Recognized Built-In Loss Is Subject to Sec. 382 Limitation

By Lisa Joire, J.D., LL.M., Washington, D.C.

Editor: Michael Dell, CPA

Corporations & Shareholders

In Chief Counsel Advice (CCA) 201132022, the IRS concluded that a taxpayer may include in its computation of taxable income or NOL only an amount of recognized built-in loss (RBIL) equal to its Sec. 382 limitation, whether or not the taxpayer has taxable income without regard to RBIL.


The taxpayer is a corporation and the common parent of a consolidated group. The taxpayer experienced an ownership change under Sec. 382(g) and had a net unrealized built-in loss (NUBIL) within the meaning of Sec. 382(h)(3) at the time of the change. During a Sec. 382(h)(7)(B) recognition period tax year (recognition year) following the ownership change, the taxpayer had an RBIL that was ordinary in character and exceeded the taxpayer’s Sec. 382 limitation for the recognition year. Without regard to the RBIL, the taxpayer had no taxable income for the recognition year.

The taxpayer asserted that it could include the full amount of its RBIL when computing its NOL for the recognition year because Sec. 382(a) does not “disallow” or limit an RBIL when the taxpayer has no taxable income for the recognition year before taking into account RBIL.

Law and Analysis

Sec. 382(h)(4) provides that, if a deduction for any portion of an RBIL is “disallowed” for any post-change year, such portion is carried forward to subsequent tax years but is subject to limitation under Sec. 382 in the same manner as a pre-change loss.

Therefore, to the extent an RBIL deduction is disallowed by Sec. 382(h)(4), that portion is a special attribute that may only be carried forward and is subject to the Sec. 382 limitation when used. If an RBIL deduction is not disallowed by Sec. 382(h)(4), however, it may be included in the taxpayer’s NOL for the year and may be carried back to preceding tax years under Sec. 172.

The taxpayer argued that Sec. 382(a) imposes no limitation when there is no taxable income before RBIL, so Sec. 382(h)(4) cannot disallow the loss. Therefore, the taxpayer concluded that the full amount of the RBIL should be included in its NOL for the year of recognition.

Sec. 382 does not define the term “disallowed,” and there are no applicable regulations. The legislative history of Sec. 382(h)(4), which the CCA quotes, states that the amount of any RBIL that “exceeds the section 382 limitation for any post-change year must be carried forward (not carried back) under rules similar to the rules applicable to net operating loss carryforwards and will be subject to the special limitations in the same manner as a pre-change loss” (emphasis added). Based on the legislative history, the IRS determined that the term “disallowed” meant any portion of an RBIL that exceeds the Sec. 382 limitation for the year and that such portion must be excluded from the NOL computation for that year and may only be carried forward as a special attribute under Sec. 382(h)(4).


Although this issue was also addressed earlier in CCA 200926027, it continues to be a subject of debate. This latest CCA confirms the IRS’s position that Sec. 382(h)(4) applies to any portion of an RBIL that exceeds the Sec. 382 limitation for any recognition tax year, regardless of whether there is taxable income for that year, absent the RBIL.


Michael Dell is a partner at Ernst & Young LLP in Washington, DC.

For additional information about these items, contact Mr. Dell at (202) 327-8788 or

Unless otherwise noted, contributors are members of or associated with Ernst & Young LLP.

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