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Proposed rules would govern built-in gains and losses

By Alistair M. Nevius, J.D.

Please note: This item is from our archives and was published in 2019. It is provided for historical reference. The content may be out of date and links may no longer function.

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Editor: Sally P. Schreiber, J.D.

To provide “clearer and more comprehensive guidance” on the application of Sec. 382(h), the IRS issued proposed regulations on Sept. 9 (REG-125710-18) to simplify the application of Sec. 382, provide more certainty in determining built-in gains and losses under Sec. 382(h), and ensure recent legislative changes in the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, do not further complicate Sec. 382(h)’s application.

Sec. 382 limits the ability of a loss corporation to offset its taxable income after an ownership change with earlier losses. Under Sec. 382(h), built-in gains recognized during the five-year period beginning on the ownership change date (the recognition period) increase the loss corporation’s Sec. 382 limitation, while built-in losses are subject to the limitation.

Notice 2003-65 provided a safe harbor for computing net unrealized built-in gains (NUBIG) and net unrealized built-in losses (NUBIL) as well as two safe harbors for calculating realized built-in gains (RBIG) and realized built-in losses (RBIL) (the Sec. 1374 safe harbor and the Sec. 338 safe harbor).

The IRS says it has received “thoughtful formal and informal commentary highlighting numerous shortcomings” of Notice 2003-65 and noted that the TCJA “exacerbated longstanding, unresolved issues regarding the application of section 382(h) and created new areas of complexity and ambiguity.”

Therefore, the IRS has issued proposed regulations to address the shortcomings. It expects to withdraw and obsolete Notice 2003-65 (and other Sec. 382(h) guidance) when the proposed regulations are finalized.

The proposed regulations would modify the notice’s Sec. 1374 safe harbor and make it mandatory when computing NUBIG and NUBIL and eliminate its Sec. 338 safe harbor. The proposed regulations’ modifications to the Sec. 1374 safe harbor are designed to ensure greater consistency between amounts that are included in the NUBIG/NUBIL computation and items that could become RBIG or RBIL during the recognition period.

The regulations are proposed to be effective for ownership changes occurring after they are finalized, but taxpayers and their related parties may apply them to any ownership change occurring during an open tax year, as long as they are applied consistently.