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  2. CONSOLIDATED RETURNS

Final Regulations on Dual Consolidated Losses: A Practical Guide (Part II)

By Karen Jacobs, CPA; Peg O’Connor, J.D.; and Margie Rollinson, J.D.

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Executive Summary

  • In general, if there is a triggering event for a DCL of a DRC or a separate unit during the certification period, the elector must recapture and report as ordinary income the amount of the DCL and pay interest.
  • A triggering event will not occur if the elector demonstrates that the transfer of assets did not result in a carryover under foreign law of the DRC’s losses, expenses, or deductions to the transferee of the assets.
  • In general, the reasonable-cause relief standard applies for all untimely filings for DCLs, including those incurred in tax years beginning before the application date of the 2007 DCL regulations.

This two-part article is organized to assist taxpayers in determining the applicability of the 2007 dual-consolidated loss (DCL) regulations and to help practitioners comply with the regulations. Part I, in the September 2007 issue, discussed the entities to which the DCL rules are applicable, the computation of a DCL, the limitation on using a DCL to offset U.S. taxable income, and the exceptions to the limitation on utilization of a DCL. Part II, below, discusses triggering events and their consequences, as well as the transition rules from the 1992 to the 2007 regulations.

Triggering Events and Their Consequences

Triggering Events

In general, if there is a triggering event for a DCL of a dual-resident corporation (DRC) or a separate unit during the certification period, the elector must recapture and report as ordinary income the amount of the DCL and pay interest. Under Regs. Sec. 1.1503(d)-6(e)(1), the following constitute triggering events:

  1. A foreign use of the DCL.
  2. An affiliated DRC or affiliated domestic owner of a separate unit ceases to be a member of the consolidated group that made the domestic-use election.27
  3. An unaffiliated DRC or unaffiliated domestic owner becomes a member of a consolidated group.
  4. 50% or more of the DRC’s or separate unit’s gross assets (measured by the fair market value (FMV) of the assets at the time of such transaction or, for multiple transactions, at the time of the first transaction) are disposed of in a single transaction or a series of transactions within a 12-month period. Dispositions are disregarded if they occur in the ordinary course of the DRC’s or separate unit’s trade or business. Also, an interest in another separate unit and the shares of a DRC are not treated as assets of a separate unit or a DRC. A triggering event will not occur if the elector demonstrates, to the IRS’s satisfaction, that the transfer of assets did not result in a carryover under foreign law of the DRC’s, or separate unit’s, losses, expenses, or deductions to the transferee of the assets. Following rebuttal, described below, the domestic-use agreement is still effective.28
  5. 50% or more of the interest in a separate unit (measured by voting power or value at the time of transaction, or for multiple transactions, at the time of the first transaction) of the domestic owner, as compared with the domestic owner’s percentage interest on the last day of the tax year in which the DCL was incurred, is disposed of in a single transaction or a series of transactions within a 12-month period.29
  6. An unaffiliated DRC, unaffiliated domestic owner, or hybrid-entity separate unit incurs a DCL and then becomes a foreign corporation (for instance, due to a reorganization or an election under Regs. Sec. 301.7701-3(c)).
  7. An unaffiliated DRC or unaffiliated domestic owner makes an election to become an RIC, REIT, or S corporation.
  8. The elector fails to file the annual certification for a DCL.
  9. A taxpayer no longer satisfies the conditions required for the stand-alone exception.
Triggering Event Exceptions

1. Continuing ownership in interests and assets: Under Regs. Sec. 1.1503(d)-6(f), the following transactions do not constitute triggering events and do not require a new domestic-use agreement (because the ownership remains in the same affiliated group or with the same unaffiliated DRC or domestic owner):

  1. An affiliated DRC or affiliated do-mestic owner is no longer a member of a consolidated group solely because of a transaction in which a member of the same consolidated group succeeds to the tax attributes of the DRC or domestic owner under Sec. 381.
  2. Assets of an affiliated DRC, or assets of (or interests in) a separate unit of an affiliated domestic owner, are disposed of, and the assets or interests are acquired by one or more members of the consolidated group that includes the affiliated DRC or affiliated domestic owner, or by a partnership or a grantor trust, but only if, immediately after the acquisition, more than 90% of the partnership’s or grantor trust’s interests is owned, directly or indirectly, by members of such consolidated group.
  3. Assets of an unaffiliated DRC, or assets of (or interests in) a separate unit of an unaffiliated domestic owner, are disposed of, and the assets or interests are acquired by the unaffiliated DRC, or unaffiliated domestic owner, as applicable, or by a partnership or grantor trust, but only if immediately after the acquisition more than 90% of the part-nership’s or grantor trust’s interests is owned, directly or indirectly, by the unaffiliated DRC or unaffiliated domestic owner.

2. New domestic-use agreement: A triggering event will not occur for multiple-party events and events re-sulting in a single consolidated group, provided the elector files a new domestic-use agreement (Regs. Sec. 1.1503(d)-6(f)(2)(i)).

A multiple-party event includes one of the following:

  1. An affiliated DRC or affiliated do-mestic owner becomes an unaffiliated domestic corporation or a member of a new consolidated group (other than in a transaction described in (2) below for events resulting in a single consolidated group).
  2. Assets of a DRC or assets of, or interests in, a separate unit are disposed of in a transaction in which such assets or interests are acquired by an unaffiliated domestic corporation, one or more members of a new consolidated group, or a partnership or grantor trust, but only if immediately after the disposition, more than 90% of the partnership’s or grantor trust’s interests is owned, directly or indirectly, by the unaffiliated domestic owner or by members of a new consolidated group.

Events resulting in a single consolidated group under Regs. Sec. 1.1503(d)-6(f)(2)(ii) include:

  1. An unaffiliated DRC or unaffiliated domestic owner becomes a member of a consolidated group.
  2. A consolidated group ceases existence due to a transaction described in Regs. Sec. 1.1502-13(j)(5)(i) (relating to acquisitions of the consolidated group’s common parent), other than a transaction in which any member of the terminating group, or the successor-in-interest of such member, is not a member of the surviving group immediately after the terminating group ceases existence.

For both the multiple-party-event exception and the events-resulting-in-a-single-consolidated-group exception, the unaffiliated domestic corporation or new consolidated group (subsequent elector) must file a new domestic-use agreement. Such agreement must follow the format and include the required information as provided under Regs. Sec. 1.1503(d)-6(f)(2)(iii)(A).

In addition to the new domestic-use agreement, in the case of a multiple-party event, the original elector must file a statement that is attached to and filed by the due date (including extensions) of its income tax return for the tax year in which the event occurs. Such statement must follow the format and include the required information as provided under Regs. Sec. 1.1503(d)-6(f)(2)(iii)(B).

3. Deemed transactions: If the assets of, or the interests in, a separate unit are transferred in a transaction that would not result in a foreign use and, except for resulting deemed transactions or events, would not result in a triggering event, the deemed transactions will not qualify as a triggering event as described in Regs. Sec. 1.1503(d)-6(e)(1)(iv) (transfers of assets) or (v) (transfers of an interest in a separate unit). Deemed transactions or events include transactions or events described in Rev. Rul. 99-530 and Sec. 70831 and the related regulations (Regs. Sec. 1.1503(d)-6(f)(4)).

4. Compulsory transfers: Under Regs. Sec. 1.1503(d)-6(f)(5), transfers of the assets or stock of a DRC, or of the assets or interests in a separate unit, will not constitute a triggering event (in-cluding a foreign use that occurs as a result of, or following, the transfer) if such transfers are:

  1. Legally required by a foreign government as a necessary condition of doing business in a foreign country;
  2. Compelled by a genuine threat of immediate expropriation by a foreign government; or
  3. The result of the expropriation of assets by the foreign government.
Consequences of a Triggering Event

1. General rule: In general, on the occurrence of a triggering event that does not qualify for an exception, the DRC or domestic owner of the separ-ate unit must recapture as gross income the total amount of the DCL for the applicable triggering event on its in-come tax return in the tax year of the triggering event (Regs. Sec. 1.1503(d)6(h)(1)). If the triggering event is a foreign use of the DCL, the event is recaptured in the tax year that in-cludes the last day of the foreign tax year during which such foreign use occurs.

The elector must pay an interest charge on the recapture amount. Under Regs. Sec. 1.1503(d)-6(h)(1)(ii), this charge may be due even if there is a complete reduction of the recapture income. In general, the interest is computed under Sec. 6601(a) by treating the additional tax resulting from the recapture as though it had been due and unpaid as of the payment date for the tax year in which the taxpayer received a tax benefit from the DCL. A tax benefit will be considered to have arisen in a tax year in which the DCL reduced U.S. taxable income. The additional tax resulting from the recapture is computed treating the recapture income as the last income earned in the recapture year; the interest becomes a part of the tax liability for that tax year.32 The recapture interest charge is deductible to the same extent as interest under Sec. 6601.

2. Reduction in recapture and/or interest charge: The DRC or domestic owner may recapture an amount less than the total DCL. Specifically, the reduction amount is the amount by which the DCL would have reduced other taxable income reported on a timely filed U.S. income tax return for any tax year up to and including the tax year of the triggering event (or, when the triggering event is a foreign use of the DCL, the tax year that includes the last day of the foreign tax year during which such foreign use occurs), as if the loss were subject to the domestic-use limitation (Regs. Sec. 1.1503(d)-6(h)(2)(i)). An elector must prepare a separate accounting illustrating the income for each year that would have reduced the DRC’s or separate unit’s recapture amount as if the domestic-use limitation were applicable.33

The interest charge may also be reduced if the elector demonstrates, to the satisfaction of the IRS, that the net interest owed would have been less if the elector had filed an amended return for the tax year when the recaptured DCL was incurred, and for any other affected tax years up to and including the tax year of recapture, as if the DCL had been subject to the domestic-use limitation.34

3. Computing taxable income in year of recapture: In general, for purposes of computing the taxable in-come for the recapture year, no current carryover or carryback losses may offset and absorb the recapture amount (Regs. Sec. 1.1503(d)-6(h)(4)(i)). The recapture amount included in gross income may be offset and absorbed by that portion of the elector’s net operating loss (NOL) carryover attributable to the DRC or separate unit, as determined under Regs. Secs.1.1502-21(b)(2)(iv) and 1.1503(d)-5, that in-curred the DCL being recaptured, if the elector demonstrates, to the Service’s satisfaction, the amount of such portion of the carryover. A computation must be prepared demonstrating the amount of NOL carryover that may absorb the recapture amount included in gross income.35

4. Character and source of recapture income: The amount recaptured will be treated as ordinary income under Regs. Sec. 1.1503(d)-6(h)(5). Except as provided in the prior sentence, such income will be treated, as applicable, as income having the same character, source, and separate category, for all purposes, including Secs. 904(d) and 907, to which the items of deduction or loss composing the DCL were allocated and apportioned, as provided under Secs. 861(b), 862(b), 863(a), 864(e), 865, and the related regulations. For this determination, the pro-rata computation of the items of de-duction or loss composing the DCL, as described above, applies.

5. Reconstituted NOL: In general, in the tax year immediately after the year in which the DCL is recaptured, the DRC, or the domestic owner of the separate unit, that incurred the recaptured DCL will be considered to have an NOL (reconstituted NOL) in an amount equal to the recaptured DCL (Regs. Sec. 1.1503(d)-6(h)(6)(i)). If a U.S. corporation (transferee) acquires the assets of the DRC or domestic owner in a Sec. 381(a) transaction, the transferee will be treated as the DRC or domestic owner, as applicable. Only one corporation will be treated as having a reconstituted NOL as a result of the recapture of a single DCL. A reconstituted NOL of a domestic owner will be attributable to the separate unit that incurred the recaptured DCL. It will be subject to the domestic-use limitation without regard to the exceptions (i.e., the domestic-use election, elective agreements in place between the United States and a foreign country, and no possibility of a foreign use). The reconstituted NOL will be available only for carryover, under Sec. 172(b), to tax years following the tax year of recapture. For purposes of determining the remaining carryover period, the reconstituted NOL will be treated as if it had been recognized in the tax year in which the recaptured DCL was incurred. The DRC or domestic owner of the separate unit will not be treated as having a reconstituted NOL if the recaptured DCL would have been eliminated under a Sec. 381(a) transaction or the cessation of separate-unit status and if no domestic-use election had been made for such loss (Regs. Sec. 1.1503(d)-6(h)(6)(ii)).

6. Multiple-party event exceptions: In general, in the case of a DCL for which multiple excepted events have occurred, only the subsequent elector (rather than the original elector and prior subsequent electors) that owns the DRC or separate unit at the time of the subsequent triggering event will be subject to the recapture rules (Regs. Sec. 1.1503(d)-6(h)(3)(ii)(A)). The subsequent elector must take into account the recapture tax amount (Regs. Sec. 1.1503(d)-6(h)(3)(ii)(B)) and must prepare a statement that computes the recapture tax amount for the DCL subject to the new domestic-use agreement (Regs. Sec. 1.1503(d)-6(h)(3)(iii)). This statement must be attached to, and filed by the due date (including extensions) of, the subsequent elector’s income tax return for the tax year in which the subsequent triggering event occurs (or, when the subsequent triggering event is a foreign use of the DCLs, the tax year that includes the last day of the foreign tax year during which such foreign use occurs). Such statement must follow the format and include the required information as provided under Regs. Sec. 1.1503(d)-6(h)(3)(iii)(A).

If the subsequent elector does not pay in full the income tax liability that includes a recapture tax amount, the IRS may collect that portion of the unpaid balance of such income tax liability attributable to the recapture tax amount in full or in part from the original elector and/or from any prior subsequent elector (Regs. Sec. 1.1503(d)-6(h)(3)(iv)(B)).

Rebuttals to Triggering Events

Under Regs. Sec. 1.1503(d)-6(j)(1), the domestic-use agreement filed for a DCL will terminate prior to the end of the certification period if:

  1. An elector is able to rebut the presumption of a triggering event;
  2. An event is not a triggering event as a result of the application of one of the exceptions relating to events requiring a new domestic-use agreement (note that the new domestic-use agreement filed in connection with the event will remain in effect); or
  3. A DCL is recaptured.

For the rebuttal of the presumption of a triggering event, the elector must file a statement, labeled “Rebuttal of Triggering Event” at the top of the page, indicating that it is submitted under the provisions of Regs. Sec. 1.1503(d)-6(e)(2). It must include the information in paragraphs (ii), (iii), and (iv) of the “no possibility of foreign use” statement (described in Part I of this article). The statement must be attached to, and filed by the due date (including extensions) of, the elector’s income tax return for the tax year in which the presumed triggering event occurs.

A domestic-use agreement filed for a DCL will terminate as of the end of a tax year if the elector:

1. Demonstrates, to the Service’s satisfaction, that there will be no foreign use of the DCL as of the end of such tax year or in any other year by any means; and

2. Prepares a statement that is attached to, and filed by the due date (including extensions) of, its U.S. income tax return for such tax year (Regs. Sec. 1.1503(d)6(j)(2)). Such statement must follow the format and include the required information as provided under Regs. Sec. 1.1503(d)-6(j)(2)(ii).

Transition Rules from the 1992 to 2007 DCL Regs.

Transition of Existing (g)(2)(i) Agreements

Under the 1992 DCL regulations, a taxpayer may use a DCL to offset income of a domestic affiliate if it certifies for 15 years that the DCL has not been, and will not be, used to offset the income of any other person under foreign income tax laws. The taxpayer must file an agreement in accordance with Regs. Sec. 1.1503-2(g)(2)(i) or Temp. Regs. Sec. 1.1503-2T(g)(2)(i) (the “(g)(2)(i) agreement”). The 2007 DCL regulations respect the (g)(2)(i) agreement as a domestic-use election and consider it to apply only for any tax year, up to and including the fifth tax year, following the year in which the DCL that is the subject of the agree-ment was incurred; thereafter it will have no effect (Regs. Sec. 1.1503(d)-8(b)(1)).

Under the 1992 DCL regulations, a DCL acquisition by an unaffiliated domestic corporation or a new consolidated group does not constitute a triggering event in certain instances if the taxpayer filed a (g)(2)(i) agreement and entered into a closing agreement with the IRS providing that the new taxpayer will be jointly and severally liable for the total amount of recapture of the DCL and interest charge if there is a triggering event.36 The closing agreement was applicable for 15 years. Under the 2007 DCL regulations, taxpayers subject to the terms of a closing agreement entered into with the Service will be deemed to have satisfied the closing agreement’s 15-year certification period requirement if the five-year certification period described above has elapsed, provided such closing agreement is still in effect as of the application date and provided the DCLs have not been triggered and recaptured (Regs. Sec. 1.1503(d)-8(b)(2)).

Events that occur after April 18, 2007, but before the effective date of the 2007 DCL regulations with respect to a taxpayer (i.e., the first day of the taxpayer’s tax year beginning on or after April 18, 2007) and that are for DCLs incurred in tax years beginning on or after October 1, 1992, are not eligible for a closing agreement, but instead are eligible for the multiple-party event exception described above with certain modifications. Specifically, (g)(2)(i) agreements (rather than domestic-use agreements) should be filed, and subsequent triggering events and exceptions have the meaning provided in Regs. Secs. 1.1503-2(g)(2)(iii)(A) and (iv) (other than the exception provided under Regs. Sec. 1.1503-2(g)(2)(iv)(B)(1)).

Relief Requests for Late Filings

Under the 1992 DCL regulations, taxpayers seeking relief for late filings under Sec. 1503(d) and the regulations apply for extensions under Regs. Secs. 301.9100-1 through -3 and Rev. Proc. 2004-42. In general, under the 2007 DCL regulations, the reasonable-cause relief standard applies for all untimely filings for DCLs, including those incurred in tax years beginning before the application date of the 2007 DCL regulations (Regs. Sec. 1.1503(d)8(b)(3)(i)). Solely for closing agreements described above, taxpayers must request relief for untimely requests through the process provided under Regs. Secs. 301.9100-1 through -3.37 Taxpayers with letter ruling requests under Regs. Secs. 301.9100-1 through -3 pending as of March 19, 2007 (other than for closing agreements), are not required to use the reasonable-cause procedure; however, if such taxpayers have not yet received a determination of their request, they may withdraw their request consistent with the procedures contained in Rev. Proc. 2007-1 (or any succeeding document) and use the reasonable-cause procedure (Regs. Sec. 1.1503(d)-8(b)(3)(iii)). In that event, the IRS will refund the taxpayer’s user fee.

The reasonable-cause exception provides that a person that is permitted or required to file an election, agreement, statement, rebuttal, computation, or other information under Sec. 1503(d) and the regulations, and that fails to make such filing in a timely manner, will be considered to have satisfied the timeliness requirement for such filing if the person is able to demonstrate to the Area Director, Field Examination, of the IRS Small Business/Self Employed Division or the Director of Field Operations of the IRS Large and Mid-Size Business Division with jurisdiction of the taxpayer’s tax return for the tax year, that such failure was due to reasonable cause and not willful neglect (Regs. Sec. 1.1503(d)-1(c)(1)). In general, the taxpayer must demonstrate that it exercised ordinary care and prudence in meeting its tax obligations, but nonetheless did not comply with the prescribed duty within the prescribed time.

Requests for reasonable-cause relief will be considered only if, once the person becomes aware of the failure to file the election, agreement, statement, rebuttal, computation, or other information, the person attaches all the documents that should have been filed, as well as a written statement setting forth the reasons for the failure to timely comply, to an amended return that amends the return to which the documents should have been attached under Sec. 1503(d) and the regulations. In addition, under Regs. Sec. 1.1503(d)-1(c)(2)(ii), the taxpayer must provide a copy of the amended return and all required attachments to the Director as follows:

  1. If the taxpayer is under examination for any tax year in which the taxpayer requests relief, the taxpayer must provide a copy of the amended return and attachments to the personnel conducting the examination.
  2. If the taxpayer is not under examination for any tax year in which the taxpayer requests relief, the taxpayer must provide a copy of the amended return and attachments to the Director with jurisdiction over the taxpayer’s return.
Basis Considerations

The 2007 DCL regulations provide new basis rules. Taxpayers may apply the basis-adjustment rules discussed below for all open years in which such basis is relevant, even if the basis adjustment is attributable to a DCL incurred (or recaptured) in a closed tax year (Regs. Sec. 1.1503(d)-8(b)(5)). Taxpayers must apply the provisions consistently for all open years.

The basis of stock in an affiliated DRC, an affiliated domestic owner of a separate unit, and other affiliated group members is adjusted in accordance with Regs. Sec. 1.1502-32.38 The adjusted basis of an interest in a hybrid-entity partnership and a partnership through which a domestic owner indirectly owns a separate unit is adjusted in accordance with Sec. 705, subject to modifications (Regs. Sec. 1.1503(d)-5(g)(2)(ii)). The adjusted basis is not decreased for any amount of a DCL attributable to the partnership interest, or separate unit owned indirectly through a partnership, as appli-cable, that is not absorbed as a result of the domestic-use limitation. The adjusted basis will, however, be de-creased for the amount of DCL that is absorbed in a carryover or carryback tax year. The adjusted basis will be increased for any amount included in income as a result of the recapture of a DCL attributable to the interest in the hybrid partnership, or separate unit owned indirectly through the partnership interest, as applicable.

A member owning stock in an affiliated domestic owner of the combined separate unit must adjust the basis in the stock of such domestic owner in the same manner as discussed above for a DRC or individual separate unit in accordance with Regs. Sec. 1.1502-32.39 An affiliated domestic owner must adjust its basis in a partnership, as described, for interests in a hybrid-entity partnership and a partnership through which a domestic owner indirectly owns a separate unit, taking into account only those items of income, gain, deduction, or loss attributable to each individual separate unit, prior to combination.40 If the DCL attributable to a combined separate unit is subject to the domestic-use limitation, the DCL must be allocated to an individual separate unit to the extent such individual separate unit contributed items of deduction or loss giving rise to the DCL.41 Finally, if one or more affiliated domestic owners are required to recapture all or part of a DCL, such recapture amount will be allocated to the affiliated domestic owner of the individual separate units composing the combined separate unit, to the extent such individual separate units contributed items of deduction or loss giving rise to the recaptured DCL.42

Conclusion

As seen from this article, the 2007 DCL regulations are extremely detailed and complex. Taxpayers should follow the approach above for determining if the rules apply by considering whether there is even a DRC or separate unit in the structure and, if so, whether that entity has a DCL. If a DRC or separate unit has a DCL, a taxpayer must determine whether the DCL is eligible for one of the exceptions to the general rule that a DCL cannot offset the income of a domestic affiliate. If an exception is applicable, the taxpayer must monitor whether there is a triggering event of such DCL over the five-year certification period creating a recapture event. However, a taxpayer may be able to rebut the presumption of a triggering event.

For information about this article, contact Ms. Rollinson at margie.rollinson@ey.com, Ms. O’Connor at margaret.oconnor@ey.com, or Ms. Jacobs at karen.jacobs@ey.com.

Notes

27 An affiliated DRC or affiliated domestic owner will be considered to cease to be a member of the consolidated group if it is no longer a member of the group within the meaning of Regs. Sec. 1.1502-1(b), or if the group discontinues existence (for example, when the group no longer files a consolidated return). An acquisition described in Regs. Sec. 1.1502-75(d)(3), in which the consolidated group that includes the affiliated DRC or affiliated domestic owner is treated as remaining in existence, is not treated as a triggering event.

28 This triggering event must be compared with the exception to foreign use for certain asset basis carryovers. Specifically, the foreign-use triggering event in (1) above will likely occur before this triggering event as a result of a 30% reduction in the aggregate adjusted basis of assets versus a 50% reduction in the FMV of such assets. However, if there is less than a 50% reduction in the FMV of the assets and at least a 30% reduction in the aggregate adjusted basis of assets, but the DCL is not available for foreign use, neither triggering event will apply.

29 This triggering event also must be compared with the exception to foreign use for a de minimis reduction in an interest in a separate unit. Specifically, the foreign-use triggering event in (1) above will likely occur before this triggering event as a result of a 10% reduction in the interest of a separate unit over a 12-month period or an aggregate 30% reduction in interest as of the last day of the tax year in which the DCL was incurred. However, if the DCL is not available for foreign use and there is less than a 50% reduction in interest, there is not a triggering event under either (1) or (5).

30 Rev. Rul. 99-5, 1991-1 CB 434. This revenue ruling deals with the tax treatment when a new owner acquires an interest in a single-member LLC so that the LLC is classified as a partnership.

31 Sec. 708 provides rules for determining continuation of partnership.

32 See Sec. 6601 for the computation of interest on a tax liability that is not paid timely.

33 Regs. Sec. 1.1503(d)-6(h)(2)(i). The separate accounting should be signed under penalties of perjury by the person who signs the elector’s tax return, should be labeled “Reduction of Recapture Amount” at the top of the page, and should indicate that it is submitted under the provisions of Regs. Sec. 1.1503(d)-6(h)(2)(i). The accounting must be attached to, and filed by the due date (including extensions) of, the elector’s income tax return for the tax year in which the triggering event occurs.

34 Regs. Sec. 1.1503(d)-6(h)(2)(ii). An elector must prepare a computation demonstrating the reduction in the net interest owed as a result of treating the DCL as a loss subject to the restrictions of the domestic-use limitation. The computation must be signed under penalties of perjury by the person who signs the elector’s tax return, must be labeled “Reduction of Interest Charge” at the top of the page, and must indicate that it is submitted under the provisions of Regs. Sec. 1.1503(d)-6(h)(2)(ii). The computation must be attached to, and filed by the due date (including extensions) of, the elector’s income tax return for the tax year in which the triggering event occurs.

35 The computation must be signed under penalties of perjury and attached to, and filed by the due date (including extensions) of, the income tax return for the tax year in which the triggering event occurs (or, when the triggering event is a foreign use of the DCL, the tax year that includes the last day of the foreign tax year during which such foreign use occurs). Regs. Sec. 1.1503(d)-6(h)(4)(ii).

36 Regs. Sec. 1.1503-2(g)(2)(iv)(B)(2)(i) of the 1992 DCL regulations.

37 Regs. Sec. 1.1503(d)-8(b)(3)(ii).

38 Regs. Sec. 1.1503(d)-5(g)(1).

39 Regs. Sec. 1.1503(d)-5(g)(3).

40 Id.

41 Id.

42 Id. It is not entirely clear how the basis rules, which associate gain on the sale of the separate unit with the separate unit, and the rules that allow for a reduction in the recapture amount all work together.

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