Rev. Rul. 72-421

Advice has been requested whether, under the circumstances described below, the net operating loss of a foreign corporation is carried over to its domestic parent under section 381 of the Internal Revenue Code of 1954.

At December 31, 1970, S corporation, a foreign corporation, was liquidated into P corporation, its domestic parent, in a transaction that qualified as a liquidation to which the provisions of section 332 of the Code were applicable.

S was at no time engaged in a trade or business in the United States and was a nonresident foreign corporation as provided by section 1.881-1 of the Income Tax Regulations. S had no income from sources within the United States and had no treaty income. S made no election pursuant to a tax convention to be subject to United States tax on a net basis as though it were engaged in trade or business within the United States through a permanent establishment situated therein. S was at no time subject to United States income tax under chapter 1 of the Code and had filed no United States income tax returns.

S had operated at a loss for several years and if it had been a domestic corporation would have had a net operating loss carryover at December 31, 1970, as provided by section 172 of the Code.

Section 1.381(a)-1(c) of the regulations provides that a foreign corporation may be a transferor for purposes of section 381 of the Code and that the net operating loss carryovers of a foreign corporation determined under the provisions of section 172 and subchapter N (section 861 and following), chapter 1 of the Code, may be carried over in accordance with section 381 of the Code when the requirements of section 1.367-1, if applicable, have been complied with.

Section 172(c) of the Code and the regulations thereunder provide that the term "net operating loss" means the excess of the deduction allowed by chapter 1 of Subtitle A of the Code over gross income.

Subchapter N of the Code (sections 861 through 997) contains the sections of the Code under which the United States imposes an income tax upon a foreign corporation and the sections that set forth the deductions that are allowable in determining the taxable income of the foreign corporation.

Section 1.881-2 of the regulations provides that a nonresident foreign corporation is liable for a flat tax on its gross income received from sources within the United States except with respect to treaty income. Section 1.882-3 and section 1.882-4 both provide that a nonresident foreign corporation is not allowed any deductions whether or not a United States return of income is filed.

Accordingly, since in the instant case S was a foreign corporation not engaged in a trade or business within the United States and had no deductions under chapter 1 of the Code it had no net operating loss carryover determined under the provisions of section 172 and subchapter N of the Code. Therefore, its net operating loss is not a carryover to P under section 381 of the Code.