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U.S. IRS and Treasury Issues Proposed Regulations Under Section 382(h) Related to Built-In Gain and Loss

On 10 September 2019, a notice of proposed rulemaking from the U.S. IRS and Treasury was published in the Federal Register for Regulations Under Section 382(h) Related to Built-In Gain and Loss.

The proposed regulations concern the items of income and deduction that are included in the calculation of built-in gains and losses under section 382 of the Internal Revenue Code (Code), and the interaction of changes made to the Code by the enactment of the Tax Cuts and Jobs Act (TCJA). Section 382 imposes a value-based limitation (section 382 limitation) on the ability of a "loss corporation" to offset its taxable income in periods subsequent to an "ownership change" with losses attributable to periods prior to that ownership change. Section 382(h) provides rules relating to the determination of a loss corporation's built-in gains and losses as of the date of the ownership change.

The proposed regulations have been issued to provide clearer and more comprehensive guidance for taxpayers in applying section 382(h) than currently provided, and would:

  • simplify the application of section 382;
  • provide more certainty to taxpayers in determining built-in gains and losses for section 382(h) purposes; and
  • ensure that difficult questions regarding the application of the TCJA do not further complicate the application of section 382(h).

One of the key aspects of the proposed regulations is mandating the use of the safe harbor computation provided in Notice 2003-65 based on the principles of section 1374, which relies on accrual method of accounting principles to identify built-in income and deduction items at the time of the ownership change, with certain exceptions. An alternate safe harbor approach provided in Notice 2003-65, the section 338 approach, would not be supported under the proposed regulations given the conclusion of the IRS and Treasury that the 1374 approach is more consistent with the text and the purpose of section 382 than the 338 approach and would simplify tax administration.

The regulations are proposed to be effective for ownership changes occurring after the date the Treasury decision adopting the proposed regulations as final regulations is published in the Federal Register. However, taxpayers and their related parties may apply the proposed regulations to ownership changes prior to that date, subject to certain conditions, including that the taxpayers and all of their related parties consistently apply the rules of the proposed regulations to such ownership change and all subsequent ownership changes that occur before the applicability date of the final regulations.

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