KPMG Requests Dual Consolidated Loss Relief

On behalf of a client and in response to the Treasury Department and the Internal Revenue Service's request for comments, this letter requests that the government provide a dual consolidated loss triggering event exception for divestitures required by the "Volcker Rule." The Volcker Rule, among other things, requires banking entities to dispose of certain interests in hedge funds and private equity funds. Without guidance from the Treasury Department and the Internal Revenue Service, the disposition of such interests could create triggering events under dual consolidated loss regulations that would result in unintended and potentially large income tax liabilities.

This letter provides an Executive Summary, discusses the relevant provisions of the dual consolidated loss rules and the Volcker Rule, explains the reason for the needed relief, proposes text of remedial guidance, and suggests a meeting to discuss any remaining issues or concerns.

I. Executive Summary

The Volcker Rule requires banks and other related institutions to dispose of investments in certain private equity funds and hedge funds. Volcker Rule divestitures may result in dual consolidated loss recapture because the divestitures may be triggering events under existing dual consolidated loss domestic use elections filed with the Internal Revenue Service. The dual consolidated loss recapture amounts may be disproportionately large because the dual consolidated loss rules require U.S. consolidated groups to combine all foreign flow-through operations on a country-by-country basis.

The existing dual consolidated loss rules contain an exception for government-mandated divestitures, but the exception is inapplicable to Volcker Rule divestitures because the exception is limited to divestitures required by foreign governments. The stated policy supporting the existing exception is that taxpayers should not be subject to dual consolidated loss recapture when the divestiture requirement is beyond the taxpayer's control. Volcker Rule divestitures required by the U.S. Government are also beyond the taxpayer's control and, therefore, implicate the same policy considerations that convinced the Treasury Department and the Internal Revenue Service to provide the exception for foreign government-mandated divestitures.

The Treasury Department and the Internal Revenue Service have requested comments from the public regarding other events and transactions that should be exempted from dual consolidated loss recapture. In response to that request and because of the recent Volcker Rule effective date, this letter requests expedited amendment to the dual consolidated loss rules exempting Volcker Rule divestitures from dual consolidated loss recapture.

II. Background

Congress in 1986 enacted the dual consolidated loss ("DCL") provision to prevent "double dipping" of certain corporate losses.¹ Although not defined in the Code or the Treasury Regulations, a double dip generally is the use of a single loss to offset two separate streams of income, one of which is not immediately subject to U.S. federal income tax.² Section 1503(d) prohibits U.S. consolidated groups from using DCLs incurred by an affiliated dual resident corporation to reduce the U.S. corporate taxable income of any other member of the affiliated group, except to the extent provided in regulations.³

Congress in 2010 enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act")⁴ in response to the "financial crisis that nearly crippled the U.S. economy beginning in 2008."⁵ Added by Senate amendment to the original House version of Wall Street reform legislation, the Volcker Rule prohibits banks from engaging in proprietary trading or investing in certain funds. The rule is known as the Volcker Rule because former Federal Reserve Chairman Paul Volcker advocated its inclusion in Wall Street reform legislation to reduce systemic risk in federally insured institutions.⁶

III. The DCL Regulations

In General

The DCL rules are contained in complex, detailed regulations that isolate certain corporate losses and limit their deductibility to carefully prescribed circumstances.⁷ The DCL regulations define a DCL to include "a net loss attributable to a separate unit."⁸ A corporation owns a separate unit if it owns directly or indirectly a branch operation in a foreign country or if it owns directly or indirectly an interest in a foreign hybrid entity.⁹ A foreign hybrid entity is an entity that is subject to income tax in a foreign country as a corporation (or otherwise at"the entity level) and that is not taxable as a corporation or association for U.S. federal income tax purposes.¹⁰ The DCL rules also contain a mandatory "combined separate unit rule" that requires a U.S. consolidated group of corporations to combine on a country-by-country basis each group member's individual separate units into a single, combined separate unit.¹¹ The DCL regulations contain detailed accounting rules for determining the items of income, gain, deduction, and loss attributable to separate units and for calculating a DCL.¹²

If a separate unit (or combined separate unit) incurs a DCL, the items of deduction and loss taken into account in computing the DCL may not be used to offset or reduce the income of the U.S. corporate owner of the separate unit or the income of any other member of the consolidated group.¹³ This prohibition on the use of items of deduction and loss taken into account in computing a DCL (referred to in the DCL regulations as a "domestic use") effectuates the anti-double dipping restriction by ensuring that the items of deduction and loss will not be used in the United States.

A U.S. consolidated group may have a domestic use of a DCL in certain prescribed circumstances. In particular, a taxpayer may have a domestic use of a DCL if it files a domestic use election ("DUE") for the DCL.¹⁴ A taxpayer filing a DUE must certify that there has not been a "foreign use" of the DCL and must agree to recapture the DCL as gross income (plus interest) if a "triggering event" occurs within the five year period following the year in which the DCL was incurred.¹⁵ A taxpayer making a DUE, therefore, must continue to monitor the items of deduction and loss taken into account in computing the DCL for an additional five years following the year in which the DCL was incurred and will have an income inclusion if there is a triggering event within the five year period.

Foreign Use

A foreign use generally occurs if an item of deduction or loss taken into account in computing a DCL is "made available" to offset or reduce an item of income or gain of an entity that is treated as a foreign corporation for Federal income tax purposes.¹⁶ The made available definition is broad; the breadth of the definition is illustrated by two principles. First, the made available definition adopts an "all or nothing" standard that requires a taxpayer to track and ring-fence (for foreign income tax purposes) every dollar of every item of deduction and loss taken into account in computing the DCL, to wit: a foreign use will occur when "any portion of a deduction or loss taken into account is made available for an offset."¹⁷ Under the all or nothing standard, there is no such thing as a partial foreign use of a DCL. Thus, mere timing differences in depreciation or other deductions can create a potential foreign use of the entire DCL.¹⁸

Second, the made available definition adopts a hypothetical standard of a foreign use, which means a foreign use may occur "regardless of whether [an item of deduction or loss taken into account in computing the DCL] actually offsets or reduces any items of income or gain under the income tax laws of the foreign country in such year, and regardless of whether any of the items may be so offset or reduced are regarded as income under U.S. income tax principles."¹⁹ Thus, taxpayers must maintain control over and monitor (for foreign income tax purposes) the items of deduction and loss taken into account in computing the DCL to ensure that no foreign use occurs.²⁰

Interaction of Foreign Use and Combined Separate Unit Rules

Some additional principles may be gleaned from the interaction of these rules. First, taxpayers must monitor and ring-fence (for foreign income tax purposes) all items of deduction and loss taken into account in computing a combined separate unit DCL, including the items of individual separate units within the combined separate unit that were profitable on a stand-alone basis during the tax year. This observation requires additional explanation. The DCL accounting rules, together with the combined separate unit rule, require consolidated groups to identify and include all items of income, gain, deduction, and loss attributable to each individual separate unit within the combined separate unit pool for purposes of calculating a DCL.²¹ If the combined separate unit's items of income and gain equal or exceed its items of deduction and loss, there is no DCL for the tax year.

If the combined separate unit's items of income and gain are less than its items of deduction and loss, there is a DCL consisting of a pro rata portion of the combined separate unit's items of deduction and loss.²² The items of deduction and loss comprising the combined separate unit DCL is determined by netting a pro rata portion of each item of deduction and loss of the combined separate unit against the combined separate unit's items of income and gain.²³ The remaining pro rata portion of the combined separate unit's items of deduction and loss comprise the combined separate unit DCL.²⁴ Thus, the items of each individual separate unit within the combined separate unit become a single, combined separate unit pool and do not directly offset items within the individual separate unit.²⁵

Once the DCL is calculated, the items of income and gain attributable to the combined separate unit and the pro rata portion of each item of deduction and loss that was netted against the income and gain items are included on the U.S. Federal income tax return.²⁶ If the taxpayer does not make a DUE for the DCL, the items of deduction and loss taken into account in computing the DCL are not included on the U.S. Federal income tax return and, instead, are subject to the separate return limitation year ("SRLY") provisions of Treasury Regulation § 1.1502-21(c), as modified by the DCL rules.²⁷ If the taxpayer makes a DUE for the DCL, the items of deduction and loss taken into account in computing the DCL also are included on the U.S. Federal income tax return.²⁸

The effect of these rules is that the individual separate units (both profitable and loss making) are absorbed into the combined separate unit, and the items of deduction and loss of all individual separate units that are not taken into account in computing a DCL are offset and absorbed by the items of income and gain of the entire U.S. consolidated group on a pro rata basis. If the taxpayer makes a DUE for a DCL, the pro rata portion of the items of deduction and loss that are taken into account in computing the DCL also are absorbed by the U.S. consolidated group. Thus, once DCL items are put to a domestic use, all individual separate units within a combined separate unit are amalgamated into a single, indivisible tax unit for Federal income tax purposes. The indivisible tax unit cannot be untangled to account for a partial foreign use. An example illustrates the point.

Second, a diminution of a taxpayer's interest in a separate unit (e.g., through the entry of a new investor, change in partnership allocations, the disposition of all or part of an individual separate unit within a combined separate unit) can result in a foreign use because the other owners of the separate unit may benefit from some of the DCL items in future years.³² The other owners may benefit from a DCL item in a future year if the DCL items become part of a foreign net operating loss ("NOL") account or if there is an inchoate, imbedded deduction that was taken into account in computing a prior year DCL. A foreign use, however, does not occur if the diminution in the interest is de minimis, which means a diminution of less than 10 percent during a 12 month period and less than 30 percent at any time.³³ In the case of a separate unit owned through a partnership or hybrid partnership, the diminution is measured by reference to the owner's interest in the profits or the capital of the separate unit.³⁴ The IRS Associate Chief Counsel (International) has advised that the de minimis reduction is calculated by reference to the interest in the entire combined separate unit.³⁵ The advice memorandum, however, does not provide any guidance on calculating the profits percentage that one individual separate unit bears to the combined separate unit, which leaves many unresolved analytical issues involving the de minimis calculation in the context of combined separate units.³⁶

Third, dispositions of a separate unit's assets in carryover basis transactions may result in the potential duplication of deductions that create a potential foreign use.³⁷ As illustrated by Example 1, an embedded, inchoate deduction creates the potential for foreign use because the cost recovery of asset basis may have contributed to a DCL, but for foreign income tax purposes, the same tax basis may be available to generate a future foreign income tax. benefit either through amortization cost recovery or by reducing gain on disposition.³⁸ The DCL regulations provide a de minimis exception for asset basis carryover transactions, if: (1) the aggregate adjusted basis of transferred assets is less than 10 percent of the separate unit's asset basis over the 12 month period ending on the date of transfer; and (2) aggregate adjusted basis of all assets transferred at any time is less than 30 percent of the aggregate adjusted basis all of the separate unit's assets determined by reference to the taxable year in which the DCL was generated.³⁹

Finally, although there are some specific de minimis exceptions for the diminution of an interest in a separate unit and for certain carryover basis transactions, there is no general de minimis rule and no partial foreign use concept. That is, if a single dollar of deduction or loss taken into account in computing the DCL is made available for a foreign use, the entire DCL is put to a foreign use.

Triggering Events

Triggering events include a foreign use of a DCL⁴⁰ and other transactions or events that impair the taxpayer's ability to monitor and control the items of deduction and loss taken into account in computing the DCL.⁴¹ In particular, triggering events include the disposition of 50 percent or more of a separate unit's assets ("asset transfer triggering events")⁴² and the disposition of 50 percent or more of the interests in a separate unit ("interest transfer triggering events").⁴³ The 50 percent threshold for interest transfer triggering events is measured by voting power or value. Whether the interest transfer triggering event 50 percent threshold is determined only by reference to the vote attributable to the transferred individual separate unit within a combined separate unit or by reference to the combined separate unit is unclear. The last sentence in Treasury Regulation § 1.1503(d)-1(b)(4)(ii) suggests that the determination is made by reference to the entire combined separate unit.⁴⁴ If the 50 percent threshold is determined by reference to the combined separate unit, then there are unresolved analytical issues with respect to comparing the voting power of one individual separate unit to the voting power of the combined separate unit.⁴⁵

A taxpayer may avoid a triggering event requiring recapture of a DCL by exercising certain rebuttal rights. With respect to an asset transfer triggering event, a taxpayer may avoid recapture by demonstrating the transfer of assets did not result in a carryover of the separate unit's expenses or .deductions under foreign income tax law.⁴⁶ With respect to an interest transfer triggering event, a taxpayer may avoid recapture by demonstrating that there can be no foreign use "by any means" of the DCL for the remainder of the 5 year period.⁴⁷ Because of the all or nothing standard and the existence of a foreign NOL account or imbedded, inchoate deductions, usually taxpayers cannot establish that there can be no foreign use of a DCL for the remainder of the 5 year period.⁴⁸

Finally and perhaps most importantly, exercising rebuttal rights and establishing de minimis thresholds requires access to detailed information that is often unavailable to minority interest holders. The paucity of necessary information in this context Is compounded when the investment involves tiers of flow-through entities.

Compulsory Transfer Exception

The DCL regulations also contain a foreign use and triggering event exception for compulsory transfers that merits full recitation:

IV. The Volcker Rule

Background

The Volcker Rule is contained in section 619 of the Dodd-Frank Act and is further implemented by final rules issued by the Board of Governors of the Federal Reserve System (the "Board"), the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, and the Commodities Future Trading Commission (hereinafter the "Agencies").⁵³ The Senate Committee on Banking, Housing, and Urban Affairs described the statutory provision as follows:

General Rule

The Volcker Rule is complex due to its lengthy definitions and exceptions.⁵⁸ The operative provision of the Volcker Rule, by contrast, is brief and simply stated:

Consistent with the statute, the final regulatory Volcker Rule generally prohibits a bank from acquiring or retaining directly or indirectly an interest in a covered fund.⁶¹ The final regulatory Volcker Rule contains important definitions and clarifications of the statutory rule⁶² and requires banks to institute a comprehensive compliance and reporting program designed to provide internal controls and to identify activities and investments that are not Volcker Rule compliant.⁶³ The definition of covered fond is objective, that is: a covered fond is determined by reference to objective criteria and not by reference to any specific finding or determination of high risk or conflict of interest.⁶⁴ Thus, many benign investments may he covered funds subject to Volcker Rule divestiture and the resulting collateral consequences. For instance, certain relatively low risk collateralized debt obligations backed by trust preferred securities ("TruPS CDOs") were initially treated as covered funds under the December 10, 2013 final Volcker Rule.⁶⁵ The imminent Volcker Rule divestitures of certain TruPS CDOs created regulatory capital and financial statement problems for some community banks that prompted highly publicized requests for immediate regulatory relief.⁶⁶ The Agencies on January 14, 2014 dispensed with formal notice and comment requirements and accommodated the regulated community in the TruPS-CDO matter by issuing an Interim Final Rule exempting certain TruPS CDOs from Volcker Rule divestiture.⁶⁷

Effective Date and Conformance Period

The effective date of the Volcker Rule is complicated. The statute states that the rule "shall take effect on the earlier of -- (A) 12 months after the date of the issuance of final rules under [ § 619(b)(2)]; or (B) 2 years after the date of enactment of this section."⁶⁸ Final regulatory rules under § 619(b)(2) were issued on December 10, 2013 and the statute was enacted on July 21, 2010; therefore, the statutory effective date is July 21, 2012. The December 10, 2013 final regulatory rules, however, state that the regulatory rules are effective April 1, 2014.⁶⁹

The effective date provisions also include a "conformance period for divestiture" that requires a bank to "bring its activities and investments into compliance with the requirements of this section not later than 2 years after the date on which the requirements become effective pursuant to this section[.]"⁷⁰ Thus, the conformance period runs from July 21, 2012 to July 21, 2014, requiring banks to be in compliance with the Volcker Rule (and thus to divest of prohibited investments) by July 21, 2014.⁷¹ The statute, however, gives the Board authority "by rule or order" to extend the conformance period for three one-year periods.⁷²

Recognizing the additional burdens created by the December 10, 2013 final regulatory rules and the rapidly approaching end of the conformance period, the Board by order dated December 31, 2013 exercised the first of its three options to extend the conformance period to July 21, 2015.⁷³ The extended conformance period ends on July 21, 2015, but the Board advised on June 8, 2012 and reiterated on December 31, 2013 that it expects banks to "engage in good-faith efforts" during the conformance period to ensure complete compliance with the Volcker Rule by the end of the conformance period.⁷⁴ Thus, even though the conformance period does not end until July 21, 2015, the Board suggested that banks should begin divesting of interests in covered funds as of July 21, 2012. The April 1, 2014 effective date of the final regulatory Volcker Rule will accelerate Volcker Rule divestitures as banks implement their Volcker Rule compliance and reporting programs.

Enforcement Mechanism and Penalties for Noncompliance

The enforcement mechanism and penalties for noncompliance with the Volcker Rule are uncertain and subject to comment and controversy.⁷⁵ The statute does not contain a specific enforcement mechanism or penalty for noncompliance; the only reference to noncompliance provides that if a bank violates the Volcker Rule the appropriate agency

V. Interaction of DCL Rules and the Volcker Rule

The following example illustrates some DCL triggering event issues created by Volcker Rule divestitures.

VI. The Case for Remedial Guidance

The Volcker Rule is a change in public policy regarding the permitted activities of certain banking institutions; the adoption of the Volcker Rule does not reflect an assertion by Congress that institutions subject to the Volcker Rule had engaged in inappropriate activities. Nevertheless, the divestiture requirement of the Volcker Rule creates significant unintended DCL recapture consequences that need to be remedied by expedited guidance, such as an Interim Final Rule or Notice.

Pursuant to the Treasury Department and Internal Revenue Service's request for comments, this letter requests additional guidance to eliminate the unintended and potentially harsh DCL recapture consequences resulting from Volcker Rule divestitures. Volcker Rule divestitures implicate the same policy concerns expressed by the American Petroleum Institute and acceded to by the Treasury Department and the Internal Revenue Service in enacting the DCL compulsory transfer exception. In particular, the Treasury Department and the Internal Revenue Service included the compulsory transfer exception because divestitures forced by foreign governments were "largely outside of the taxpayer's control."⁸² Volcker Rule divestitures also are outside a bank's control, and, under this rationale, there is no reason to limit the compulsory transfer exception to divestitures required by a foreign government. The effect of both divestiture requirements is the same.

There are two simple and effective ways to provide this requested relief. The first remedy is to provide a new foreign use and triggering event exception for divestitures required by the Volcker Rule.

The second remedy is to amend the existing compulsory transfer exception to include divestitures required by the U.S. Government, as well as divestitures required by state and local governments. As discussed above, uncertainty regarding the Volcker Rule enforcement mechanism would create ambiguity if the "condition of doing business" requirement were left in the compulsory transfer exception. Accordingly, the second remedy requires deleting Treasury Regulation § 1.1503(d)-6(f)(5)(i) and replacing it with the following: (i) Legally required by a government.

The second remedy is broader than the first, but it eliminates the need to address future government-mandated divestitures on an ad hoc basis.

Both suggested remedies are surgical in nature and would not require the Treasury Department and the Internal Revenue Service to revisit and change the settled positions on the mandatory combined separate unit rule and the all or nothing standard. Revisiting these positions would be welcome by many taxpayers,⁸³ but doing so requires a more careful review of overall DCL policy and implicates potential retroactivity issues. Such matters would likely affect several aspects of the DCL regulations and would require considerable time and resources. The requested remedies, by contrast, require a simple policy decision and may be achieved by an unobtrusive, limited change to the existing regulations. Moreover, because banks will need to make Volcker Rule divestitures over the course of 2014 and 2015, time is of the essence and expedited guidance is required.

Finally, granting the requested relief on an expedited basis would be consistent with the executive branch's accommodative and flexible approach regarding Volcker Rule implementation, as exhibited by the Board's extension of the conformance period and the Agencies' issuance of the Interim Final Rule addressing TruPS CDOs. Because the U.S. income tax liabilities resulting from the interaction of the DCL rules and the Volcker Rule are potentially large and may have other near-term collateral effect, the Treasury Department and the Internal Revenue Service should use expedited procedures in providing remedial guidance.

VII. Conclusion

I appreciate your attention to this matter. I welcome the opportunity to meet to discuss any remaining issues or concerns.

²See generally T.D. 8434, 1992-2 C.B. 240, 241; T.D. 9315, 2007-1 C.B. 891.

³ Section 1503(d)(2)(B) provides "[t]o the extent provided in regulations, the term 'dual consolidated loss' shall not include any loss which, under the foreign income tax law, does not offset the income of any foreign corporation."

⁴See Pub. L. No. 111-203.

⁵ S. Rep. No. 111-176, at 2 (2010).

⁶See S. Rep. No. 111-176, at 9 (citing Paul Volcker's February 2, 2010 testimony before the Senate Banking Committee).

⁷See generally Treas Reg. §§ 1.1503(d)-1 through 8, T.D. 9315, 2007-1 C.B. 891. Treasury Decision 9315 finalized proposed regulations (the "Proposed DCL Regulations"), which were published in the Federal Register on May 24, 2005 at Volume 70, page 29, 868.

⁸ Treas. Reg. § 1.1503(d)-1 (b)(5)(ii). A DCL also includes a net operating loss incurred by a dual resident corporation. See I.R.C. § 1503(d)(2)(A); Treas. Reg. § 1.1503(d)-1(b)(5)(i). The DCL provisions affecting dual resident corporations are not discussed in this letter.

⁹ See Treas. Reg. § I. J 503(d)-1(b)(4). Indirectly for these purposes means owned through a partnership, an entity that is disregarded as a separate entity from its owner (a "disregarded entity" or "DE"), or a grantor trust. See Treas. Reg.§ 1.1503(d)-1(b)(19).

¹⁰See Treas. Reg. § 1.1503(d)-1(b)(3).

¹¹ See Treas. Reg. § L1503(d)-1(b)(4)(ii). The combined separate unit rule applies to all separate units within a country and does not contain an exception for de minimis interests. Moreover, any individual separate unit composing a combined separate unit loses its character as an individual separate unit, unless specifically provided otherwise in the DCL regulations. See id.

¹²See generally Treas. Reg. § 1.1503(d)-5.

¹³ See Treas. Reg. § 1.1503(d)-2.

¹⁴See Treas. Reg. § 1.1503(d)-6(d).

¹⁵See Treas. Reg. §§ 1.1503(d)-6(d)(i), (e), (j); L1503(d)-i(b)(20). A taxpayer filing a DUE must comply with other substantive and administrative requirements that are not relevant to this letter. See generally Treas. Reg. § 1.1503(d)-6(d)(1),(g).

¹⁶See generally Treas. Reg. § 1.1503(d)-3.

¹⁷ Treas. Reg. § 1.1503(d)-3(b).

¹⁸See Treas. Reg. § 1.1503(d)-7(c), Exs. 15, 16, 31, 33.

¹⁹ Treas. Reg. § 1.1503(d)-3(b); see also Treas. Reg. § 1.1503(d)-7(c), Exs. 5 and 9 (confirming that a foreign use occurs even when the DCL deductions do not contemporaneously offset any income in the foreign jurisdiction).

²⁰Cf. Treas. Reg. § 1.1503(d)-7(c), Ex. 31.

²¹See Treas. Reg. § 1.1503(d)-5(c)(4)(B)(ii).

²²See Treas. Reg. § 1.1503(d)-4(c)(2), -7(c), Exs. 29 and 38.

²³See id.

²⁴See id.

²⁵See id; see also § 1.1503(d)-7(c), Ex. 19.

²⁶See id.

²⁷See id.

²⁸See Treas. Reg. § 1.1503(d)-2, -6(d), -7(c), Exs. 2, 3, 4.

²⁹See Treas. Reg. § 1.1503(d)-7(c), Exs. 29 and 38.

³⁰ As discussed, infra, this could result from US2's disposition of all or part of its interests in DE2. Imbedded, inchoate deductions also may exist for DE1.

³¹ As discussed, infra, the failure to monitor and control these items may trigger DCL recapture with respect to prior year DUEs.

³²See Treas. Reg. § 1.1503(d)-3(c)(4)(iii); see also Treas. Reg. § 1.1503(d)-7(c),Exs. 13 and 14.

³³See Treas. Reg. § 1.1503(d)-3(c)(5); see also Treas. Reg. § 1.1503(d)-7(c), Ex. 5.

³⁴See Treas. Reg. § 1.1503(d)-3(c)(5)(m).

³⁵See Advice Memorandum 2008-007 (June 25, 2008).

³⁶ The percentage of capital calculation is presumably straightforward, although the requisite information is often unavailable.

³⁷Cf. Treas. Reg. § 1.1503(d)-7(c), Ex. 33.

³⁸See also Treas. Reg. § 1.1503(d)-7(c), Ex. 33.

³⁹See Treas. Reg. § 1.1503(d)-3(c)(6).

⁴⁰See Treas. Reg. § 1.1503(d)-6(e)(1)(i).

⁴¹See Treas. Reg. § 1.1503(d)-6(e)(1)(ii-vii).

⁴²See Treas. Reg. § 1.1503(d)-6(e)(1)(iv).

⁴³ See Treas. Reg. § 1.1503(d)-6(e)(1)(v).

⁴⁴See also T.D. 9315, 2007-1 C.B. 891, 893 ("the separate unit combination rule generally applies for all purposes of section 1503(d) . . . [f]or example, in determining whether there is a triggering event as a result of the transfer of the assets of a combined separate unit, all of the assets of the combined separate unit are taken into account (rather than only the assets of any individual separate unit within the combined separate unit."). This language from the Preamble of the DCL regulations, however, addresses asset transfer triggering events but does not address interest transfer triggering events.

⁴⁵See, e.g., Paul J. Crispino and John D. Bates, DCL Separate Unit Combination and Foreign Use Rules Issues, 134 Tax Notes 1407, 1416 (March 12, 2012). As noted infra, this analysis is particularly difficult when the combined separate unit is comprised of hybrid entity separate units and of foreign branch separate units.

⁴⁶See Treas. Reg. § 1.1503(d)-6(e)(2)(ii).

⁴⁷See Treas. Reg. § 1.1503(d)-6(e)(2)(i).

⁴⁸ In this respect, it is important to note that the de minimis exception and other exceptions to foreign use described in Treasury Regulation § 1.1503(d)-3(c) do not apply in determining whether a presumption of recapture may be rebutted. See Treas. Reg. § 1.1503(d)-3(c)(1).

⁴⁹ Treas. Reg. § 1.1503(d)-6(f)(5).

⁵⁰ American Petroleum Institute, Comments On Proposed Regulations Addressing Dual Consolidated losses, reprinted in, 2005 TNT 180-76 (Sept. 19, 2005) (emphasis added). The Treasury Department and Internal Revenue Service in the Preamble to the Proposed DCL Regulations requested comments with respect to additional safe harbors for foreign use and triggering events and stated that subsequent guidance in the form of a revenue procedure would be issued providing such relief. See 70 Fed.Reg. 29, 881 (May 24, 2005). After receiving comments (including the American Petroleum Institute's comments), the Treasury Department and the Internal Revenue Service determined that the final DCL regulations (rather than a revenue procedure) should contain many of the requested safe harbors.

⁵¹ T.D. 9315, 2007-1 C.B. 891, 896; see also 2007-1 C.B. 891, 902.

⁵²See Treas. Reg. § U503(d)-3(c)(9); see T.D. 9315, 2007-1 C.B. 891, 896.

⁵³See 79 Fed.Reg. 5536 (January 31, 2014). The Dodd-Frank Act directs the Agencies to issue coordinated rules to implement certain provisions of the Volcker Rule. See Dodd-Frank Act, Pub. L. No. 111-203, § 619(b)(2). Because the final agency rules are issued in identical form by several agencies of the Federal Government, the coordinated rules simultaneously amend several volumes and parts of the C.F.R, (e.g., the Board rules amend 12 C.F.R. Part 248, the Office of the Comptroller of the Currency rules amend 12 C.F.R. Part 44, the Securities and Exchange Commission rules amend 17 C.F.R. Part 255). For ease of reference, this letter will refer to the final rule issued by the Board and will not cross-reference the other Agency amendments to corresponding volumes and parts of the C.F.R.

⁵⁴ S. Rep. No. 111-176, at 90 (2010).

⁵⁵ Pub. L. 106-102.

⁵⁶ Senate Comm. on Banking, Housing, and Urban Affairs Report on the Financial Services Modernization Act of 1999, S. Rep. No. 106-44, at 4 (1999).

⁵⁷See Dodd-Frank Act, Pub. L. No. 111-203, § 1601 (amending section 1256 of the Code).

⁵⁸See, e.g., Dodd-Frank Act, Pub. L. 111-203, § 619(d), (e), (f), (h). The implementing regulations are even more detailed and complex. See 12 C.F.R. §§ 248.10(a)(2), (b), (c-g), 248.11-15.

⁵⁹ Dodd-Frank Act, Fob. L. 111-203, § 619(a)(1) (emphasis added). See also 12 C.F.R. §§ 248.3(a), 248.10(a)(1). The final rules refer to hedge fund, private equity funds, and other similar funds subject to the Volcker Rule as "covered funds." See 12 C.F.R. § 248.10(b). The remainder of this letter will use the same nomenclature. The Volcker Rule also imposes additional capital requirements and quantitative limits on certain nonbank financial companies that engage in proprietary trading or own interests in hedge funds and private equity funds. See Dodd-Frank Act, Pub. L. 111-203, § 619(a)(2). This letter addresses only the Volcker Rule provisions that are applicable to banks.

⁶⁰See Dodd-Frank Act, Pub. L. 111-203, § 619(c)(2).

⁶¹See 12 C.F.R. § 248.10(a)(1).

⁶²See 12 C.F.R. § 248.1-15.

⁶³See 12 C.F.R. § 248.20 and Appendix A and B; see also Dodd-Frank Act, Pub. L. 111-203, § 619(e)(1) (providing explicit regulator)' authority to issue rules regarding internal controls and recordkeeping).

⁶⁴See generally 12 C.F.R. § 248.10(b).

⁶⁵See Statement regarding Treatment of Certain Collateralized Debt Obligations Backed by Trust Preferred Securities under the Rules implementing Section 619 of the Dodd-Frank Act, www.federalreserve.gov/newsevents/press/bcreg/20131227a.htm.

⁶⁶See, e.g., Andrew R. Johnson, Zions Not Only Bank to Be Hit by Volcker CDO Impact, Wall St. J., Dec. 17, 2013, http://blogs.wsj.com/moneybeat/2013/12/17/zions-not-only-bank-to-be-hit-by-volcker-cdo-impact/; American Bankers Association's December 23, 2013 Letter to the Board, FDIC, and Comptroller of the Currency regarding the Volcker Rule and TruPS CDOs, http://www.aba.com/Advocacy/LetterstoCongress/Documents/ABA-Volcker-Regulators-122313.pdf; Rob Blackwell, Banks Near Victory Over Volcker Rule Provision, Am. Banker, Jan. 2, 2014, http://www.castconsultants.com/wp-content/uploads/2014/01/Banks-Near-Victory-in-Fight-Over-Volcker-Rule-Provision.pdf.

⁶⁷See 79 Fed.Reg. 5223 (January 31, 2014) (adding 12 C.F.R, § 248.16 to the Volcker Rule); see also id at 5226 (concluding pursuant to Administrative Procedure Act standards that notice and comment was "impracticable, unnecessary, or contrary to the public interest").

⁶⁸See Dodd-Frank Act, Pub. L. 111-203, § 619(c)(1).

⁶⁹See 79 Fed.Reg. 5536 (January 31, 2014).

⁷⁰ Dodd-Frank Act, Pub. L. 111-203, § 619(c)(2).

⁷¹See also 12 C.F.R. § 225.181(a)(1).

⁷² Dodd-Frank Act, Pub, L. 111-203, § 619(c)(2). Unlike the coordinated rulemaking provision, the statute gives the Board sole authority to extend the conformance period. Compare § 619(b)(2) with § 619(c)(2). The Board also has authority to grant specific banks extensions with respect to certain investments in "illiquid assets." See Dodd-Frank Act, Pub. L. 111-203, § 619(c)(3), (4).

⁷³See December 31, 2013 Board of Governors of the Federal Reserve System Order Extending Conformance Period to July 21, 2015. http://www.federalreserve.gov/newsevents/press/bcreg/bcreg20131210b1.pdf. The July 21, 2014 conformance period remains applicable for the Appendix A reporting and recordkeeping requirements for certain banks. See id.

⁷⁴ Statement of Policy Regarding the Conformance Period for Entities Engaged in Prohibited Proprietary Trading or Private Equity Fund or Hedge Fund Activities, 77 Fed.Reg. 33,949, 33,950 (June 8, 2012); December 31, 2013 Board of Governors of the Federal Reserve System Order Extending Conformance Period to July 21, 2015, http:/www.federalreserve.gov/newsevents/press/bcreg/bcreg20131210b1.pdf.

⁷⁵See Preamble to Final Volcker Rule, 79 Fed.Reg. at 5772-5774 (January 31, 2014) (summarizing and addressing various comments on the enforcement mechanism and penalties); see also Peter J. Hennings, Don't Expect Eye-Popping Fines for Volcker Rule Violations, N.Y. Times, Dec. 16, 2013, http://dealbook.nytimes.com/2013/12/16/dont-expect-eye-popping-fines-for-volcker-rule-violations/?_php=true&_type=blogs&_r=0.

⁷⁶ Dodd-Frank Act, Pub. L. 111-203, § 619(e).

⁷⁷See 12 C.F.R. § 248, 21.

⁷⁸ Although there may be some uncertainty as to whether Volcker Rule compliance would be legally required as a necessary requirement for doing business, it is clear that Volcker Rule compliance is necessary as a practical matter.

⁷⁹See Treas. Reg. § 1.1503(d)-6(d)(2).

⁸⁰ USBH also will be precluded from filing a DUE with respect to the 2014 Country A combined separate unit if the disposition of the interest in Fund X results in a foreign use. See Treas, Reg. § 1.1503(d)-6(d)(2).

⁸¹ In other situations a taxpayer may have already used a portion of the 10 percent yearly limitation or the 30 percent overall limitation.

⁸² T.D. 9315, 2007-1 C.B.891, 896.

⁸³See, e.g., James M. Gannon and Irwin Halpern, December 2, 2011 Letter to Treasury and Internal Revenue Service re: Comments on the Application and Impact of Section 1503(d) Dual Consolidated Loss Regulations, reprinted in 2011 TNT 245-12 (Dec. 21, 2011); James M. Gannon and Irwin Halpern, June 13, 2012 Letter to Treasury and Internal Revenue Service re: The Section 1503(d) Dual Consolidated Loss Regulations, reprinted in 2012 TNT 114-14 (June 13, 2012); John D. McDonald & Jeffrey P. Maydew, All-or-Nothing Rule Leaves Taxpayers Empty-Handed, 2010 TNT 50-8 (March 16, 2010).