Tax professionals could see a return of the so-called wasting asset rule when the final loss limitation regulations are issued.
The tax bar’s comment letters urging recognized built-in gain (RBIG) treatment for wasting assets “have been heard loud and clear and taken very seriously,” Robert Liquerman of the IRS Office of Associate Chief Counsel (Corporate) said October 21 during a webinar hosted by the Practising Law Institute.
Liquerman was addressing the status of the proposed section 382(h) regs (REG-125710-18), issued in September 2019, which would eliminate the section 338 approach in Notice 2003-65, 2003-2 C.B. 747, for determining recognized built-in gain and loss if there’s an ownership change of a loss corporation. The section 338 approach, known as the wasting asset rule, is favorable for taxpayers with RBIG because it treats some built-in gain assets as generating RBIG even if those assets weren’t disposed of during the recognition period.
Treasury said in the preamble to the proposed regs that because of changes introduced by the Tax Cuts and Jobs Act, allowing taxpayers to continue using the section 338 approach “likely would not be tenable.” The proposed regs would require taxpayers to instead use a modified version of the section 1374 approach for determining built-in items.
An IRS official said in November 2019 that the government hadn’t made a final call on whether taxpayers would truly no longer be able to use the section 338 approach. The official said that the IRS viewed the proposed regs, as well as the request for comments on that particular provision, as a way to start a dialogue on the appropriate method for applying section 382(h).
Liquerman said that while he can’t guarantee that the final regs will include a wasting asset approach, some arguments for the rule “make a lot of sense and are getting very serious attention.” Because there are many different approaches to an RBIG calculation of wasting assets, Treasury will have to weigh the pros and cons of each if it decides to adopt a wasting asset approach, he said.
As for the timing of the final regs, Liquerman said that Treasury has made good progress on some issues but needs to delve deeper on others.
“What I would feel very comfortable telling you is our work is not at an imminent stage,” Liquerman said, adding that whether the regs will be issued in final form or reproposed hasn’t been decided.
Treasury and the IRS issued an updated version of the proposed rules in January 2020 that would delay the applicability date of the final regs until 30 days after they are published in the Federal Register. The government said it made the move in response to comments that the proposed regs would impose a significant burden on taxpayers evaluating and negotiating business transactions.