the December 2023

Administrative Guidance addresses the

treatment under the Transitional CbCR

Safe Harbour of Hybrid Arbitrage

Arrangements entered into after December 15, 2022.

The December 2023 Administrative

Guidance involving Hybrid Arbitrage

Arrangements is intended, in part, to

address avoidance transactions that are

designed to exploit differences between

tax and financial accounting treatment

to allow a Tested Jurisdiction to qualify

for the Transitional CbCR Safe Harbour,

which would be contrary to the pur-

https://www.oecd.org/tax/beps/safe-harbours-and-penalty-relief-global-anti-base-erosion-rules-pillar-two.pdf. The Safe Harbours have since been incorporated into the GloBE Model

Rules Consolidated Commentary.

11

The Transition Period covers all of the Fiscal Years beginning on or before December 31, 2026, but not including a Fiscal Year that ends after June 30, 2028.

12

Other than a Fiscal Year that ends after June 30, 2028. The Safe Harbour takes a “once out, always out” approach under which, if an MNE Group does not apply the Safe Harbour with

respect to a jurisdiction in a Fiscal Year in which it is subject to the GloBE Rules, the MNE Group cannot qualify for the Safe Harbour for that jurisdiction in a subsequent year, except where

the MNE Group did not have any Constituent Entities located in the jurisdiction in the previous Fiscal Year.

13

The notice defines legacy DCLs as dual consolidated losses incurred in (i) taxable years ending on or before December 31, 2023, or (ii) provided the taxpayer’s taxable year begins and

ends on the same dates as the Fiscal Year of the MNE Group that could take into account as an expense any portion of a deduction or loss comprising such a DCL, taxable years beginning

before January 1, 2024, and ending after December 31, 2023.

14

https://www.oecd.org/tax/beps/administrative-guidance-global-anti-base-erosion-rules-pillar-two-december-2023.pdf. The December 2023 Administrative Guidance has since been incorporated into the GloBE Model Rules Consolidated Commentary.

10

August 26, 2024

540

Bulletin No. 2024–35

poses of the GloBE Model Rules. One

of the Hybrid Arbitrage Arrangements

addressed under the guidance is a “duplicate loss arrangement.” A duplicate loss

arrangement includes an arrangement

that results in an expense or loss being

included in the financial statement of a

Constituent Entity to the extent that the

arrangement also gives rise to a duplicate amount that is deductible for purposes of determining the taxable income

of another Constituent Entity in another

jurisdiction. An arrangement will not be

a duplicate loss arrangement, however,

to the extent that the amount of the relevant expense is offset against revenue

or income that is included in both (i) the

financial statements of the Constituent

Entity including the expense or loss in

its financial statements; and (ii) the taxable income of the Constituent Entity

claiming the deduction for the relevant

expense or loss. Under this guidance, a

Tested Jurisdiction’s Transitional CbCR

Safe Harbour calculation is adjusted by

excluding any expense or loss arising as

a result of a duplicate loss arrangement

from the Tested Jurisdiction’s profit

before tax.

The December 2023 Administrative

Guidance states that further guidance will

be provided to address Hybrid Arbitrage

Arrangements, including those addressed

in the December 2023 Administrative

Guidance, that may otherwise affect the

application of the GloBE Model Rules

outside the context of the Transitional

CbCR Safe Harbour.

Explanation of Provisions

I. Dual Consolidated Loss Rules

A. Interaction with the intercompany

transaction regulations

As discussed in part I.B of the Background section of this preamble, the dual

consolidated loss regulations provide

that, in the case of an affiliated dual resident corporation or an affiliated domestic owner acting through a separate unit

(a “section 1503(d) member”), the computation of income or dual consolidated

loss takes into account rules under section 1502 regarding the computation of

consolidated taxable income. No specific

Bulletin No. 2024–35

guidance is provided as to the interaction

of rules under section 1502 and those

under section 1503(d).

Comments with respect to proposed

regulations addressing certain hybrid

arrangements that were published in the

Federal Register on December 28, 2018

(REG-104352-18, 83 FR 67612) (the

“2018 proposed regulations”), addressed

the interaction of the matching rule under

§1.1502-13(c) with the computation of

income or dual consolidated loss. The preamble to final regulations published in the

Federal Register on April 8, 2020 (TD

9896, 85 FR 19830), stated that the Treasury Department and the IRS were studying this issue.

The comments recommended that the

Treasury Department and the IRS clarify

that the matching rule does not apply to

cause regarded items to be redetermined

(and thus effectively disregarded) for

purposes of the dual consolidated loss

rules. The comments stated that such an

approach promotes the policies of the

dual consolidated loss rules and leads to

more accurate computations. In addition,

a comment asserted that such an approach

is consistent with how taxpayers generally

apply the rules, and that for these taxpayers a contrary approach could have a significant and unanticipated effect on existing structures.

However, one of the comments cautioned that, if the dual consolidated loss

rules were to apply differently with respect

to an item arising from an intercompany

transaction and an item arising from a

disregarded transaction, then the disparity could produce inappropriate policy

outcomes. For example, a taxpayer might

structure its internal transactions so that

(i) payments by separate units are made

pursuant to disregarded transactions, such

that the payments would not increase

or create a dual consolidated loss, and

(ii) payments to separate units are made

pursuant to intercompany transactions,

such that the payments would reduce

or eliminate a dual consolidated loss.

The comment described additional rules

– including a rule that would require a

consolidated group to treat intercompany

transactions and disregarded payments

consistently for purposes of the dual consolidated loss rules – that might minimize

tax planning opportunities arising from

541

any such disparity. These proposed regulations address the concern raised in this

comment with the disregarded payment

loss rules, as discussed in part II of this

Explanation of Provisions.

Another comment raised the possibility

that taxpayers may have differing views

regarding the interaction of the matching

rule with the dual consolidated loss rules

under current law. As a result, taxpayers

currently may be adopting different treatments of the section 1503(d) member’s

intercompany (or corresponding) items.

Accordingly, the comment recommended

clarifying how these rules interact.

The dual consolidated loss rules are

intended to take into account an item of

a dual resident corporation, or attribute

an item of a domestic owner to a separate unit, to the extent that the item is

likely taken into account for foreign tax

purposes. Because it is unlikely that a

foreign jurisdiction would disregard an

intercompany transaction (or, more generally, transactions between separate legal

entities), it is consistent with the policies

of the dual consolidated loss rules to take

into account items arising from an intercompany transaction on a separate entity

basis, to the extent of the application of

section 1503(d). In addition, the failure to

take items arising from an intercompany

transaction into account in an appropriate

manner for the section 1503(d) rules could

lead to distortive results – both an underand over-inclusive application of the dual

consolidated loss rules – and could create

inappropriate planning opportunities.

Accordingly, and consistent with the

approach recommended by the comments, the proposed regulations would

amend §1.1502-13 to clarify the treatment of items that are subject to the section 1503(d) rules and the intercompany

transaction regulations. Specifically, the

proposed regulations clarify that a section 1503(d) member has special status

under §1.1502-13(c)(5) for purposes of

applying the dual consolidated loss rules.

This approach is consistent with treating a

member with losses from separate return

limitation years as having special status

under §1.1502-13(c)(5) for purposes of

determining the member’s SRLY limitation. See §1.1502-13(c)(7)(ii)(J)(4).

As a result, if a section 1503(d) member’s intercompany (or correspond-

August 26, 2024

ing) loss otherwise would be taken into

account in the current year, and if the dual

consolidated loss rules apply to limit the

use of that loss (causing the loss to not be

currently deductible), the intercompany

transaction regulations would not redetermine that loss as not being subject to the

limitation under section 1503(d). Therefore, a section 1503(d) member’s intercompany (or corresponding) loss could

be limited (and therefore not currently

deductible) under the dual consolidated

loss rules, even though such an outcome is

inconsistent with single entity treatment.

In conjunction with the special status

rule for the section 1503(d) member, the

proposed regulations also clarify the treatment of the section 1503(d) member’s

counterparty in an intercompany transaction. Proposed §1.1502-13(j)(10)(iv)

applies §1.1502-13(c) (the matching rule),

or principles of the matching rule as relevant in §1.1502-13(d) (the acceleration

rule), to the counterparty member as if the

section 1503(d) member were not subject

to the dual consolidated loss rules. This

approach is consistent with the special status rule in §1.1502-13(c)(5), which provides that, even though the Code or regulations require certain treatment of the

special status member’s items by reason

of its special status, that treatment does

not affect the attributes of the counterparty

member’s items under the matching rule.

For example, assume that, in the current year, S (the counterparty member) has

interest income, and B (a section 1503(d)

member) has an interest deduction on an

intercompany loan. Even if B’s interest

deduction were limited under the domestic use limitation under §1.1503(d)-4(b)

and therefore not currently deductible,

S nevertheless would take its interest

income into account in the current year

under proposed §1.1502-13(j)(10)(iv).

In other words, this rule clarifies that the

intercompany transaction regulations

would not redetermine the attributes of S’s

interest income to match the treatment of

B’s interest deduction in situations where

B’s deduction is limited due to B’s special

status as a section 1503(d) member. The

Treasury Department and the IRS are of

the view that redetermining S’s interest

income as not currently includible in these

situations effectively would give the consolidated group the benefit of B’s deduc-

August 26, 2024

tion and would not achieve the appropriate

result under dual consolidated loss policy.

These proposed regulations also clarify

the order of operation between §1.150213 and the dual consolidated loss rules.

The dual consolidated loss rules apply

to an item only to the extent that the

item is otherwise taken into account in

income or loss. Consistent with this general rule, the proposed regulations clarify that (i) the intercompany transaction

regulations apply first to determine when

an intercompany (or corresponding) item

is taken into account, and (ii) such item

is then included in the dual consolidated

loss computations. Thus, for example, in

a year in which an intercompany deduction of S (a section 1503(d) member) is

deferred under the intercompany transaction regulations, the deduction would not

be included in computing S’s income or

dual consolidated loss for that year under

section 1503(d). Moreover, when S’s

deduction is taken into account under the

matching rule in a later year, that deduction would be included in S’s dual consolidated loss computations for that year.

See proposed §1.1502-13(j)(15)(xi) for an

example illustrating the application of the

matching rule.

B. Computing income or dual

consolidated loss

1. Items Arising from Ownership of

Stock

As discussed in part I.B of the Background section of this preamble, an item

of income, gain, deduction, or loss is generally taken into account for purposes of

computing income or dual consolidated

loss to the extent it is likely that the relevant foreign country would take into

account the item (assuming the item is

recognized) for tax purposes. In many

cases, gain from the sale or exchange of

stock of a corporation, or a dividend from

a corporation, is unlikely to be included

in income in the foreign country due to,

for example, a participation exemption or

indirect foreign tax credits. In addition, an

inclusion with respect to stock of a foreign

corporation (such as under section 951(a)

(1)(A) or 951A(a)) is unlikely to be taken

into account (and therefore is unlikely

to be included in income) in the foreign

542

country; moreover, the difference resulting from these inclusions is likely to be

permanent because the related earnings of

the foreign corporation are unlikely to be

included in income in the foreign country

when distributed.

Further, the Treasury Department and

the IRS are aware that taxpayers may be

affirmatively structuring into these rules to

produce inappropriate double-deduction

outcomes. For example, in order to eliminate a dual consolidated loss otherwise

attributable to an interest in a disregarded

entity, a domestic corporation could transfer the stock of a controlled foreign corporation (as defined in section 957(a))

that gives rise to inclusions under section

951A(a) to that disregarded entity, even

though the foreign country in which the

disregarded entity is subject to tax does

not tax income of, or distributions from,

the controlled foreign corporation.

In light of the prevalence of participation exemptions (or similar regimes that

exempt income with respect to stock),

coupled with taxpayers structuring into

the rules to reduce or eliminate dual consolidated losses, the Treasury Department

and the IRS are of the view that the rules

should be revised. The proposed regulations therefore generally provide that

items arising from the ownership of stock

– such as gain recognized on the sale or

exchange of stock, dividends (including

by reason of section 1248), inclusions

under section 951(a) (including by reason of section 245A(e)(2) or 964(e)(4))

or 951A(a), as well as deductions with

respect thereto (including under section

245A(a) or 250(a)(1)(B)) – are not taken

into account for purposes of computing

income or a dual consolidated loss. See

proposed §1.1503(d)-5(b)(2)(iv)(A) and

(c)(4)(iv)(A). These rules are not limited

to items arising from the ownership of

stock of a foreign corporation because,

for example, a dividend from a domestic

corporation may be eligible for a participation exemption under the laws of the

foreign country.

However, these rules do not apply

with respect to a dividend (or other inclusion) arising from a separate unit or dual

resident corporation’s ownership of portfolio stock of a corporation (domestic or

foreign), which generally is defined as

stock representing less than ten percent

Bulletin No. 2024–35

of the value of the corporation. See proposed §1.1503(d)-5(b)(2)(iv)(B) and (c)

(4)(iv)(B) and (C). In these cases, the

items are likely to be included (or the

related earnings are likely to be subsequently included when distributed) in

income in the foreign country in which

the separate unit or dual resident corporation is subject to tax. The proposed regulations are intended to ensure that these

items, as offset or reduced by any deductions with respect to the items for U.S.

tax purposes, are taken into account for

purposes of computing income or a dual

consolidated loss.

The Treasury Department and the

IRS are of the view that this approach is

simpler and more administrable than an

alternative approach that would consider

the extent to which an item is, or will be,

actually taken into account under the tax

law of the foreign country in which the

separate unit or dual resident corporation

is subject to tax and not offset or reduced

by an exemption, exclusion, deduction,

credit, or other similar relief particular to

the item. Further, in most cases a more

precise approach would not lead to significantly different results given the likelihood that items of income arising from

the ownership of stock will be offset or

reduced under the tax laws of the foreign

country.

The Treasury Department and the IRS

recognize that certain amounts included

in the income of a domestic owner arising

from the ownership of stock in a foreign

corporation (in the case of a separate unit,

regardless of whether the stock of the foreign corporation is held through the separate unit) may reflect amounts that have

been subject to tax, to some extent, by both

the foreign jurisdiction and the United

States. For example, where a domestic

owner of a separate unit that is taxed as

a resident in a particular foreign jurisdiction holds stock of a controlled foreign

corporation that is also taxed as a resident

in the same foreign jurisdiction, the controlled foreign corporation’s income may

be taxed, to some extent, under the income

tax laws of the foreign jurisdiction and by

the United States through inclusions under

section 951(a) or 951A(a); this could

occur regardless of whether the inclusion

itself is taken into account by the same

foreign jurisdiction. To the extent such

Bulletin No. 2024–35

amounts are taxed in the same manner and

to the same extent as if they were earned

directly by the domestic owner, they could

be viewed as representing dual inclusion

income (that is, items that are included in

income in both the United States and the

foreign country and not offset or reduced

by certain amounts particular to the item)

that could be taken into account when

determining the dual consolidated loss

attributable to the separate unit.

The proposed regulations do not provide a rule that would permit taxpayers

to identify and take into account such

amounts as dual inclusion income. Doing

so would require complicated rules, and

raise related administrability concerns,

to isolate the amount of dual inclusion

income with respect to a particular foreign

jurisdiction (for example, where a controlled foreign corporation owns one or

more disregarded entities that are subject

to tax in different foreign jurisdictions).

Such an approach would also need to take

into account rate disparities (for example,

as a result of the deduction allowed under

section 250(a)(1)(B) with respect to inclusions under section 951A) and other differences that may result between income

earned directly by a domestic owner and

earned indirectly through a controlled foreign corporation.

2. Adjustments to Conform to U.S. Tax

Principles

As discussed in part I.B of the Background section of this preamble, regarded

items of a domestic owner generally are

attributable to a hybrid entity separate unit

to the extent they are reflected on the books

and records of the hybrid entity. These

items reflected on the books and records

must, however, be adjusted to conform

to U.S. tax principles. Such adjustments

would include, for example, adjustments

to reflect differences in the calculation of

depreciation for accounting and tax purposes, and adjustments to eliminate items

reflected on the books and records that are

not deductible for tax purposes (such as a

penalty or fine). See §1.1503(d)-7(c)(25)

for an example illustrating adjustments to

conform to U.S. tax principles.

The Treasury Department and the IRS

are aware that certain taxpayers may be

taking the position that items that are not

543

reflected on the books and records of a

hybrid entity may nevertheless be attributable to the hybrid entity separate unit.

Specifically, taxpayers may assert that the

adjustments to the books and records necessary to conform to U.S. tax principles

can include an item that has not been (and

will not be) reflected on the books and

records of the hybrid entity. For example, if a hybrid entity provides services

to its domestic owner and receives a payment as compensation for those services

that is generally disregarded for U.S. tax

purposes, a taxpayer may take the position that a portion of the domestic owner’s regarded income can be reallocated

to the books and records of the hybrid

entity (and, thus, taken into account by

the hybrid entity separate unit) under, for

example, the principles of section 482 or

section 864(c).

This position is incorrect under

the current regulations and misinterprets the required adjustments under

§1.1503(d)-5(c)(3)(i).

Such

adjustments account for discrepancies between

accounting treatment and U.S. tax treatment; they are not permitted to give

effect to disregarded payments that

§1.1503(d)-5(c)(1)(ii) explicitly excludes

from the calculation of income or dual

consolidated loss. See §1.1503(d)-7(c)

(23) for an example illustrating the application of §1.1503(d)-5(c). Further, this

position is contrary to the policy underlying §1.1503(d)-5(c)(3), which is to take

into account only items that are regarded

for U.S. tax purposes and also are (or have

been or will be) reflected on the books and

records of the hybrid entity. Nevertheless,

for the avoidance of doubt, the proposed

regulations clarify that the adjustments

necessary to conform to U.S. tax principles

do not permit the attribution to a hybrid

entity separate unit, or an interest in a

transparent entity, of any item that has not

been and will not be reflected on the books

and records of the hybrid entity or transparent entity. See proposed §1.1503(d)-5(c)

(3)(i); see also proposed §1.1503(d)-7(c)

(23)(iii) for an example illustrating the

application of §1.1503(d)-5(c); but see

§§1.1503(d)-5(c)(4)(iii), 1.1503(d)-5(c)

(4)(v) and 1.1503(d)-5(c)(4)(vi) (special

attribution rules that do not require that an

item be reflected on the books and records

to be taken into account).

August 26, 2024

C. Anti-avoidance rule

As discussed in sections I.A (interaction with the matching rule), I.B.1 (items

arising from ownership of stock), I.B.2

(adjustments to conform to U.S. tax principles), and II.A. (disregarded payment

losses) of this Explanation of Provisions,

the Treasury Department and the IRS continue to learn of transactions or structures

that attempt to obtain a double-deduction

outcome while avoiding the application of

the dual consolidated loss rules. In addition, the Treasury Department and the IRS

are aware of other avoidance transactions

that may facilitate a double-deduction outcome by manipulating the computation of

income or a dual consolidated loss with

items that are not included in income,

or do not give rise to tax, in the foreign

country. For example, income-producing

assets located within the United States

could be transferred to, or otherwise be

acquired by, a separate unit that is a tax

resident in a jurisdiction that, pursuant to a

participation exemption or similar regime

(including a regime that grants a foreign

tax credit for foreign taxes paid on foreign

income), would exempt or otherwise not

tax the income derived from those assets.

Because such assets are located in the

United States, however, taxpayers could

assert that they would not give rise to a

foreign branch separate unit and, assuming

they are not held by a transparent entity,

take the position that income derived from

those assets would reduce or eliminate a

dual consolidated loss (despite not being

subject to tax in the foreign jurisdiction).

Even if these particular transactions

were also addressed by new rules in these

proposed regulations, other avoidance

transactions could continue to be developed. Accordingly, and rather than continuing to address these transactions on a

case-by-case basis, the proposed regulations include an anti-avoidance rule that,

in general, is intended to address additional transactions, or interpretations, that

may attempt to avoid the purposes of the

dual consolidated loss rules. See proposed

§1.1503(d)-1(f); see also §1.1503(d)-7(c)

(43) for an example illustrating the application of the anti-avoidance rule to a transfer of assets located in the United States to

a separate unit. This anti-avoidance rule

also applies with respect to transactions

August 26, 2024

that attempt to avoid the purposes of the

disregarded payment loss rules because,

as discussed in part II of this Explanation

of Provisions, such rules are also intended

to address transactions that raise policy

concerns similar to those arising under the

dual consolidated loss rules. See proposed

§1.1503(d)-1(f).

D. GloBE Model Rules

1. General Applicability of Dual

Consolidated Loss Rules

As discussed in part IV.B of the Background section of this preamble, Notice

2023-80 requested comments on the interaction of the dual consolidated loss rules

with the GloBE Model Rules. In response,

comments requested that the dual consolidated loss rules be made inapplicable

with respect to a foreign tax based on the

GloBE Model Rules. In support of these

recommendations, comments asserted that

the QDMTT, IIR, and UTPR have unique

characteristics that are not present in the

income taxes that were in existence when

section 1503(d) was enacted. According

to some comments, these taxes are not

based on the traditional concept of tax residency and thus do not present the possibility for the mismatches in tax residency

that the dual consolidated loss rules were

intended to address. Comments further

noted that the QDMTT, IIR, and UTPR

are minimum taxes based on an MNE

Group’s financial accounting income and,

in contrast to typical tax consolidation

or group relief regimes, the aggregation

of revenue or expense under the GloBE

Model Rules is not elective. Finally, comments asserted that the IIR differs from a

typical foreign income tax because it is

not a tax on an entity’s income (including

income imputed from a subsidiary) arising

in the foreign jurisdiction where the entity

is a tax resident. According to these comments, a foreign use cannot occur under

the current dual consolidated loss rules as

a result of a loss being taken into account

under an IIR if the entity incurring the loss

is not a tax resident in the foreign jurisdiction imposing the IIR – that is, these

comments assert a foreign use can only

occur if a dual consolidated loss is made

available under the laws of the foreign

jurisdiction in which the loss arises.

544

As indicated in Notice 2023-80, the

Treasury Department and the IRS are of

the view that the aggregation of items of

revenue and expense of Constituent Entities in the same jurisdiction in calculating the ETR can result in double-deduction outcomes that the dual consolidated

loss rules were intended to address. First,

despite the differences between the GloBE

Model Rules and more traditional foreign

income tax systems, the GloBE Model

Rules can also present a typical example

of tax residency arbitrage that the dual

consolidated loss rules were intended

to address. For example, assume USP, a

domestic corporation, owns all the interests in DEx, an entity organized under the

laws of Country X that is disregarded as

an entity separate from its owner. DEx, in

turn, owns all the stock in CFCx, a foreign corporation organized under the laws

of Country X. DEx incurs a $100x loss

and CFCx generates $100x of income. If

Country X does not impose an income tax

on Country X entities, then the $100x loss

incurred by DEx would not be a dual consolidated loss with respect to USP’s interests in DEx. See §1.1503(d)-1(b)(5)(ii),

(b)(3), and (b)(4)(i). This is appropriate as

the loss could not be used to offset CFCx’s

income and give rise to a double-deduction outcome because there is no Country

X income tax that could be reduced as a

result of the offset. If, however, Country X

enacted a QDMTT that is an income tax,

and absent the application of the dual consolidated loss rules, the $100x loss of DEx

could then be available to reduce U.S. tax

imposed on USP’s income as well as the

Country X QDMTT imposed on CFCx’s

income. The Treasury Department and

the IRS are of the view that as a matter

of the policy underlying the dual consolidated loss rules there is no meaningful distinction between using DEx’s $100x loss

to offset the Country X QDMTT versus

using the loss to instead offset a more traditional income tax imposed by Country

X; both cases give rise to a double-deduction outcome. Further, a double-deduction

outcome could also occur if the loss were

to offset income under another country’s

IIR, rather than under a QDMTT.

Moreover, the features of the IIR or

QDMTT noted by comments – such as

using financial accounting income as a

starting point for purposes of determin-

Bulletin No. 2024–35

ing GloBE Income or Loss, or being a

minimum tax – do not preclude an IIR

or QDMTT from being the type of tax

to which the dual consolidated loss rules

were intended to apply. Indeed, these

types of features are included in the U.S.

income tax. See, for example, sections 55,

56A, and 59 (corporate alternative minimum tax). The sharing of the loss through

the mechanics of calculating Net GloBE

Income similarly is an insufficient basis

to distinguish the IIR or QDMTT from a

more traditional foreign income tax where

the loss is shared pursuant to a consolidation election or similar loss-sharing

regime.

As an alternative to a foreign use exception, some comments recommended an

anti-abuse rule that provides that a foreign

use can only occur as a result of aggregation under the GloBE Model Rules if

the losses were created for a tax-avoidance purpose. These proposed regulations do not provide such an anti-abuse

rule because there is no indication in the

statutory language or legislative history

that the application of the dual consolidated loss rules should be limited to losses

incurred for a tax-avoidance purpose.15

Many deductions that can be structured to

give rise to a double-deduction outcome

are incurred for non-tax business reasons,

such as interest expense incurred on external debt that is issued to acquire property

or fund business operations.

Accordingly, the proposed regulations

provide that an income tax may include a

tax that is intended to ensure a minimum

level of taxation on income or computes

income or loss by reference to financial

accounting net income or loss. See proposed §1.1503(d)-1(b)(6)(ii). Therefore,

an IIR or QDMTT may be an income tax

for purposes of the dual consolidated loss

rules and a foreign use may occur under

such tax by reason of a loss being used in

the calculation of Net GloBE Income or to

qualify for a Transitional CbCR Safe Harbour. See proposed §1.1503(d)-7(c)(3)(ii)

for an example illustrating the application

of the dual consolidated loss rules with

respect to a QDMTT. These proposed regulations do not, however, provide specific

guidance regarding the UTPR. The Treasury Department and the IRS continue to

analyze issues related to the UTPR.

2. Effect on Certain Entities and Foreign

Business Operations

As discussed in parts I.A, I.B, and I.E

of the Background section of this preamble, the definitions of hybrid entity,

hybrid entity separate unit, and dual resident corporation are each based, in part,

on whether the relevant entity is subject to

an income tax of a foreign country on its

worldwide income or on a residence basis.

The definition of a foreign branch separate

unit, on the other hand, is based on the

level of activities required to constitute a

foreign branch under §1.367(a)-6T(g)(1)

(subject to an exception where business

operations do not constitute a permanent

establishment under an applicable income

tax convention). Among other requirements, an entity is a transparent entity

only if it is not subject to an income tax of

a foreign country on its worldwide income

or on a residence basis.

As discussed in part IV.A of the Background section of this preamble, a top-up

tax may be collected by a jurisdiction

with respect to the Net GloBE Income of

a Constituent Entity under a QDMTT or

an IIR. The top-up tax under an IIR with

respect to the Net GloBE Income of an

entity located in one jurisdiction may be

collected by a different jurisdiction from

another Constituent Entity in the MNE

Group. As mentioned in part I.D.1 of this

Explanation of Provisions, comments

have asserted that the IIR is not based on

the traditional concept of tax residency

and, if a loss does not arise in the foreign

jurisdiction that assesses the tax, the dual

consolidated loss rules do not apply.

The Treasury Department and the IRS

are of the view, that where a loss reduces

or eliminates the amount of Net GloBE

Income in a jurisdiction, the results under

the dual consolidated loss rules should

be the same regardless of the jurisdiction collecting tax with respect to the

amount of Jurisdictional Top-up Tax. For

example, assume a domestic corporation

(“DC”) owns a foreign disregarded entity

(“FDEx”), a tax resident in Country X that

imposes a QDMTT that is an income tax.

Further assume that FDEx owns all the

stock of a foreign corporation organized

under the laws of Country X (“CFCx”)

and that is also a tax resident in Country

X. FDEx should be treated as subject to

the QDMTT, and as a hybrid entity as a

result of being subject to the QDMTT, to

prevent the double-deduction outcome

discussed in part I.D.1 of this Explanation

of Provisions.

Alternatively, assume that DC owns

another disregarded entity (“FDEy”), that

is a tax resident in Country Y, a jurisdiction that imposes an IIR that is income

tax, and FDEy owns FDEx, which owns

CFCx, and that Country X does not impose

a QDMTT. In this case, a loss of FDEx

can reduce the GloBE Income of CFCx

for purposes of the Country Y IIR and, as

was the case with a Country X QDMTT

(that is also calculated in part by reference

to FDEx’s income), a double-deduction

outcome may result. The treatment of an

interest in FDEx as a separate unit should

not be affected if, instead of the QDMTT

being collected from FDEx with respect to

its GloBE Income, an IIR is collected on

FDEy, the owner of FDEx, with respect to

the GloBE Income of FDEx. Moreover,

a loss of FDEx cannot offset income of a

Country Y Constituent Entity for purposes

of the Country Y IIR and, therefore, the

FDEx separate unit should not be part of

a combined separate unit that includes

FDEy, which would otherwise distort the

calculation of income or loss attributable

to the combined Country Y separate unit.

In other words, specifically identifying

these separate units is necessary to apply

the separate unit combination rule, including for purposes of describing the location

of separate units arising from a QDMTT

or an IIR.

Accordingly, the proposed regulations

generally provide that if the income or

loss of a foreign entity that is not taxed

as an association for Federal income tax

purposes is taken into account in determining the amount of tax under an IIR,

then a domestic corporation’s directly or

In contrast, the anti-avoidance rule under proposed §1.1503(d)-1(f) is intended to backstop the dual consolidated loss rules, which apply to losses without regard to whether incurred for

a tax-avoidance purpose.

15

Bulletin No. 2024–35

545

August 26, 2024

indirectly held interest in such an entity

is a hybrid entity separate unit. See proposed §1.1503(d)-1(b)(4)(i)(B)(2). Further, such a hybrid entity separate unit

would form part of a combined separate

unit based on where the relevant entity is

located for purposes of the IIR. See proposed §1.1503(d)-1(b)(4)(ii)(A) and (b)

(4)(ii)(B)(2). Thus, in both variations of

the example in the preceding paragraph,

the interest in FDEx would, by reason of

the relevant foreign income tax, be treated

as a separate unit in Country X, which is

the country in which FDEx is located for

purposes of the QDMTT and IIR. Further,

because a double-deduction outcome may

also result from a place of business conducted by a domestic corporation outside

the United States that is treated as a Permanent Establishment with respect to a

QDMTT or an IIR, the proposed regulations would treat such a place of business

as a foreign branch separate unit. See proposed §1.1503(d)-1(b)(4)(i)(A)(2).

These new definitions of hybrid entity

separate unit and foreign branch separate unit do not apply to an interest in an

entity, or place of business, respectively,

that would otherwise qualify as a separate

unit under the definitions included in the

current regulations. This is because a loss

attributable to a separate unit as defined

under the current regulations is already

a dual consolidated loss and, thus, additional rules are not necessary to prevent

a double-deduction outcome from occurring as a result of the use of losses attributable to such separate units for purposes of

a QDMTT or IIR. For example, if a hybrid

entity’s loss is also taken into account in

determining the amount of tax under an

IIR, a foreign use may result if a dual

consolidated loss attributable to an interest in the entity is made available to offset

income either for purposes of the foreign

income tax to which the entity is subject

or for purposes of the IIR.

Under the proposed regulations, being

subject to an IIR would not cause an interest in a Tax Transparent Entity to be a

hybrid entity separate unit. See proposed

§1.1503(d)-1(b)(4)(i)(B)(2).

Although

a calculation of GloBE Income or Loss

is required for a Tax Transparent Entity,

for purposes of an IIR, all of the entity’s

Financial Accounting Net Income or Loss

is allocated to its owners (or to a permanent establishment of the entity) and, thus,

it is unlikely that a loss attributable to an

interest in such an entity could give rise

to a double-deduction outcome. This treatment is also consistent with the treatment,

and policy rationale, under the existing

dual consolidated loss rules that an interest in a partnership that is not a hybrid

entity is not a separate unit.

The Treasury Department and the IRS

are of the view that the treatment of a foreign entity or a place of business outside

the United States as a Stateless Constituent Entity should not preclude treating a

domestic corporation’s interest in such

an entity or the place of business as an

individual separate unit. Even though

the GloBE Income or Loss of a Stateless

Constituent Entity is not combined with

the GloBE Income or Loss of any other

Constituent Entity, treating an interest in

such an entity or a place of business as an

individual separate unit is appropriate to

prevent double-deduction outcomes that

may nevertheless arise (for example, if

the foreign entity were to generate a loss

during the first half of the taxable year and

then elect to be treated as a foreign corporation for U.S. tax purposes).

The income or loss of a domestic entity

may also be taken into account in determining the amount of tax imposed under

an IIR (for example, if a domestic corporation were wholly owned by a foreign

corporation organized under the laws of

a jurisdiction that imposed an IIR). However, the Treasury Department and the IRS

are of the view that the IIR alone should

not cause a domestic entity to be treated

as a dual resident corporation or a hybrid

entity. The dual consolidated loss rules

are intended to prevent double-deduction outcomes that can arise from structures involving the possibility of a form

of arbitrage, such as from an entity or

place of business being subject to tax in

more than one country, or from the entity

or place of business having different tax

classifications under U.S. and foreign tax

law. Absent this type of arbitrage, the dual

consolidated loss rules would not apply

to limit the deductibility of a domestic

entity’s loss due to that entity’s income

or loss being reflected in the amount

of tax imposed under an IIR (or a similar shareholder-level tax). Moreover, if a

loss of a domestic entity were viewed as

giving rise to a second deduction because

it is taken into account to determine the

amount of tax imposed under an IIR, the

loss is likely only available to offset dual

inclusion income (and therefore would not

give rise to a double-deduction outcome)

since the income of any domestic affiliate

that could be offset by the loss for domestic tax purposes should also be taken into

account in determining the amount of

tax imposed under the IIR. Accordingly,

under the proposed regulations a domestic entity is not treated as a dual resident

corporation or a hybrid entity solely as a

result of the domestic entity’s income or

loss being taken into account in determining the amount of an IIR. See proposed

§1.1503(d)-7(c)(3)(iii) for an example

illustrating the treatment of domestic

entities under an IIR. Applying the dual

consolidated loss rules only when there is

an element of hybridity (or mismatch) is

consistent with the scope of both the current dual consolidated loss regulations and

the OECD reports addressing hybrid and

branch mismatch arrangements.16

3. Application to Transitional CbCR Safe

Harbour

Comments requested guidance providing that, even if the dual consolidated

loss rules apply with respect to the GloBE

Model Rules, a foreign use should not

occur solely because a dual consolidated

loss is taken into account for purposes of

the Transitional CbCR Safe Harbour. The

comments noted that, unlike the QDMTT,

IIR, and UTPR, the Transitional CbCR

Safe Harbour is not a collection mechanism and thus does not operate to impose

a tax liability. Instead, according to some

comments, the Transitional CbCR Safe

Harbour can be viewed as a “gating”

mechanism to determine if a taxpayer

See, for example, OECD/G20, Neutralising the Effects of Hybrid Mismatch Arrangements, Action 2: 2015 Final Report (October 2015) (“Hybrid Mismatch Report”), Part I recommendations, paragraph 13 (“While cross-border mismatches arise in other contexts (such as the payment of deductible interest to a tax exempt entity), the only types of mismatches targeted by this

report are those that rely on a hybrid element to produce such outcomes.”).

16

August 26, 2024

546

Bulletin No. 2024–35

is subject to tax, similar to a determination of whether activity rises to the level

of a permanent establishment under an

applicable tax treaty. Further, comments

claimed that the calculation of income and

expenses under the Transitional CbCR

Safe Harbour is substantially different

from such calculations under the general GloBE Model Rules and generally

accepted accounting principles.

Because the Transitional CbCR Safe

Harbour is intended to serve as a simplified proxy for determining whether the

Tested Jurisdiction is likely to have an

ETR that is at or above the minimum rate,

the Treasury Department and the IRS are

of the view that a foreign use exception

for the Transitional CbCR Safe Harbour

is not appropriate where, in the absence

of the Transitional CbCR Safe Harbour,

a dual consolidated loss could be made

available to reduce the amount of income

subject to a Top-up Tax. In other words,

the use of a loss or expense to qualify for

the Transitional CbCR Safe Harbour, and

thereby avoid tax that may otherwise be

imposed under the GloBE Model Rules

absent the application of the Transitional

CbCR Safe Harbour, has the same double-deduction outcome effect as if the loss

or expense were made available to directly

reduce the tax. As a result, a foreign use

may occur with respect to the application

of the Transitional CbCR Safe Harbour.

See proposed §1.1503(d)-7(c)(3)(ii) for

an example illustrating that duplicate loss

arrangement rules may prevent such a foreign use.

Finally, one comment requested guidance that jurisdictional blending in a

Tested Jurisdiction under the GloBE

Model Rules does not constitute a foreign

use of a dual consolidated loss if the Transitional CbCR Safe Harbour is satisfied

in that Tested Jurisdiction after the application of the duplicate loss arrangement

rules. This concern could arise because

satisfying the Transitional CbCR Safe

Harbour in a Tested Jurisdiction technically does not preclude the application of

the GloBE Model Rules (and, thus, technically would not preclude a foreign use

that could occur under the “made available” standard), but rather only deems the

17

Jurisdictional Top-up Tax in the Tested

Jurisdiction to be zero. Consistent with

the guidance requested in this comment,

the proposed regulations provide a limited foreign use exception under which

there is deemed to be no foreign use with

respect to the GloBE Model Rules where

the Transitional CbCR Safe Harbour is

satisfied and no foreign use occurs with

respect to the Transitional CbCR Safe

Harbour due to the application of the

duplicate loss arrangement rules. See proposed §1.1503(d)-3(c)(9). For the avoidance of doubt, however, this foreign use

exception does not preclude a foreign

use from occurring if the duplicate loss

arrangement rules do not apply and a dual

consolidated loss is taken into account

in determining whether the Transitional

CbCR Safe Harbour is satisfied.

4. Mirror Legislation

As discussed in part IV.C. of the Background section of this preamble, the

December 2023 Administrative Guidance

contains rules that disallow expenses for

purposes of qualifying for the Transitional

CbCR Safe Harbour if there is a duplicate loss arrangement. An arrangement

qualifies as a duplicate loss arrangement,

in relevant part, if an expense or loss in

the financial statements of a Constituent Entity also gives rise to a duplicate

amount that is deductible in determining

the taxable income of another Constituent Entity in another jurisdiction. Comments requested guidance as to whether

the duplicate loss arrangement rules in the

December 2023 Administrative Guidance

constitute mirror legislation (within the

meaning of §1.1503(d)-3(e)(1)).

As discussed in part I.D of the Background section of this preamble, the taxpayer’s ability to choose the jurisdiction

in which a dual consolidated loss is used

is a long-standing feature of the dual consolidated loss rules. The mirror legislation rule was issued to address situations

where foreign legislation undermines

the taxpayer’s ability to choose by denying any opportunity for a foreign use of

a particular dual consolidated loss and

thereby compelling the taxpayer to make

a domestic use election. However, not all

forms of foreign law that deny the foreign

use of deductions composing a dual consolidated loss are mirror legislation. See

§1.1503(d)-7(c)(18)(iii) for an example

illustrating that a foreign law similar to the

dual consolidated loss rules is not mirror

legislation because it permits the loss to

be used in that jurisdiction if the loss is not

used in another jurisdiction.

The Treasury Department and the IRS

are of the view that a taxpayer’s ability

to choose whether to put a dual consolidated loss to a domestic use or a foreign

use can be preserved even if the foreign

law does not explicitly provide an election to use the loss (like the dual consolidated loss rules) and instead only denies

a loss to avoid a double-deduction outcome. The duplicate loss arrangement

rules in the December 2023 Administrative Guidance preserve such a choice and

thus do not constitute mirror legislation

because a dual consolidated loss could be

put to a foreign use for purposes of the

Transitional CbCR Safe Harbour. That is,

if no domestic use election is made with

respect to a dual consolidated loss, then

the loss is subject to the domestic use

limitation, and the duplicate loss arrangement rules should not apply because the

loss would not be deductible for purposes of determining the taxable income

of another Constituent Entity in another

jurisdiction. If, on the other hand, a

domestic use election is made for a dual

consolidated loss, then the loss would be

put to a domestic use and the duplicate

loss arrangement rules should prevent

the expense or loss from being taken into

account for purposes of the Transitional

CbCR Safe Harbour (that is, they should

prevent a foreign use). Thus, through its

ability to make or forgo a domestic use

election, a taxpayer retains the choice to

put a dual consolidated loss to a domestic use or a foreign use (but not both).

For the same reason, the double-deduction rules included in the OECD report

addressing hybrid and branch mismatch

arrangements,17 which similarly deny the

foreign use of a dual consolidated loss

to the extent it is deductible in another

jurisdiction, do not constitute mirror

See the Hybrid Mismatch Report; OECD/G20, Neutralising the Effects of Branch Mismatch Arrangements, Action 2: Inclusive Framework on BEPS (July 2017).

Bulletin No. 2024–35

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August 26, 2024

legislation.18 Accordingly, the proposed

regulations clarify that foreign law that

preserves a taxpayer’s choice to put a

dual consolidated loss to a domestic use

or a foreign use (but not both) does not

constitute mirror legislation, even if there

are specific instances where the foreign

law denies the foreign use of a deduction or expense to the extent necessary

to prevent a double-deduction outcome.

See proposed §1.1503(d)-7(c)(18)(iv) for

an example illustrating a foreign law that

provides such a choice.

5. Transition Rules

As discussed in part IV.B of the Background section of this preamble, Notice

2023-80 announced that future regulations would be promulgated concerning

legacy DCLs (that is, certain dual consolidated losses incurred before any legislation enacting the GloBE Model Rules is

effective).

Several comments requested that the

foreign use exception described in Notice

2023-80 be extended to include dual consolidated losses incurred in taxable years

beginning after December 31, 2023 (for

example, for taxable years ending on or

before December 31, 2024, or taxable

years beginning in the year that final regulations concerning the applicability of the

dual consolidated loss rules with respect

to the QDMTT and IIR are issued). Comments asserted that the extension of the

foreign use exception is warranted to provide certainty and to take into account further developments from the OECD, such

as the possible future application of the

duplicate loss arrangement rules outside

the context of the Transitional CbCR Safe

Harbour.

The Treasury Department and the IRS

are of the view that it is appropriate to

extend, for a limited period, relief from

the application of the dual consolidated

loss rules with respect to the GloBE

Model Rules. This would provide tax-

payers more certainty, allow for further

consideration of these proposed regulations and comments that may be submitted, and allow for consideration of

any future developments at the OECD.

Extending the relief only for a limited

period is intended to minimize the double-deduction outcomes that may result.

Accordingly, and subject to an antiabuse rule, these proposed regulations

provide that the dual consolidated loss

rules apply without taking into account

QDMTTs or Top-up Taxes with respect

to losses incurred in taxable years beginning before August 6, 2024. See proposed

§1.1503(d)-8(b)(12).

In addition to not being limited to legacy DCLs, this transition relief differs

from the relief provided in Notice 202380 in that it applies beyond foreign use,

applying with respect to all the dual consolidated loss rules (including foreign

use). This broader relief is intended, in

part, to relieve the administrative burden

of having to file a domestic use election

and annual certifications for dual consolidated losses that would otherwise qualify

for the foreign use exception described

in Notice 2023-80 (or for the additional

relief provided under the proposed regulations). Further, this would prevent a loss

from being subject to recapture as a result

of a triggering event other than a foreign

use, such as the failure to file an annual

certification.

6. Interaction with Anti-hybrid Rules

As noted in part IV.B of the Background section of this preamble, the Treasury Department and the IRS are studying

the interaction of the GloBE Model Rules

with the rules under sections 245A(e)

and 267A and request comments in this

regard. For example, the Treasury Department and the IRS are considering whether

a foreign country’s traditional income tax

and a Top-up Tax with respect to the operations in the foreign country should be

viewed as part of the same “tax laws” of

the country for purposes of section 267A.

E. Applicability dates

Proposed §1.1502-13(j)(10), relating

to the interaction of the dual consolidated

loss rules with the intercompany transaction regulations, is proposed to apply

to taxable years for which the original

Federal income tax return is due (without

extensions) after the date that final regulations are published in the Federal Register. See proposed §1.1502-13(l)(11).

However, taxpayers may apply proposed

§1.1502-13(j)(10), once published in the

Federal Register as final regulations, to

an earlier taxable year that remains open,

provided that the taxpayer and all members of its consolidated group apply the

regulations consistently in that taxable

year and each subsequent taxable year.

See id.

The parenthetical in proposed

§1.1503(d)-1(c)(1)(ii), clarifying that a

specified foreign tax resident that is a disregarded entity can be related to a domestic consenting corporation for purposes

of §1.1503(d)-1(c)(1)(ii), is proposed to

apply to determinations relating to taxable

years ending on or after August 6, 2024.

See proposed §1.1503(d)-8(b)(6).

Proposed §1.1503(d)-5(b)(2)(iv) and

(c)(4)(iv), relating to the attribution of

items arising from ownership of stock, are

proposed to apply to taxable years ending

on or after August 6, 2024. See proposed

§1.1503(d)-8(b)(9).

The fourth and fifth sentences of proposed §1.1503(d)-5(c)(3)(i), relating to

the adjustments to conform to U.S. tax

principles, are proposed to apply to taxable years ending on or after August 6,

2024. See proposed §1.1503(d)-8(b)(10).

As noted in part I.B.2 of this Explanation

of Provisions, the proposed addition of

these two sentences is intended merely

to clarify the existing regulation for the

avoidance of any doubt. The IRS may

See, for example, New Zealand’s Tax Information Bulletin, Vol. 31 No. 3 April 2019 at p. 50, which discusses New Zealand’s deduction disallowance rules that are based on the double-deduction rules in the Hybrid Mismatch Report. In discussing the interaction of the New Zealand rules with the dual consolidated loss rules, the Bulletin provides:

18

Expenditure incurred by a US taxpayer, or a New Zealand hybrid entity which is deductible by a US owner, will not be subject to [New Zealand’s deduction disallowance rules] so long

as the US taxpayer is subject to the [dual consolidated loss] rules and has not made a domestic use election. If the US taxpayer has made a domestic use election, then [the New Zealand

deduction disallowance rules] will apply to deny a deduction for the expenditure. That is because the domestic use election is an election that the [dual consolidated loss] rules do not

apply to the US taxpayer in respect of the relevant expenditure.



August 26, 2024

548

Bulletin No. 2024–35

challenge contrary positions for taxable

years ending before August 6, 2024 under

the rules applicable to such taxable years.

Proposed §1.1503(d)-8(b)(12), relating

to the application of the dual consolidated

loss rules without regard to QDMTTs

or Top-up Taxes, applies with respect to

losses incurred in taxable years beginning

before August 6, 2024.

Proposed §1.1503(d)-3(c)(9), relating

to the foreign use exception for qualification for the Transitional CbCR Safe Harbour, is proposed to apply to taxable years

beginning on or after August 6, 2024. See

proposed §1.1503(d)-8(b)(13).

Proposed

§§1.1503(d)-1(b)(4)(i)

(A)(2), 1.1503(d)-1(b)(4)(i)(B)(2), and

1.1503(d)-1(b)(4)(ii)(B)(2), relating to

separate units arising as a result of a

QDMTT or IIR, apply to taxable years

beginning on or after August 6, 2024. See

proposed §1.1503(d)-8(b)(14).

Proposed §1.1503(d)-1(f), relating to an

anti-avoidance rule, is proposed to apply

to taxable years ending on or after August

6, 2024. See proposed §1.1503(d)-8(b)

(15).

Proposed §1.1503(d)-1(b)(6)(ii), relating to minimum taxes and taxes based on

financial accounting principles, is proposed to apply to taxable years ending

on or after August 6, 2024. See proposed

§1.1503(d)-8(b)(16).

A taxpayer may rely on these proposed

regulations for any taxable year ending

on or after August 6, 2024 and beginning on or before the date that regulations

finalizing these proposed regulations are

published in the Federal Register, provided that the taxpayer and all members

of its consolidated group apply the proposed regulations in their entirety and in

a consistent manner for all taxable years

beginning with the first taxable year of

reliance until the applicability date of

those final regulations. In addition, a taxpayer may rely on the foreign use exception described in Notice 2023-80 for any

taxable year ending on or after December

11, 2023 and before August 6, 2024, provided that the taxpayer and all members

of its consolidated group apply those rules

in their entirety and in a consistent manner for all taxable years beginning with

the first taxable year of reliance until the

applicability date of the final regulations

on this topic.

Bulletin No. 2024–35

II. Rules Regarding Disregarded Payment

Losses

A. Overview

The preamble to the 2018 proposed

regulations describes structures involving

payments from foreign disregarded entities to their domestic corporate owners

that are regarded for foreign tax purposes

but disregarded for U.S. tax purposes. For

foreign tax purposes, the payments give

rise to a deduction or loss that, for example, can be surrendered (or otherwise used,

such as through a consolidation regime)

to offset non-dual inclusion income. The

preamble notes that these structures are

not addressed under the current section

1503(d) regulations but give rise to significant policy concerns that are similar

to those arising under sections 245A(e),

267A, and 1503(d). In addition, the preamble states that the Treasury Department

and the IRS are studying these transactions and request comments.

In response to this request, a comment

agreed that these structures can produce

a deduction/no-inclusion (“D/NI”) outcome. In a similar context, the comment

asserted that arriving at the correct result

would generally require, for U.S. tax purposes, disaggregating a disregarded payment into a regarded item of deduction

and a regarded item of income, and taking such items into account for purposes

of the dual consolidated loss rules to the

extent reflected on the books and records

of the entity. However, the comment did

not recommend this approach due to complexity, noting, for example, that it would

require tracking of transactions between a

foreign disregarded entity and its domestic corporate owner, as well as determining the character and source of items that

would not otherwise exist for U.S. tax purposes. To mitigate certain D/NI outcomes,

the comment recommended an alternative

approach, which would track disregarded

items only so as to offset regarded items,

and thus not so as to create items of income

and deduction. The comment conceded,

however, that this approach would not

address the paradigm structure involving

only disregarded deductions that give rise

to D/NI outcomes and therefore would not

address the policy concerns. The comment

queried whether it might be better for the

549

dual consolidated loss rules not to apply,

with the expectation that the foreign jurisdiction could, in some cases, eliminate D/

NI outcomes by denying the foreign tax

deduction.

The Treasury Department and the IRS

are of the view that treating items otherwise disregarded for U.S. tax purposes

as regarded could give rise to considerable complexity, and that the alternative

approach recommended by the comment

would not address the paradigm structure, and therefore would not sufficiently

address the policy concerns underlying

these structures. Accordingly, neither of

these approaches is adopted. However,

the Treasury Department and the IRS

are not of the view that these structures

should be addressed only to the extent of

applicable foreign tax rules addressing D/

NI outcomes; in the absence of a foreign

tax rule denying a foreign tax deduction,

these structures would continue to give

rise to the significant policy concerns

noted above. In addition, the OECD/G20

recommends defensive rules that require

income inclusions to neutralize D/NI

outcomes. See, for example, Hybrid Mismatch Report Recommendations 1.1(b)

and 3.1(b).

Accordingly, the proposed regulations address these structures through

the entity classification rules under section 7701 and the dual consolidated loss

rules under section 1503(d), in a manner that is consistent with the “domestic

consenting corporation” approach under

§§301.7701-3(c)(3) and 1.1503(d)-1(c)

addressing domestic reverse hybrids.

Under this approach, when certain eligible entities (“specified eligible entities”) are treated as disregarded entities

for U.S. tax purposes, a domestic corporation that acquires, or on the effective

date of the election directly or indirectly

owns, interests in such a specified eligible entity consents to be subject to the

rules of proposed §1.1503(d)-1(d). See

proposed §301.7701-3(c)(4)(i).

Pursuant to these rules (the “disregarded payment loss” rules), and as further

discussed in part II.B. of this Explanation

of Provisions, the domestic corporation

agrees that it will monitor a net loss of

the entity under a foreign tax law that is

composed of certain payments that are

disregarded for U.S. tax purposes and,

August 26, 2024

if a D/NI outcome occurs as to the loss,

include in gross income an amount equal

to the loss. See proposed §1.1503(d)-1(d)

(1). The Treasury Department and the IRS

are of the view that the domestic corporation’s inclusion of the amount in gross

income generally neutralizes the D/NI

outcome, and places the parties in approximately the same position in which they

would have been had the specified eligible

entity not been permitted to be classified

as a disregarded entity. In addition, the

Treasury Department and the IRS are of

the view that this approach is more administrable than alternative approaches, such

as disaggregating each disregarded payment into a regarded item of deduction

and income, or, upon a D/NI outcome as

to the loss, terminating the specified eligible entity’s classification retroactive to

the taxable year in which the loss was

incurred. These alternative approaches

would have the same effect of giving rise

to an item of income to the domestic corporation because the payment would be

regarded.

The proposed regulations also include

a deemed consent rule pursuant to which,

beginning on the date that is twelve

months after the date that the disregarded payment loss rules are applicable, a domestic corporation that directly

or indirectly owns interests in a specified eligible entity is deemed to consent

to be subject to the rules, to the extent

it has not otherwise so consented. See

proposed §301.7701-3(c)(4)(iii) and (vi).

This default rule is intended to reflect the

result that taxpayers would be expected

to favor (for example, to avoid the various income inclusion rules that would

typically apply upon the conversion of

a hybrid entity to a foreign corporation).

However, the deemed consent can be

avoided if the specified eligible entity

elects to be treated as an association.19 See

proposed §301.7701-3(c)(4)(iv). Further,

the twelve-month delay for deemed consent provides an opportunity to restructure existing arrangements to avoid the

application of the disregarded payment

loss rules without changing the classification of a specified eligible entity.

B. Consequences of consent

1. In General

When a domestic corporation consents to be subject to the disregarded

payment loss rules, the domestic corporation agrees that if the specified eligible

entity (described below) incurs a disregarded payment loss during a certification period (discussed in section II.B.3

of this Explanation of Provisions) and

a triggering event occurs with respect

to that loss, then the domestic corporation will include in gross income the

DPL inclusion amount. See proposed

§1.1503(d)-1(d)(1)(i). These rules also

apply to a disregarded payment loss of a

foreign branch of the domestic corporation because disregarded payments from

the domestic corporation to the specified

eligible entity may, under the branch’s

tax law, be attributable to, and deductible

by, the branch and thus could produce a

D/NI outcome (for example, if the branch

surrendered the loss to a foreign corporation). See id.

In general, a specified eligible entity

is an entity that, when classified as a

disregarded entity, could pay or receive

amounts that could give rise to a D/NI

outcome by reason of being disregarded

for U.S. tax purposes but deductible for

foreign tax purposes. Thus, a specified

eligible entity includes an eligible entity

(regardless of whether domestic or foreign) that is a foreign tax resident (which,

in the case of a domestic eligible entity,

may occur, for example, if the entity

is managed and controlled in a foreign

country), because amounts paid by such

an entity may be disregarded for U.S. tax

purposes but deductible for foreign tax

purposes. See proposed §301.7701-3(c)

(4)(i).

2. Disregarded Payment Loss

Computation

A disregarded payment loss with

respect to a specified eligible entity or a

foreign branch (in either case, a “disregarded payment entity,” and the domestic

corporation that consents to be subject to

the disregarded payment loss rules, the

“specified domestic owner” of the disregarded payment entity) is computed for

each foreign taxable year of the entity.

See proposed §1.1503(d)-1(d)(6)(ii).

The disregarded payment loss generally

measures the entity’s net loss, if any, for

foreign tax purposes that is composed of

certain payments that are disregarded for

U.S. tax purposes as transactions between

the disregarded payment entity and its

tax owner (for example, a payment by

the disregarded payment entity to the

specified domestic owner or to another

disregarded payment entity of the specified domestic owner). See id. That is, it

generally measures the entity’s net loss

that, but for the disregarded payment loss

rules, could produce a D/NI outcome. For

example, if for a foreign taxable year a

disregarded payment entity’s only items

are a $100x interest deduction and $70x

of royalty income, and if each item were

disregarded for U.S. tax purposes as a

payment between a disregarded entity

and its tax owner (but taken into account

under foreign law), then the entity would

have a $30x disregarded payment loss for

the taxable year.

In general, the items of deduction

taken into account for purposes of computing a disregarded payment loss include

any item that is deductible under the relevant foreign tax law, is disregarded for

U.S. tax purposes and, if regarded for

U.S. tax purposes, would be interest, a

structured payment, or a royalty within

the meaning of §1.267A-5(a)(12), (b)(5)

(ii), or (a)(16), respectively. See proposed

§1.1503(d)-1(d)(6)(ii)(C). Similar rules

apply for determining items of income that

offset the items of income for purposes of

determining a disregarded payment loss.

See proposed §1.1503(d)-1(d)(6)(ii)(D).

The Treasury Department and the IRS are

of the view that defining a duplicated payment loss in this manner tailors the application of the rules to arrangements that

are likely structured to produce a D/NI

outcome. Moreover, this approach is consistent with the scope of section 267A. In

addition, only items generated or incurred

The deemed consent rule could also be avoided by restructuring such that the rule would not apply, for example, by contributing the interests in the specified eligible entity to a foreign

corporation or by converting the entity into a partnership.

19

August 26, 2024

550

Bulletin No. 2024–35

during a period in which an interest in the

disregarded payment entity is a separate

unit are taken into account. See proposed

§1.1503(d)-1(d)(6)(ii). In other words,

items generally are taken into account

only to the extent they would be subject

to the dual consolidated loss rules but for

the items being disregarded for U.S. tax

purposes. Thus, for example, if a domestic

corporation becomes a dual resident corporation as a result of changing its place

of management, disregarded payments

made to or from a domestic disregarded

entity held by the domestic corporation

are not taken into account in computing

a disregarded payment loss to the extent

such payments gave rise to a deduction

under the relevant foreign law before the

domestic corporation was a dual resident

corporation subject to the dual consolidated loss rules.

The rules for computing a disregarded

payment loss therefore differ in certain

respects from comparable rules applicable

for purposes of computing a dual consolidated loss. For example, the latter rules do

not take into account the deductibility of

an item under a foreign tax law and are not

limited to interest, structured payments, or

royalties. See §1.1503(d)-5(b) through (d).

3. Triggering Events

In general, the specified domestic

owner must include in gross income the

DPL inclusion amount with respect to a

disregarded payment loss if either of two

triggering events occurs with respect to

the loss during a certification period (the

“DPL certification period”). See proposed

§1.1503(d)-1(d)(2)(i). The DPL certification period includes the foreign taxable

year in which the disregarded payment

loss is incurred, any prior foreign taxable

year, and the subsequent 60-month period.

See proposed §1.1503(d)-1(d)(6)(iii); but

see proposed 1.1503(d)-1(d)(7)(iii) (terminating the certification period upon a

sale of the disregarded payment entity).

This proposed definition is consistent with

the certification period under the dual

consolidated loss rules, which is revised

to include at least the 60-month period

following the year in which the dual consolidated loss is incurred, as well as all

taxable years (unlike the disregarded payment loss rules, as determined under U.S.

tax law) before the taxable year in which

a dual consolidated loss is incurred. See

proposed §1.1503(d)-1(b)(20).

The two triggering events are based on

certain principles of the dual consolidated

loss rules. See proposed §1.1503(d)-1(d)

(3). The first triggering event addresses

likely D/NI outcomes – that is, a foreign

use of the disregarded payment loss (determined by taking into account the exceptions described in §1.1503(d)-3(c)).20

See proposed §1.1503(d)-1(d)(3)(i).

However, for purposes of determining

whether a foreign use occurs (and unlike

the approach under the dual consolidated

loss rules), only persons that are related

to the specified domestic owner are taken

into account. See id. This limitation is

intended to minimize triggering events

resulting from transactions that are not tax

motivated, such as a foreign use resulting

from the sale of a disregarded payment

entity to an unrelated person, yet still deter

arrangements structured to produce D/NI

outcomes that typically involve related

parties. Thus, for example, a foreign use

triggering event occurs if, under a foreign

tax law, a deduction taken into account in

computing the disregarded payment loss

is made available (including by reason of

a foreign consolidation regime or similar

regime, or a sale, merger, or similar transaction) to offset an item of income that, for

U.S. tax purposes, is an item of a foreign

corporation, but only if that foreign corporation is related to the specified domestic

owner of the disregarded payment entity.

The second triggering event is a failure

by the specified domestic owner to comply with certification requirements. See

proposed §1.1503(d)-1(d)(3)(ii). In general, the specified domestic owner must,

for the foreign taxable year in which a

disregarded payment loss is incurred, and

for each subsequent taxable year within

the DPL certification period, file a statement providing information about the

disregarded payment loss of such entity

and certifying that a foreign use of the disregarded payment loss has not occurred.

See proposed §1.1503(d)-1(d)(4). Relief is

available for a failure to properly comply

with the certification requirements. See

proposed §1.1503(d)-1(e).

For simplicity purposes, the proposed

regulations include fewer triggering events

than the dual consolidated loss rules. For

example, the disregarded payment loss

triggering events do not include specific

triggering events related to the transfer

of assets of, or interests in, a disregarded

payment entity. Nevertheless, the scope of

the disregarded payment loss triggering

events is, in general, consistent with that

of the dual consolidated loss triggering

events because a foreign use triggering

event typically occurs, or will occur, in

connection with other dual consolidated

loss triggering events that are not rebutted.

For example, the transfer of all the interests in a disregarded entity by its domestic

owner to a related and wholly owned foreign corporation would constitute a triggering event described in §1.1503(d)-6(e)

(1)(v) (transfer of 50 percent or more of an

interest in a separate unit). However, such

a transfer would also typically give rise to

a foreign use triggering event described

in §1.1503(d)-6(e)(1)(i) because a portion

of a deduction or loss taken into account

in computing the dual consolidated loss

would generally carry over under foreign law following the transfer and thus

be made available to offset or reduce an

item that is recognized as income or gain

under foreign law and that is, or would

be, considered under U.S. tax principles

to be an item of a foreign corporation.

See §1.1503(d)-3(a)(1). Many of these

non-foreign use dual consolidated loss

triggering events are intended to heighten

awareness that certain transactions or

events are likely to give rise to a foreign

use, which results in a double-deduction

outcome, and therefore serve to increase

compliance with the rules. Because D/

NI outcomes from disregarded payment

losses involve only related parties and

typically are highly-structured, however,

Because an expense resulting from an Intragroup Financing Arrangement is generally excluded from the calculation of a Low-Tax Entity’s GloBE Income or loss if there is no commensurate

increase in the taxable income of the High-Tax Counterparty, a disregarded payment loss (that is, a payment that generally does not increase U.S. taxable income) should generally not be

put to a foreign use as a result of jurisdictional blending under the GloBE Model Rules.

20

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551

August 26, 2024

the Treasury Department and the IRS are

of the view that the foreign use and certification triggering events are sufficient for

purposes of the disregarded payment loss

rules.

the entire $100x of the disregarded payment loss).

4. DPL Inclusion Amount

Similar to the dual consolidated loss

rules, the proposed regulations include

a rule pursuant to which disregarded

payment entities for which the relevant

foreign tax law is the same (“individual

disregarded payment entities”) are generally combined and treated as a single

disregarded payment entity (“combined

disregarded payment entity”) for purposes

of the disregarded payment loss rules. See

proposed §1.1503(d)-1(d)(7)(i); see also

§1.1503(d)-1(b)(4)(ii) (combined separate

unit rule for dual consolidated loss purposes). Accordingly, for a foreign taxable

year, only a single amount of disregarded

payment income or a single disregarded

payment loss exists with respect to the

combined disregarded payment entity.

This amount is computed by first determining the disregarded payment income

or loss with respect to each of the individual disregarded payment entities and then

aggregating such amounts.

This combination rule is intended to

prevent the application of the disregarded

payment loss rules to cases in which,

taking into account the overall effect of

disregarded payments under a foreign

tax law, there is not an opportunity for a

disregarded payment loss of an individual

disregarded payment entity to produce a

D/NI outcome. For example, assume USP,

a domestic corporation, wholly owns

DE1X, which wholly owns DE2X, and

each of DE1X and DE2X is a disregarded

payment entity tax resident in Country X.

Further assume that, computed on a separate basis during a foreign taxable year,

DE1X has a $100x disregarded payment

loss (consisting solely of a $100x payment

by DE1X to DE2X), and DE2X has $100x

of disregarded payment income (consisting solely of the $100x payment received

by DE2X from DE1X). Absent the combination rule, the specified domestic owner

of DE1X would be required to monitor

DE1X’s disregarded payment loss and

annually certify that no foreign use has

occurred with respect to the loss. However, taking into account the overall effect

of the payment under Country X law, there

In general, the DPL inclusion amount

is, with respect to a disregarded payment

loss as to which a triggering event occurs

during the DPL certification period, the

amount of the disregarded payment loss.

See proposed §1.1503(d)-1(d)(2)(i). For

U.S. tax purposes, the DPL inclusion

amount is treated as ordinary income and

characterized in the same manner as if the

amount were interest or royalty income

paid by a foreign corporation. See proposed §1.1503(d)-1(d)(2)(ii).

In certain cases, the DPL inclusion

amount is reduced by the positive balance,

if any, of the “DPL cumulative register”

with respect to the disregarded payment

entity. See proposed §1.1503(d)-1(d)(5)

(i). The DPL cumulative register is similar to the cumulative register for dual

consolidated loss purposes, and generally reflects each disregarded payment

loss or amount of “disregarded payment

income” of a disregarded payment entity.

See §1.1503(d)-1(d)(5)(ii). Disregarded

payment income is computed in a manner

similar to that of computing a disregarded

payment loss, and measures a disregarded

payment entity’s net income, if any, for a

foreign taxable year that is composed of

certain disregarded payments attributable

to interest, structured payments, or royalties. See proposed §1.1503(d)-1(d)(6)

(ii). Taking into account whether there is

sufficient cumulative register to absorb a

disregarded payment loss is intended to

ensure that the DPL inclusion amount represents only the portion of the disregarded

payment loss that is available to be put to

a foreign use under the foreign tax law.

For example, if a disregarded payment

entity incurs a $100x disregarded payment loss in year 1 and has $80x of disregarded payment income in year 2, only

$20x of the disregarded payment loss is

likely available under the foreign tax law

to be put to a foreign use. As such, if a

triggering event occurs at the end of year

2, then the specified domestic owner must

include in gross income $20x (rather than

August 26, 2024

5. Disregarded Payment Entity

Combination Rule

552

is likely to be no net loss attributable to

the payment and, as a result, there likely is

not an opportunity for the payment to give

rise to a D/NI outcome. The combination

rule thus limits the application of the disregarded payment loss rules to cases in

which it is likely that disregarded payments could give rise to a D/NI outcome.

6. Application to Dual Resident

Corporations

The proposed regulations include special rules pursuant to which the disregarded

payment loss rules also apply to dual resident corporations, because a disregarded

payment by a dual resident corporation to

its disregarded entity could also give rise

to a D/NI outcome (for example, if the dual

resident corporation surrenders the loss to

a foreign corporation). Thus, pursuant to

the consent rules described in part II.A of

this Explanation of Provisions, a dual resident corporation that directly or indirectly

owns interests in an eligible entity that is

classified as a disregarded entity agrees, for

purposes of the disregarded payment loss

rules, to be treated as a disregarded payment entity and as a specified owner of such

disregarded payment entity. See proposed

§§1.1503(d)-1(d)(1)(ii) and 301.7701-3(c)

(4)(ii).

C. Interaction with dual consolidated loss

rules

Although the disregarded payment loss

rules address similar policy concerns as,

and rely on certain aspects of, the existing

dual consolidated loss rules, the Treasury

Department and the IRS are of the view

that integrating the two regimes would

result in considerable complexity and

administrative burden. For example, integrating the regimes could require rules

pursuant to which a disregarded payment

entity’s deduction under a foreign tax law

for a disregarded payment is considered to

in part offset the entity’s items of regarded

income (which would have the effect of

increasing a dual consolidated loss, relative to not taking into account the payment for purposes of the dual consolidated

loss rules) and to in part offset the entity’s items of income that are disregarded

for U.S. tax purposes (which would have

the effect of decreasing a disregarded

Bulletin No. 2024–35

payment loss, relative to only taking into

account the payment for purposes of the

disregarded payment loss rules).

The disregarded payment loss rules

therefore operate independently of the

dual consolidated loss rules. Thus, for

example, only items that are regarded for

U.S. tax purposes are taken into account

in computing a dual consolidated loss (or

cumulative register), and only items that

are disregarded for U.S. tax purposes are

taken into account in computing a disregarded payment loss (or DPL cumulative

register). In addition, a disregarded payment entity may have both a dual consolidated loss and a disregarded payment

loss for the same taxable year, and both

of these items could be triggered by a single event (such as a foreign use pursuant

to a foreign loss surrender regime); in

contrast, a foreign use could be avoided

both for a dual consolidated loss and disregarded payment loss of the same disregarded payment entity if, for example, an

election is required to enable a foreign use

and no such election is made.

As discussed in part I.B of the Background section of this preamble, the

dual consolidated loss rules do not take

into account disregarded transactions

(that typically are regarded for foreign

tax purposes) for purposes of attributing

items to a separate unit or an interest in

a transparent entity. This approach, which

minimizes the need for additional complex rules, can result in both the over- and

under-application of the dual consolidated

loss rules as compared to more precise

rules that would take into account such

items to the extent necessary to neutralize double-deduction outcomes. Thus,

the decision to ignore disregarded transactions in the dual consolidated loss rules

for this purpose reflects a balance of policy and administrability. In other contexts,

various policy objectives have required

giving effect to certain disregarded transactions. See, for example, §1.904-4(f)(2)

(vi) (attributing gross income to a foreign

branch) and §1.951A-2(c)(7)(ii)(B)(2)

(determining gross income for purposes

of applying the high-tax exception). The

Treasury Department and the IRS are of

the view that, in light of the policies underlying the enactment of sections 245A(e),

267A, and 1503(d), the disregarded payment loss rules are another case where it

Bulletin No. 2024–35

is necessary to take into account disregarded transactions; the absence of such

rules would otherwise permit taxpayers to

continue to implement structures involving such payments to obtain D/NI outcomes. The Treasury Department and the

IRS will continue to study the treatment of

disregarded items for purposes of the dual

consolidated loss rules, including whether

it may be appropriate to take into account

items of disregarded income, gain, deduction or loss in other cases.

D. Applicability date

The proposed rules relating to consent

to be subject to the disregarded payment

loss rules are proposed to apply to entity

classification elections filed on or after

August 6, 2024 (regardless of whether

the election is effective before August

6, 2024). See proposed §301.7701-3(c)

(4)(vi)(A). The proposed rule relating to

deemed consent is proposed to apply on

or after August 6, 2025. See proposed

§301.7701-3(c)(4)(vi)(B). The proposed

rules relating to disregarded payment

losses are proposed to apply to taxable

years ending on or after August 6, 2024.

See proposed §1.1503(d)-8(b)(11).

Conforming Amendments to Other

Regulations

The Treasury Department and the IRS

intend to make conforming amendments

to the regulations under section 1503(d),

including with respect to examples, upon

finalization of the proposed regulations.

Special Analyses

I. Regulatory Planning and Review

Pursuant to the Memorandum of

Agreement, Review of Treasury Regulations under Executive Order 12866 (June

9, 2023), tax regulatory actions issued by

the IRS are not subject to the requirements

of section 6 of Executive Order 12866, as

amended. Therefore, a regulatory impact

assessment is not required.

II. Paperwork Reduction Act

The Paperwork Reduction Act of 1995

(44 U.S.C. 3501-3520) (“PRA”) requires

553

that a Federal agency obtain the approval

of the OMB before collecting information

from the public, whether such collection

of information is mandatory, voluntary,

or required to obtain or retain a benefit.

Section 1.1503(d)-1(d)(4) of these proposed regulations requires the collection

of information.

As discussed in part II.B of this Explanation of Provisions, the proposed regulations require certain taxpayers to certify that no foreign use has occurred with

respect to a disregarded payment loss. The

IRS will use this information to determine

the extent to which these taxpayers need

to recognize income under the proposed

regulations.

The reporting burden associated with

this collection of information will be

reflected in the PRA submissions associated with Form 1120 (OMB control number 1545-0123). The Treasury Department

and the IRS do not have readily available

data to determine the number of taxpayers

affected by this collection of information

because no reporting module currently

identifies these types of disregarded payments. The Treasury Department and the

IRS request comments on all aspects of

information collection burdens related to

the proposed regulations, including ways

for the IRS to minimize the paperwork

burden.

III. Regulatory Flexibility Act

When an agency issues a rulemaking

proposal, the Regulatory Flexibility Act

(5 U.S.C. chapter 6) (“RFA”) requires the

agency to prepare and make available for

public comment an initial regulatory flexibility analysis that will describe the impact

of the proposed rule on small entities. See

5 U.S.C. 603(a). Section 605 of the RFA

provides an exception to this requirement

if the agency certifies that the proposed

rulemaking will not have a significant

economic impact on a substantial number

of small entities. A small entity is defined

as a small business, small nonprofit organization, or small governmental jurisdiction. See 5 U.S.C. 601(3) through (6).

The Treasury Department and the IRS

do not expect that the proposed dual consolidated loss regulations described in

parts I.A, I.B, and I.C of the Explanation

of Provisions will have a significant eco-

August 26, 2024

nomic impact on a substantial number of

small entities because those regulations

refine computations under the current

dual consolidated loss regulations without changing the economic impact of the

current regulations. Further, the Treasury

Department and the IRS do not expect

the proposed dual consolidated loss regulations described in parts I.D.1 through

I.D.6 of the Explanation of Provisions

will have a significant economic impact

on a substantial number of small entities

because they provide exceptions and other

rules that limit the application of the current dual consolidated loss regulations.

However, because there is a possibility

of significant economic impact on a substantial number of small entities, an initial

regulatory flexibility analysis for the regulation is provided below. The Treasury

Department and the IRS request comments from the public on the number of

small entities that may be impacted and

whether that impact will be economically

significant.

A. Reasons why action is being

considered

The proposed dual consolidated loss

regulations described in parts I.A through

I.D of the Explanation of Provisions

address potential uncertainty, and refine or

adjust certain computations, under current

law. In addition, the proposed dual consolidated loss regulations provide limited

exceptions to the application of the dual

consolidated loss rules where not inconsistent with the general policy underlying

those rules. As a result, this portion of the

proposed regulations increases the precision of the dual consolidated loss regulations and reduces inappropriate planning

opportunities.

As explained in part II.A of the Explanation of Provisions, the proposed disregarded payment loss regulations address

certain hybrid payments that can give rise

to deduction/no-inclusion outcomes.

B. Objectives of, and legal basis for, the

proposed regulations

The proposed regulations described in

parts I.A, I.B, I.C, I.D.1, I.D.2, and I.D.4

of the Explanation of Provisions address

potential uncertainty, and refine or adjust

August 26, 2024

certain computations, under the current

dual consolidated loss regulations. The

proposed dual consolidated loss regulations described in parts I.D.3 and I.D.5

of the Explanation of Provisions limit the

application of the current dual consolidated

loss regulations. The proposed disregarded

payment loss regulations described in part

II of the Explanation of Provisions require

an income inclusion for U.S. tax purposes

to eliminate the deduction/no-inclusion

outcome that would otherwise arise from

certain hybrid payments. The legal basis

for these regulations is contained in sections 1502, 1503(d), 7701, and 7805.

C. Small entities to which these

regulations will apply

Because an estimate of the number of

small businesses affected is not currently

feasible, this initial regulatory flexibility

analysis assumes that a substantial number of small businesses will be affected.

The Treasury Department and the IRS do

not expect that these proposed regulations

will affect a substantial number of small

nonprofit organizations or small governmental jurisdictions.

D. Projected reporting, recordkeeping,

and other compliance requirements

The proposed dual consolidated loss

regulations do not impose additional

reporting or recordkeeping obligations.

The proposed disregarded payment loss

regulations impose a certification requirement that is filed with a domestic corporation’s tax return.

E. Duplicate, overlapping, or relevant

Federal rules

These proposed regulations would

replace portions of the dual consolidated

loss regulations. The Treasury Department

and the IRS are not aware of any Federal

rules that duplicate, overlap, or conflict

with these proposed regulations.

F. Alternatives considered

The Treasury Department and the IRS

did not consider any significant alternative

to the proposed dual consolidated loss regulations. The proposed regulations described

554

in parts I.A, I.B, I.C, I.D.1, I.D.2, and I.D.4

of the Explanation of Provisions simply

address potential uncertainty, or refine or

adjust certain computations, under current

law. The proposed regulations described in

parts I.D.3 and I.D.5 of the Explanation of

Provisions limit the application of the dual

consolidated loss regulations. As a result,

the proposed dual consolidated loss regulations do not impose an additional economic

burden and, consequently, the regulations

represent the approach with the least economic impact.

As discussed in part II.A of the Explanation of Provisions, the proposed disregarded payment loss regulations address

policy concerns that are similar to the concerns underlying the enactment of sections

245A(e), 267A, and 1503(d). Sections

245A, 267A, and 1503(d) apply uniformly

to large and small business entities, and

the Treasury Department and the IRS are

of the view that the proposed disregarded

payment loss regulations should generally

apply without regard to the size of the

corporation – a small business exception

would undermine the anti-hybridity policies underlying these regulations. Accordingly, there is no viable alternative to the

proposed regulations for small entities.

Pursuant to section 7805(f) of the

Code, the proposed regulations have been

submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small

businesses. The Treasury Department and

the IRS also request comments from the

public on the analysis in part III of the

Special Analyses.

IV. Unfunded Mandates Reform Act

Section 202 of the Unfunded Mandates Reform Act of 1995 (“UMRA”)

requires that agencies assess anticipated

costs and benefits and take certain other

actions before issuing a final rule that

includes any Federal mandate that may

result in expenditures in any one year by

a State, local, or Tribal government, in

the aggregate, or by the private sector,

of $100 million in 1995 dollars, updated

annually for inflation. The proposed rules

do not include any Federal mandate that

may result in expenditures by State, local,

or Tribal governments, or by the private

sector in excess of that threshold.

Bulletin No. 2024–35

V. Executive Order 13132: Federalism

Executive Order 13132 (Federalism)

prohibits an agency from publishing any

rule that has federalism implications if

the rule either imposes substantial, direct

compliance costs on State and local governments, and is not required by statute,

or preempts State law, unless the agency

meets the consultation and funding

requirements of section 6 of Executive

Order 13132. The proposed rules do not

have federalism implications and do not

impose substantial direct compliance

costs on State and local governments or

preempt State law within the meaning of

Executive Order 13132.

Incorporation by Reference

Sections 1.1503(d)-1(b)(4)(i)(A)(2), (b)

(4)(i)(B)(2), (b)(4)(ii)(B)(2), and (b)(21),

and §§1.1503(d)-3(c)(9), 1.1503(d)-7(b)

(16) and (c)(3), and 1.1503(d)-8(b)(12)

of these proposed regulations use terminology based on their definitions

under the GloBE Model Rules and

the GloBE Model Rules Consolidated

Commentary. The Office of the Federal

Register has regulations concerning

incorporation by reference. 1 CFR part

51. These regulations require that agencies must discuss in the preamble to a

rule or proposed rule the way in which

materials that the agency incorporates

by reference are reasonably available to

interested persons, and how interested

parties can obtain the materials. 1 CFR

51.5(b).

The GloBE Model Rules and Administrative Guidance addressing Hybrid Arbitrage Arrangements are discussed in Part

IV of the Background section of this preamble. The GloBE Model Rules and the

GloBE Model Rules Consolidated Commentary were issued by the OECD on

December 20, 2021, and April 25, 2024,

respectively, and are available at www.

oecd.org/tax/beps/tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-base-erosion-modelrules-pillar-two.htm. The Administrative

Guidance was issued on December 15,

2023, and is available at www.oecd.org/

tax/beps/administrative-guidance-global-anti-base-erosion-rules-pillar-twojune-2024.pdf.

Bulletin No. 2024–35

Comments and Requests for Public

Hearing

Before these proposed amendments to

the final regulations are adopted as final

regulations, consideration will be given

to comments that are submitted timely

to the IRS as prescribed in this preamble under the ADDRESSES heading.

In addition to the comments specifically

requested in the Explanation of Provisions, the Treasury Department and

the IRS request comments on all other

aspects of the proposed regulations. Any

comments submitted will be made available at https://www.regulations.gov or

upon request.

A public hearing will be scheduled if

requested in writing by any person who

timely submits electronic or written comments. Requests for a public hearing are

also encouraged to be made electronically. If a public hearing is scheduled,

notice of the date and time for the public

hearing will be published in the Federal

Register.

Drafting Information

The principal authors of these regulations are Andrew L. Wigmore of the

Office of Associate Chief Counsel (International) and Julie Wang of the Office

of Associate Chief Counsel (Corporate).

However, other personnel from the Treasury Department and the IRS participated

in their development.

Statement of Availability of IRS

Documents

IRS Revenue Procedures, Revenue

Rulings, Notices, and other guidance

cited in this document are published in the

Internal Revenue Bulletin or Cumulative

Bulletin and are available from the Superintendent of Documents, U.S. Government Publishing Office, Washington, DC

20402, or by visiting the IRS website at

https://www.irs.gov.

List of Subjects

26 CFR Part 301

Employment taxes, Estate taxes,

Excise taxes, Gift taxes, Income taxes,

Penalties, Reporting and recordkeeping

requirements.

Proposed Amendments to the

Regulations

Accordingly, the Treasury Department

and the IRS propose to amend 26 CFR

parts 1 and 301 as follows:

PART 1―INCOME TAXES

Paragraph 1. The authority citation

for part 1 is amended by removing the

entry for section 1.1503(d) and adding

entries for sections 1.1503(d)-1 through

1.1503(d)-8 in numerical order to read as

follows:

Authority: 26 U.S.C. 7805 * * *

*****

Sections 1.1503(d)-1 through 8 also

issued under 26 U.S.C. 953(d), 26 U.S.C.

1502, 26 U.S.C. 1503(d), 26 U.S.C.

1503(d)(2)(B), 26 U.S.C. 1503(d)(3), and

26 U.S.C. 1503(d)(4).

*****

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:

§1.1502-13 Intercompany transactions.

26 CFR Part 1

Income taxes, reporting and recordkeeping requirements.

555

(a) * * *

(6) * * *

(ii) * * *

August 26, 2024

Rule

*******

(G) Miscellaneous

operating rules.

General location

Paragraph

Example

§1.1502-13(j)(15)

(i)

Example 1. Intercompany sale followed by section 351

transfer to member.

Example 2. Intercompany sale of member stock followed by

recapitalization.

Example 3. Back-to-back intercompany transactions—

matching.

Example 4. Back-to-back intercompany transactions—acceleration.

Example 5. Successor group.

Example 6. Liquidation—80% distributee.

Example 7. Liquidation—no 80% distributee.

Example 8. Loan by section 987 QBU.

Example 9. Sale of property by section 987 QBU.

Example 10. Interest on intercompany obligation.

Example 11. Loss of a section 1503(d) member.

(ii)

(iii)

(iv)

(v)

(vi)

(vii)

(viii)

(ix)

(x)

(xi)

*****

(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

August 26, 2024

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.

*****

(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

556

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. 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

Bulletin No. 2024–35

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

Bulletin No. 2024–35

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.

*****

(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.

*****

Par. 3. Section 1.1503(d)-1 is amended

by:

1. Revising the section heading.

2. Revising the third sentence in paragraph (a) and adding three new sentences

at the end.

3. Revising paragraphs (b)(4)(i) and

(ii), and (b)(6).

4. In the second sentence of paragraph

(b)(16)(i), removing the language “An

entity” and adding the language “Other

than an entity described in paragraph (b)

(4)(i)(B)(2) of this section, an entity” in

its place.

5. In paragraph (b)(20),

a. Adding the language “(not less than

60 months)” after “time”; and

b. Adding the language “, as well as

any prior taxable years” after “incurred”

at the end of the sentence.

6. Adding paragraph (b)(21).

7. In paragraph (c)(1)(ii), adding the

language “(including, in the case of a

specified foreign tax resident that under

§§301.7701-1 through 301.7701-3 of this

chapter is disregarded as an entity separate from its owner for U.S. tax purposes,

by reason of its tax owner bearing)” after

the language “bears.”

557

8. Redesignating paragraph (d) as paragraph (e).

9. Adding paragraphs (d) and (f).

The revisions and additions read as follows:

§1.1503(d)-1 Definitions, special rules,

and filings.

(a) * * * Paragraph (c) of this section

provides rules for a domestic consenting

corporation. Paragraph (d) of this section

provides rules for disregarded payment

losses. Paragraph (e) of this section provides relief for certain compliance failures

due to reasonable cause and a signature

requirement for filings. Paragraph (f) of

this section provides an anti-avoidance

rule.

(b) * * *

(4) * * *

(i) In general. The term separate unit

means either a foreign branch separate

unit or a hybrid entity separate unit.

(A) Foreign branch separate unit. The

term foreign branch separate unit means

either of the following that is carried on,

directly or indirectly, by a domestic corporation (including a dual resident corporation):

(1) Except to the extent provided in

paragraph (b)(4)(iii) of this section, a business operation outside the United States

that, if carried on by a U.S. person, would

constitute a foreign branch as defined in

§1.367(a)-6T(g)(1).

(2) A place of business (including a

deemed place of business) outside the

United States that is a Permanent Establishment with respect to a QDMTT or an

IIR, provided that the Permanent Establishment is not otherwise described in

paragraph (b)(4)(i)(A)(1) of this section.

(B) Hybrid entity separate unit. The

term hybrid entity separate unit means

either of the following that is owned,

directly or indirectly, by a domestic corporation (including a dual resident corporation):

(1) An interest in a hybrid entity; and

(2) An interest in a foreign entity

(other than a Tax Transparent Entity with

respect to an IIR) that is not taxed as an

association for Federal tax purposes and

the net income or loss of which is taken

into account in determining the amount of

tax under an IIR, provided that the inter-

August 26, 2024

est is not otherwise described in paragraph (b)(4)(i)(B)(1) of this section. See

§1.1503(d)-7(c)(3)(iii) for an example

illustrating the application of this rule.

(ii) Separate unit combination rule―

(A) In general. Except as otherwise provided in paragraph (b)(4)(ii)(B) of this

section, if a domestic owner, or two or

more domestic owners that are members

of the same consolidated group, have two

or more separate units (individual separate units), then all such individual separate units that are located (in the case of

a foreign branch separate unit or a hybrid

entity separate unit described in paragraph

(b)(4)(i)(B)(2) of this section) or subject

to an income tax either on their worldwide

income or on a residence basis (in the case

of a hybrid entity an interest in which is

a hybrid entity separate unit described in

paragraph (b)(4)(i)(B)(1) of this section)

in the same foreign country are treated

as one separate unit (combined separate

unit). See §1.1503(d)-7(c)(1) for an example illustrating the application of this paragraph (b)(4)(ii)(A). Except as specifically

provided in this section or §§1.1503(d)-2

through 1.1503(d)-8, any individual separate unit composing a combined separate

unit loses its character as an individual

separate unit.

(B) Special rules―(1) Certain dual

resident corporations. Separate units of a

foreign insurance company that is a dual

resident corporation under paragraph (b)

(2)(ii) of this section are not combined

with separate units of any other domestic

corporation.

(2) Location of separate units arising

from a QDMTT or an IIR. For purposes

of paragraph (b)(4)(ii)(A) of this section,

a separate unit described in paragraph

(b)(4)(i)(A)(2) or (b)(4)(i)(B)(2) of this

section is located in the country in which

it is located for purposes of the relevant

QDMTT or IIR. If such place of business

or entity is not located in a specific jurisdiction (for example, because the entity is

a stateless entity for purposes of an IIR),

the individual separate unit is not combined with any other separate units. See

§1.1503(d)-7(c)(3)(iii) for an example

illustrating the application of this paragraph (b)(4)(ii)(B)(2).

*****

(6) Tax determination―(i) Subject to

tax. For purposes of determining whether

August 26, 2024

a domestic corporation or another entity is

subject to an income tax of a foreign country on its income, the fact that it has no

actual income tax liability to the foreign

country for a particular taxable year shall

not be taken into account.

(ii) Minimum taxes and taxes computed by reference to financial accounting principles. For purposes of section

1503(d) and the regulations in this part

issued under section 1503(d), the determination of whether a tax is an income tax

is made without regard to whether the tax

is intended to ensure a minimum level of

taxation on income or computes income

or loss by reference to financial accounting net income or loss.

*****

(21) Pillar Two terminology. Qualified Domestic Minimum Top-up Tax

(QDMTT), Income Inclusion Rule (IIR),

and any other capitalized terms that are

used in connection with or are otherwise

relevant to a minimum tax based on a

QDMTT or IIR have the same meaning

ascribed to such terms under the material

listed in paragraphs (b)(21)(i) through (iii)

of this section. These materials are incorporated by reference into §§1.1503(d)-1

through 1.1503(d)-8 with the approval

of the Director of the Federal Register

under 5 U.S.C. 552(a) and 1 CFR part 51.

This material is available for inspection at

the IRS and at the National Archives and

Records Administration (NARA). Contact

the IRS at: IRS FOIA Request, Headquarters Disclosure Office, CL:GLD:D, 1111

Constitution Avenue NW, Washington,

DC 20224; phone: +1 312 292 3297;

website: https://foiapublicaccessportal.

for.irs.gov/app/Home.aspx. For information on the availability of this material at

NARA, email: fr.inspection@nara.gov, or

go to: www.archives.gov/federal-register/

cfr/ibr-locations. This material may be

obtained from the Organisation for Economic Co-operation and Development

(OECD) at: 2, rue André Pascal, 75016

Paris; phone: +33 1 45 24 82 00; website:

www.oecd.org/tax/beps/tax-challengesarising-from-the-digitalisation-of-theeconomy-global-anti-base-erosion-model-rules-pillar-two.htm.

(i) OECD (2021), Tax Challenges Arising from the Digitalisation of the Economy

– Global Anti-Base Erosion Model Rules

(Pillar Two): Inclusive Framework on

558

BEPS, OECD, Paris, December 20, 2021.

(Available at www.oecd.org/tax/beps/

tax-challenges-arising-from-the-digitalisation-of-the-economy-global-anti-baseerosion-model-rules-pillar-two.htm.)

(ii) OECD (2024), Tax Challenges

Arising from the Digitalisation of the

Economy – Consolidated Commentary

to the Global Anti-Base Erosion Model

Rules (2023): Inclusive Framework on

BEPS, OECD/G20 Base Erosion and

Profit Shifting Project, OECD Publishing,

Paris, April 23, 2024. (Available at https://

doi.org/10.1787/b849f926-en.)

(iii) OECD (2024), Tax Challenges

Arising from the Digitalisation of the

Economy – Administrative Guidance on

the Global Anti-Base Erosion Model Rules

(Pillar Two), June 2024, OECD/G20

Inclusive Framework on BEPS, OECD,

Paris, December 15, 2023. (Available at

www.oecd.org/tax/beps/administrativeguidance-global-anti-base-erosion-rulespillar-two-june-2024.pdf.)

*****

(d) Disregarded payment loss rules―

(1) Consequences of consent―(i) In general. As provided in §301.7701-3(c)(4)

(i) of this chapter, a domestic corporation

that directly or indirectly owns interests

in a specified eligible entity (as defined

in §301.7701-3(c)(4)(i) of this chapter)

classified as a disregarded entity consents

to be subject to the disregarded payment

loss rules of this paragraph (d). Pursuant

to such consent, the domestic corporation agrees that if the specified eligible

entity or a foreign branch of the domestic

corporation (the specified eligible entity

or such a foreign branch, a disregarded

payment entity, and the domestic corporation, a specified domestic owner) incurs

a disregarded payment loss (other than a

disregarded payment loss described in

paragraph (d)(7)(iii) of this section) and

a triggering event occurs with respect to

the disregarded payment loss during the

DPL certification period, then, for the taxable year of the specified domestic owner

during which the triggering event occurs,

the specified domestic owner includes in

gross income the DPL inclusion amount.

See §1.1503(d)-7(c)(42) for an example

illustrating the application of the disregarded payment loss rules.

(ii) Special rule regarding dual resident

corporations. As provided in §301.7701-

Bulletin No. 2024–35

3(c)(4)(ii) of this chapter, a dual resident

corporation that directly or indirectly

owns an interest in an eligible entity classified as a disregarded entity consents to

be subject to the disregarded payment loss

rules of this paragraph (d). Pursuant to

such consent, the dual resident corporation agrees, for purposes of this paragraph

(d), to be treated as a disregarded payment

entity and as a specified domestic owner

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