IRS Issues Proposed Regulations on Built-In Gains and Losses

LossCo’s Section 382 limitation for any year in the recognition period would not be increased, and only $2 of the NOLs of LossCo would be eligible to offset any income of LossCo each year. RBILs are defined as any losses recognized during the recognition period on the disposition of any asset except to the extent the loss corporation establishes that it did not hold such asset immediately before the change date, or such loss exceeds the built-in loss of such asset on the change date. RBIGs are defined as any gain recognized during the recognition period on the disposition of any asset if the loss corporation establishes that it held the asset immediately before the change date, and the gain does not exceed the built-in gain in the asset on the change date. Corporations should watch for rule changes as any future ownership change could make the availability of NOLs or other tax attribute carryovers subject to significantly more restrictive annual Section 382 limitations to offsetting future taxable income and tax liability.

Notice 2013–69 Notice 2013–69

Further, because the transaction occurs among related persons, the overall economic ownership of the partnership among the related partners remains the same as before the transaction. For purposes of all covered transactions described in section 3.04 of this notice, upon a qualifying disposition of a corresponding property, any § 732 RPBA to which that property corresponds would cease to be a § 732 RPBA. A qualifying disposition would mean a disposition of property to an unrelated person in a fully taxable, arm’s-length transaction. On September 9, 2019, the Treasury Department (Treasury) and Internal Revenue Service (IRS) released proposed regulations under Section 382(h) of the Internal Revenue Code (the Code), which, if finalized in their current form, would significantly limit the ability of a corporation to utilize its net operating loss carryforwards (NOLs) and certain other tax attributes following an ownership change. Specifically, the proposed regulations would withdraw a favorable safe harbor that taxpayers have relied upon for the past 16 years, mandate a more restrictive method in computing the annual limitation imposed by Section 382, and make a number of technical updates in light of the 2017 Tax Cuts and Jobs Act (TCJA) with generally unfavorable results to taxpayers. The proposed regulations have a 60-day comment period ending November 12, 2019.These rules are critical to parties to M&A transactions and restructurings, particularly in distressed and start-up contexts.

Proposed built-in gain regulations now provided with transition rules

Its remaining $90 million of assets consist of self-created intangibles with no tax basis. With the implementation of FIN 48 and a shift toward corporate taxpayers using different firms for their tax and audit functions, application of a particular methodology could cause disagreements among advisers, as many are taking alternative approaches to deal with the issue. 1 Unless otherwise provided, all citations in this notice and the draft FFI agreement are to the Internal Revenue Code of 1986 and to the income tax regulations thereunder. Notwithstanding anything to the contrary in this agreement, a reporting Model 2 FFI is not entering into a binding agreement by agreeing to comply with the terms of this agreement, except to the extent that such an FFI is entering into an agreement on behalf of one or more of its branches in order for each such branch to be treated as a participating FFI. For the avoidance of doubt, compliance with the terms of this agreement requires compliance with the requirement to recertify on the FATCA registration website that the reporting Model 2 FFI shall comply with the terms of any renewed agreement, including any modified terms pursuant to section 12.02 of this agreement.

Understanding the Built-in Gain and Loss Rules of Section 382—and Possible Significant Changes on the Horizon

Superseded describes a situation where the new ruling does nothing more than restate the substance and situation of a previously published ruling (or rulings). Thus, the term is used to republish under the 1986 Code and regulations the same position published under the 1939 Code and regulations. The term is also used when it is desired to republish in a single ruling a series of situations, names, etc., that were previously published over a period of time in separate rulings. If the new ruling does more than restate the substance of a prior ruling, a combination of terms is used. Irs Proposes New Section 382 Regulations To Further Limit Use Of Tax Losses For example, modified and superseded describes a situation where the substance of a previously published ruling is being changed in part and is continued without change in part and it is desired to restate the valid portion of the previously published ruling in a new ruling that is self contained. In this case, the previously published ruling is first modified and then, as modified, is superseded.

Revised Applicability Dates for Regulations under Section 382(h) Related to Built-in Gain and Loss

Payor that is a participating FFI will satisfy its reporting obligations under chapter 61 (Form 1099 reporting) with respect to a payee that is a non-exempt recipient (or presumed U.S. non-exempt recipient) if such participating FFI reports such an account holder pursuant to this section 6. Notwithstanding the preceding sentence, a participating FFI is required to report on Form 1099 to the extent the participating FFI applies backup withholding to the payment. A participating FFI (including a U.S. branch that is not treated as a U.S. person) that elects to perform chapter 61 reporting must report the information otherwise required to be reported under sections 6041, 6042, 6045, and 6049 and must report payments made to an account subject to reporting under the applicable section. Payor, however, must determine the payments subject to reporting under the applicable section by reporting as if it were a U.S. payor.

• For purposes of the forthcoming Proposed Related-Party Basis Adjustment Regulations, the term “cost recovery” means an allowance for depreciation, amortization, or depletion under subtitle A.
• Generally, except for certain plans under sections 104 and 105 of the Pension Protection Act of 2006, § 430 of the Code specifies the minimum funding requirements that apply to single employer plans pursuant to § 412.
• Both the Treasury Department and the IRS concluded that the 338 approach “lacks sufficient grounding in the statutory text of Section 382(h).” They go on to point out the relative simplicity and ease of administration of the accrual-based 1374 approach.
• Pursuant to paragraph (j)(15)(iii)(B) of this section, Public P2’s lowest percentage of ownership is the sum of its lowest percentage of ownership (zero) and a proportionate amount of former Public P1’s lowest ownership percentage of L of 2.6 percent (32.5 percent x 8 percent).

A participating FFI must file Form 945 with the IRS on or before January 31 of the year following the calendar year to which the form relates. A U.S. branch of a participating FFI (regardless of whether it is treated as a U.S. person) must report separately on Form 1042-S or 1099 with respect to amounts paid or received by the U.S. branch during the year on behalf of its account holders. A U.S. branch of a participating FFI that is not treated as a U.S. person is only required to report on Form 1042-S or Form 1099, however, to the extent described in section 6.05(B) of this agreement. See section 6.06(B) of this agreement for the requirement for a U.S. branch to file a separate Form 1042 or Form 945. In the case of a withholdable payment that is also subject to withholding under section 1441, 1442, or 1443, a participating FFI may credit the tax withheld under section 4.02 of this agreement against its liability under section 1441, 1442, or 1443 as described in §1.1474–6(b). In the case of a withholdable payment that is also subject to withholding under section 1445, withholding under section 1445 applies to the payment to the extent described under §1.1474–4(6)(c), and withholding is not required under section 4.02 of this agreement.

• NUBIGs and NUBILs must be properly adjusted to account for income and deduction items that would be RBIGs or RBILs if such amounts were taken into account (or allowable as deductions) during the recognition period.
• With respect to an account held by an entity treated as a passive NFFE with substantial U.S. owners or held by an owner-documented FFI with specified U.S. persons identified in §1.1471–3(d)(6)(iv)(A)(1) and (2), the participating FFI must report on Form 8966 the U.S. owner information described in §1.1471–4(d)(5)(ii) and (iii) and the accompanying instructions to the form.
• See §1.382–3(j)(14)(ii) and (iii), as contained in 26 CFR part 1 revised as of April 1, 1994, for the application of paragraph (j)(10) to stock issued on the exercise of certain options exercised on or after November 4, 1992 and for an election to apply paragraphs (j)(1) through (12) retroactively to certain issuances and deemed issuances of stock occurring in taxable years prior to November 4, 1992.
• Section 7701(o)(5)(A) provides that the “economic substance doctrine” means the common law doctrine under which tax benefits under subtitle A of the Code with respect to a transaction are not allowable if the transaction does not have economic substance or lacks a business purpose.

This is the case even if the new investors are Small Shareholders, especially in light of the dilutive effect of the cash issuance exception on owner shifts attributable to capital-raising transactions. Accordingly, the final regulations do not expand the 10-percent limitation of the small issuance exception. The preamble to the proposed regulations explains that the asset threshold was created to ensure that the segregation rules would continue to apply to transactions in the stock of 5-Percent Entities that were motivated by attempts to exploit the attributes of the loss corporation.

For more information about the application of these proposed changes, please contact any of the lawyers listed on this alert, or any member of the Proskauer Rose LLP Tax Group with whom you normally consult on these matters. A’s ownership should not fluctuate based on the value of the common or preferred stock. As such, it seems reasonable to assume that A’s interest remains at 80%, which results in total ownership for purposes of Sec. 382 of 160% (80% for A and 80% for C). Pursuant to § 48A(d)(4), on July 19, 2012, the Internal Revenue Service (the “Service”) issued Notice 2012–51, 2012–33 I.R.B. 150 (the “Notice”) to establish the § 48A Phase III qualifying advanced coal project program (the “Phase III program”) and to allocate § 48A credits (the “Phase III credits”) in the total amount of $658,500,000. The Notice provides that the credit for a taxable year under the Phase III program is an amount equal to 30 percent of the qualified investment for that taxable year in a qualifying advanced coal project that uses integrated gasification combined cycle technology or other advanced coal-based generation technology.

However, in the case of an account held by a passive NFFE that provides the documentation described in §1.1471–3(d)(12) to establish its status as a passive NFFE but fails to provide the information regarding its owners required under §1.1471–3(d)(12)(iii), the participating FFI must treat the account as held by a recalcitrant account holder in accordance with §1.1471–5(g)(2)(iv). An FFI that agrees to comply with the terms of this agreement applicable to one or more of its branches will be treated as a participating FFI with respect to such branches, and such participating FFI branches will not be subject to withholding under section 1471. An FFI (or branch of an FFI) must act in its capacity as a participating FFI with respect to all the accounts that it maintains for purposes of reporting such accounts and must act as a withholding agent to the extent required under this agreement. A branch of an FFI that cannot satisfy all of the terms of this agreement under the laws of the jurisdiction in which such branch is located will be treated as a limited branch (as defined in this agreement) and will be subject to withholding under section 1471 as a nonparticipating FFI.

Built-in gains

Investment advisory offered through either Moss Adams Wealth Advisors LLC or Baker Tilly Wealth Management, LLC. Since corporations often experience various equity events, including stock issuances, repurchases, and transfers throughout their lifetimes that create owner shifts, pre-TCJA NOLs generally have a greater likelihood of being subject to potentially restrictive Section 382 limitations. As a result, a corporation’s pre-TCJA NOLs may be more valuable in potentially offsetting a corporation’s taxable income.

For example, if Y Co. were to sell an asset immediately after its acquisition by X Co. for a gain of $20,000, this $20,000 would increase X Co.’s Section 382 limitation for the year from $50,000 to $70,000. The proposed regulations provide several reasons supporting the adoption of the 1374 approach (with modifications) and elimination of the 338 approach. Section 382(h)(6) provides that an item of income that is properly taken into account during the recognition period but is attributable to the period before the change date will be treated as an RBIG, and an amount that is allowable as a deduction during the recognition period, but is attributable to the period before the change date will be treated as an RBIL.

The IRS and the Treasury Department believe that maintaining the ownership limitation at 10 percent represents an appropriate balance between reducing administrative and compliance burdens while protecting against transactions that may raise loss trafficking concerns. Accordingly, the final regulations retain the 10 percent ownership limitation. In the preamble to the proposed regulations, the IRS and the Treasury Department requested comments as to whether further refinement of the small issuance exception in the current regulations might be warranted in the context of any potential expansion of the additional exceptions proposed therein. As discussed, these final regulations expand the small redemption exception to apply to redemptions of the stock of 5-Percent Entities, and provide that the stock of the 5-Percent Entity engaging in the redemption is the appropriate baseline for computing the 10-percent limitation for the small redemption exception in such cases.