To provide “clearer and more comprehensive guidance” on the application of Sec. 382(h), the IRS issued proposed regulations on Monday (REG-125710-18) that are designed to simplify the application of Sec. 382, provide more certainty to taxpayers in determining built-in gains and losses under Sec. 382(h), and ensure recent legislative changes do not further complicate the application of Sec. 382(h).
Sec. 382 limits the ability of a loss corporation to offset its taxable income after an ownership change with losses incurred before the ownership change. Sec. 382(h) provides rules for determining a loss corporation’s built-in gains and losses as of the date of an ownership change. Generally, 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.
In Notice 2003-65, the IRS provided a safe harbor for computing net unrealized built-in gains (NUBIG) and net unrealized built-in losses (NUBIL) when applying Sec. 382(h). The notice also provides 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. The enactment of the law known as the Tax Cuts and Jobs Act, P.L. 115-97, according to the IRS, “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 guidance associated with Sec. 382(h)) when the proposed regulations are finalized.
The proposed regulations would modify the Sec. 1374 safe harbor of Notice 2003-65 and make its use mandatory when computing NUBIG and NUBIL. That notice’s Sec. 338 safe harbor would be eliminated. 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 consistently apply the proposed regulations’ rules to that ownership change and any subsequent ownership changes that occur before the regulations are finalized.
— Alistair M. Nevius, J.D., (Alistair.Nevius@aicpa-cima.com) is The Tax Adviser’s editor-in-chief.