Treasury issues comprehensive proposed regulations under Section 382(h)

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September 2019


Treasury on September 9, 2019,  released proposed regulations under Section 382(h) (the Proposed Regulations), regarding the items of income and deduction included in the computation of a loss corporation’s net unrealized built-in gain or loss (NUBIG or NUBIL) and recognized built-in gain or loss (RBIG or RBIL). The Proposed Regulations would provide the first comprehensive regulations under Section 382(h) since the current statute was enacted in 1986. 

Most notably, the Proposed Regulations would eliminate the Section 338 or “wasting asset” approach to determining RBIG or RBIL, which has been available to taxpayers since Notice 2003-65 was first issued. The Proposed Regulations also reflect numerous changes to the Code made by the 2017 tax reform legislation.

The new regulations are proposed generally to be effective for ownership changes occurring after the date final regulations are published. However, the regulations state that the Proposed Regulations may be relied upon by taxpayers for ownership changes occurring prior to that date if certain conditions are satisfied. Comments on the Proposed Regulations are due by November 12, 2019.

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Treasury issues proposed regulations under Section 382(h)

The takeaway

The long-awaited, comprehensive Proposed Regulations under Section 382(h) are intended to accomplish a number of objectives. The lengthy regulations seek to simplify the application of Section 382(h) for taxpayers and the government; provide more certainty to taxpayers in determining built-in income and deduction items; and better align the Section 382 built-in gain and loss technical area with the statute and so-called neutrality principle. 

The Proposed Regulations provide helpful clarification of several tax-reform related issues.  We anticipate there could be a vigorous debate during the comment period over whether the Section 338 Approach for determining RBIG and RBIL, an approach to which taxpayers have grown accustomed since 2003, may be overly generous or simply one reasonable interpretation of an ambiguous statutory phrase, i.e.,  “attributable to.” 

If the Proposed Regulations are finalized and the Section 338 Approach is eliminated, the ability to utilize tax attributes of loss corporations will decrease significantly unless they otherwise are able to generate significant RBIG during the recognition period.  The elimination of the Section 338 Approach will have a significant impact on capital-intensive companies, such as pharmaceutical and technology companies. These companies generally have large NOLs from development of intellectual property and large NUBIGs as a result of having zero basis in the developed property. The effect of the elimination of the Section 338 Approach would be compounded by the elimination of dividends from RBIG and changes to the way that liabilities are treated for purposes of both the calculation of NUBIG and inclusion in RBIG when those liabilities result in COD income.

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Julie Allen

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

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