Domestic Use Limitation — Foreign Branch Separate Unit Owned Through a Partnership

P and S organize a partnership, PRSₓ, under the laws of Country X. PRSₓ is treated as a partnership for both U.S. and Country X tax purposes, and it owns FBₓ, a Country X foreign branch. PRSₓ also earns U.S. source income that is unconnected with its FBₓ branch operations; that U.S. source income is not subject to tax by Country X and is not attributable to FBₓ under § 1.1503(d)-5.

Under § 1.1503(d)-1(b)(4)(i)(A), P’s and S’s shares of FBₓ, owned indirectly through their interests in PRSₓ, are each individual foreign branch separate units. Pursuant to § 1.1503(d)-1(b)(4)(ii), those individual separate units are combined and treated as a single separate unit of the consolidated group of which P is the parent.

Unless an exception under § 1.1503(d)-6 applies, any dual consolidated loss attributable to FBₓ cannot offset income of P or S — other than income attributable to FBₓ itself, subject to the application of § 1.1503(d)-4(c). In particular, the DCL cannot offset the partners’ distributive share of the U.S. source income earned through their interests in PRSₓ, nor can it offset income of any other domestic affiliate.

• Consolidated Returns — Example 2
• Consolidated Returns — Example 2 (Alternate Facts)
• State Law Consolidation