On August 5, 2011, the Internal Revenue Service (the IRS) issued a generic legal advice – AM 2011-002 (the Chief Counsel Memo) – explaining how the separate return limitation year (SRLY) rules apply to the computation of consolidated taxable income for an affiliated group with a dual consolidated loss (a DCL) that is attributable to a separate unit. In the Chief Counsel Memo, the IRS concluded that a current year DCL of the separate unit should be taken into account for purposes of calculating the consolidated taxable income of the affiliated group for that taxable year to the extent that income was attributable to the separate unit in a prior taxable year of the affiliated group. Stated differently, the IRS allowed the affiliated group to use the separate unit’s current year DCL to the extent of the separate unit’s positive “SRLY register” (which also is referred to as the “cumulative register”). Significantly, the Chief Counsel Memo constitutes the first piece of written guidance issued by the IRS on this issue.

Background

In general, a DCL is a net operating loss of a dual resident corporation or the net loss attributable to a separate unit. Pursuant to § 1503(d)(1) of the Internal Revenue Code of 1986, a DCL for any taxable year of any corporation generally is not allowed to reduce the taxable income of any other member of the affiliated group of which that corporation is a member for the taxable year or any other taxable year. As a complement to the general rule of § 1503(d)(1), § 1503(d)(3) provides that, to the extent provided in Treasury regulations, any loss of a “separate unit” of a domestic corporation will be subject to the limitations of § 1503(d) in the same manner “as if such [separate] unit were a wholly owned subsidiary of such corporation.” Thus, pursuant to this rule, any loss that is attributable to a separate unit of a domestic corporation, whether or not that domestic corporation is a member of a consolidated group for U.S. federal tax purposes, generally will be treated as a DCL.