IRS releases proposed Section 382 regulations

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.

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

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

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