Close
Close

IRS releases proposed Section 382 regulations

RFP
Tax Hot Topics newsletterThe IRS published proposed regulations (REG-125710-18) under Section 382(h) on Sept. 9 providing rules regarding built-in gains or losses after a Section 382 change in ownership.

A corporation experiences a Section 382 change in control when there is a greater-than-50% shift in economic ownership by 5% of shareholders within a “testing period” (generally a rolling, three-year window). When such a change occurs, the corporation must determine if its assets overall have a net unrealized built-in gain (NUBIG), a net unrealized built-in loss (NUBIL), or neither (due to such overall determination falling within certain de minimus thresholds). Depending on that determination, additional consequences may occur when gain or losses in such assets are triggered as either recognized built-in gains (RBIG), recognized built-in losses (RBIL) or certain built-in items of income or deduction are similarly treated.

Prior to the proposed regulations, Notice 2003-65 provided two safe harbors for taxpayers to make the above determinations. The Section 1374 method allowed taxpayers to apply subchapter S rules and principles in making such determinations while the Section 338 method allowed taxpayers to treat the ownership change as if a hypothetical Section 338 transaction occurred. The former is generally viewed as more advantageous for corporations that are in a NUBIL posture as it minimizes the RBIL subject to the Section 382 limitation. The latter is generally viewed as more advantageous for corporations that are in a NUBIG posture as it may maximize RBIG benefit due to the deemed exploitation of “wasting” assets (i.e. depreciable or amortizable assets).

In addition to long-standing questions regarding application of the notice, recent changes by the Tax Cuts and Jobs Act has put more pressure on the need to update and revise prior guidance. The proposed regulations would prescribe the Section 1374 method, with certain additional adjustments, as a single method for NUBIG or NUBIL and RBIG or RBIL determinations. The overall determination of NUBIG or NUBIL is premised on the deemed sale of all asset to a third party with such third party assuming none of the liabilities. Excluded cancellation of debt income (CODI) is not included/added to such determination to the extent there is concomitant Section 108 attribution reduction using pre-ownership change attributes. Contingent liabilities are factored into both NUBIG or NUBIL as well as for RBIL consequences. Additional rules for the treatment of CODI, depending on whether it is recourse or non-recourse, are also provided. Finally, the proposed regulations address certain interactions with Section 163(j) carryovers by providing that Section 382 disallowed business interest expense carryovers are not treated are RBIL (to prevent duplicative RBIL results) and including rules for the treatment of excess business interest expense of a partnership.

The effective date of the proposed regulations are ownership change dates on or after when such regulations are finalized. The regulations propose to withdraw and obsolesce Notice 87-79, Notice 90-27, Notice 2003-65, and Notice 2018-30.

Contact
Josha Brady
Principal
Washington National Tax Office 
T +1 202 521 1503

Greg Fairbanks
Managing Director
Washington National Tax Office 
T +1 202 521 1503

Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.