Academic journal article Journal of Accountancy

Dual Resident Company Regulations: The Mirror Legislation Provision

Academic journal article Journal of Accountancy

Dual Resident Company Regulations: The Mirror Legislation Provision

Article excerpt

The Tax Court ruled in British Car Auctions, Inc. v The United States that the "minor legislation" provision in U.S. Treasury regulations section 1.1503-2A(c)(ii)(B) was valid. A dual resident corporation's losses cannot reduce a U.S. corporation's income, even when the losses cannot be used in another other country because the country's legislation is similar to internal Revenue Code section 1503(d).

Section 1503(d) disallows the use of a "dual consolidated loss" to reduce the taxable income of any member of a U.S. consolidated group. A dual consolidated loss is a net operating loss of a U.S. corporation that is either subject to tax on a worldwide basis or is taxed as a resident in a foreign country. Such companies are referred to as dual resident companies because they are incorporated in one of the states and they simultaneously meet the criteria for residency in another country. Before this provision was enacted, it was possible to "double dip" losses of a dual resident corporation by using the losses to offset the incomes of both the foreign affiliated group and a U.S. affiliated group.

Section 1503(d) includes a stand-alone exception when the loss of the dual resident company does not offset the income of any other foreign company. However, a provision known as the mirror legislation provision prevents the use of the standalone exception when the foreign country has legislation similar to, or "mirroring," section 1503(d). …

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