IRS Confirms Application of SRLY Cumulative Register Concept to Dual Consolidated Losses

Recent informal Internal Revenue Service (IRS) guidance confirms that the cumulative separate return limitation year (SRLY) register concept applies in determining whether a dual consolidated loss (DCL) can be utilized within a consolidated group. Many U.S. insurance groups own one or more offshore insurance companies to which the DCL limitations apply by reason of a section 953(d) election to treat the foreign insurer as a domestic insurer for U.S. tax purposes. Accordingly, the recent informal guidance facilitates utilization of a section 953(d) company’s DCL in a U.S. consolidated income tax return.

The application of the cumulative register allows a DCL subject to the domestic use limitation rule, and in turn subject to the SRLY limitations (in Treas. Reg. § 1.1503(d)-4(c)(3)), to be utilized to the extent that the member or unit that incurred the DCL made a positive cumulative contribution to taxable income of the consolidated group in all prior consolidated return years. Prior to the IRS adoption of the SRLY cumulative register under the general consolidated return regulations, the SRLY limitation was computed on a year-by-year approach. In that case, a SRLY net operating loss (NOL) could not be utilized in a current year if the member that generated the SRLY NOL had no taxable income in the current year, even if the member had made a cumulative contribution to taxable income while a member of the consolidated group. IRS personnel had previously indicated orally that the cumulative approach also would apply to DCLs, but this is the first published guidance confirming the application.