Dual consolidated losses.

• Author: Laffie, Lesli S.
• Position: FROM THE IRS

On Oct. 6, 2006, Treasury unveiled a major agreement between the U.K. and the U.S. to allow taxpayers to claim dual consolidated losses (DCLs) that otherwise would not be allowed because of conflicting legislation in the two countries.

The agreement, the first of its kind, allows taxpayers to elect whether they want to use a loss in the U.K. or the U.S., but not both. Practitioners have said this is generous treatment, as the taxing authorities could easily have provided that the loss has to be taken in the country in which the income was primarily earned. The accord also allows taxpayers to elect to use the loss in any open tax year.

Background: Negotiated by the two nations' competent authorities, the accord addresses the problem of "mirror legislation" (conflicting statutes intended to prevent taxpayers from using the same loss twice in two different jurisdictions).

The U.K.'s mirror laws effectively prevented some taxpayers from using DCLs at all. The issue has been one of the most controversial, as U.S. tax authorities work to update DCL rules under Sec. 1503(d) that are nearly 15 years old. The accord falls under Pegs. Sec. 1.1503-2(g)(1).

Eligibility: The agreement sets out a number of rules and conditions that must be met for taxpayers to...