however, that the Preamble to the proposed regulation states that the proposed regulations

however, that the Preamble to the proposed regulation states that the proposed regulations “clarify that a disregarded entity is a person for purposes of Regulation 1.881-3,” implying that the IRS does not need the proposed regulation's change to effect this result. 24 Consequently, practitioners practicing in this area should employ caution both before and after the proposed regulation becomes final. Dual Consolidated Losses. The dual consolidated loss (DCL) rules are generally intended to prevent companies with tax residency in two different jurisdictions from using the same losses to obtain tax benefits in both jurisdictions. The provisions in Section 1503(d), and the consolidated return regulations that disallow the use of a DCL, generally treat a DRE as a separate entity. 2 An example of a DRE to which the DCL rules may apply is the so-called “hybrid entity,” which is an entity that is disregarded for U.S. tax purposes but is subject to an entity-level income tax by a foreign country. “ The purpose of the DCL provisions, as applied to a domestic corporation that owns a hybrid entity, is to prevent a single net operating loss (NOL) generated by a DRE from being used in both the U.S. and in a foreign jurisdiction. ” The DCL rules apply only to a dual resident corporation (DRC). A DRC is a domestic corporation or a separate unit of the domestic corporation (e.g., a hybrid entity that is a DRE for U.S. tax purposes) that is subject to U.S. tax on its worldwide income and a foreign jurisdiction's tax on its worldwide income or with respect to its separate unit's worldwide income. “ Without the general disallowance of the DCL to the DRC, use of the DCL could occur in both the U.S. and the foreign jurisdiction because the DRC could offset its own income with the NOL generated by the DRE for U.S. tax purposes, and that NOL might also be used for foreign tax purposes against income that may not be subject to U.S. tax. 7 In general, the DCL rules forbid a DRC from reducing the taxable income of any other member of its affiliated group by the amount of the DRE's DCL unless, as provided in the regulations, the loss does not offset the income of any foreign corporation. “ For purposes of determining the DCL, the DRE is treated as a separate entity and its income, deductions, gain, and loss are computed on a “stand alone” basis from the DRC that owns the DRE. ~ In that respect, the DRE is not treated as a disregarded entity. Treatment by Foreign Countries Practitioners should also be aware of the treatment of DREs by foreign countries. Canada, for example, generally does not disregard U.S. SMLLCs; rather, it treats them as corporations. Also, a grantor trust that is disregarded in the U.S. is respected as a trust in Canada. Some income tax treaties between the U.S. and foreign countries specifically address the treatment of disregarded entities (also called “fiscally transparent” entities by some treaties). In addition to some countries treating DREs differently than the U.S., the Code contains some provisions that create special rules for certain DREs (or “fiscally transparent” entities). Section 894 generally operates to deny certain treaty benefits to a “hybrid entity” (i.e., an entity treated as fiscally transparent for U.S. income tax purposes but recognized as a separate entity for purposes of the tax law of the foreign country). Under that section, income derived by a foreign person through a fiscally transparent entity is denied the benefit of a reduced rate of withholding tax that an income tax treaty may provide if certain conditions are met. For instance, if a U.S. company makes an interest payment to an LLC that is wholly owned by a Canadian company, the payment is generally subject to the full 30% withholding rate imposed by Code section 1442(a) and is not entitled to the benefits of a reduced rate of withholding that the U.S./Canada income tax treaty would otherwise permit. HOUSE_OVERSIGHT_026591