Proposed Regulations under Section 382 reduce tax attributes’ value in M&A transactions

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September 2019

Overview

Treasury on September 9, 2019, released proposed regulations under Section 382(h) (the Proposed Regulations) that can reduce the value of tax attributes in M&A transactions even before the Proposed Regulations become effective.  In very general terms, Section 382 serves to limit the use of net operating losses (NOLs) and other tax attributes of a loss corporation following an ownership change of such corporation.  An ownership change generally occurs where new shareholders acquire a greater than fifty percent interest in the loss corporation. Among other changes to current law, the Proposed Regulations reduce the potential uplift to the base annual NOL limitation applicable to a loss corporation that has built-in gain assets prior to an ownership change.  

The takeaway

If the Proposed Regulations are finalized in their current form, the ability to utilize tax attributes of loss corporations will decrease significantly compared to the currently available method. Thus, the value of these tax attributes is likely to fall, in anticipation of the potential finalization of the regulations. Taxpayers with significant limitations may consider engaging in taxable restructuring transactions in order to reduce the impact of the rule change. Further, buyers and sellers of companies must consider the Proposed Regulations in any currently contemplated transactions in the event the Proposed Regulations become final in their current form and affect a later divestiture of the purchased company.

For a deeper technical explanation of the Proposed Regulations, see the link below to the PwC Insight.

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Julie Allen

National Tax Services Market Leader and Mergers and Acquisitions Tax Leader, PwC US

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