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Chamber of Commerce Seeks Changes to Loss Limitation Regs

NOV. 11, 2019

Chamber of Commerce Seeks Changes to Loss Limitation Regs

DATED NOV. 11, 2019
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November 11, 2019

Office of Associate Chief Counsel (Corporate)
Attention: Kevin M. Jacobs and Marie C. Milnes-Vasquez
Internal Revenue Service (I.R.S.)
1111 Constitution Avenue, NW
Washington, DC 20224

CC:PA:LPD:PR
(REG-125710-18)
Room 5203
Internal Revenue Service
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20224

RE: Comments on REG-125710-18: Regulations Under Section 382(h) Related to Built-In Gain and Loss

Dear Mr. Jacobs and Ms. Milnes-Vasquez:

The U.S. Chamber of Commerce appreciates the opportunity to provide feedback on REG-125710-18, guidance regarding the items of income and deduction which are included in the calculation of built-in gains and losses under section 382 of the Internal Revenue Code, as published in the Federal Register on September 10, 2019.

The attached chart identifies issues arising under REG-125710-18 and provides suggested solutions as well as any additional explanation the Chamber believes would be helpful in addressing the issue. This feedback is the product of extensive conversations with a very wide array of impacted Chamber members. These comments may be considered as representing some of the most serious issues, but are not all the issues concerning Chamber members on REG-125710-18.

The Chamber appreciates the opportunity to provide this feedback on REG-125710-18.The Chamber strongly urges Treasury and the I.R.S. to continue to work closely with the business community to implement the recent tax changes in a manner to ensure as little disruption as possible to normal business operations and that this law encourages the U.S. economy to achieve its true growth potential. The Chamber looks forward to working with you to address these and other issues as we work to implement our new, pro-growth tax code. Thank you for your time and attention.

Sincerely,

Caroline L. Harris
CHAMBER OF COMMERCE OF THE UNITED STATES OF AMERICA
Washington, DC

Cc:
Charles P. Rettig, Commissioner, Office of the Commissioner, Internal Revenue Service, U.S. Department of the Treasury
David J. Kautter, Assistant Secretary, Office of Tax Policy, U.S. Department of the Treasury
William M. Paul, Deputy Chief Counsel (Technical), Office of the Chief Counsel,
Internal Revenue Service, U.S. Department of the Treasury


Feedback for REG-125710-18 (Regulations under §382(h)1 Related to Built-in Gain and Loss)

PROPOSED REGS SECTION NUMBER

SECTION TITLE

ISSUE

RECOMMENDATION

ADDITIONAL EXPLANATION /QUERIES

Prop. Regs. §1.382–2(b)

Effective dates

Transition rule

Transition rules should be issued quickly, in advance of the later issuance of final regulations. Those transition rules should provide for broader grandfathering relief for certain transactions that may close after the date the Proposed Regulations are finalized. Any such grandfathering should take into account whether the transactions have been publicly announced prior to finalization of the Proposed Regulations. This would preserve the economics of deals that were negotiated and priced based on the existing rules of Notice 2003-65.

Transaction agreements are frequently amended or modified between signing and closing. Accordingly, a transition rule solely focused on whether the transaction closes pursuant to a binding agreement that was in place prior to finalization of the Proposed Regulations is not by itself sufficient in that it could still create uncertainty regarding which rules apply (i.e., did an agreement amendment cause grandfathering status to be lost). To create clarity around these issues, the effective date provisions should make it clear that any deals publicly announced prior to finalization of the Proposed Regulations are grandfathered under the prior rules of Notice 2003-65.

The Proposed Regulations would by their terms apply to any ownership change occurring after the date of publication of the Treasury decision adopting the Proposed Regulations as final regulations in the Federal Register. The impact of this proposed effective date is that pending transactions that were in progress long before the Proposed Regulations were issued may be disrupted as a result of uncertainty over whether such transactions will close before or after finalization of the Proposed Regulations. Uncertainty regarding potential application of the Proposed Regulations to pending transactions will also affect decision-making regarding tax elections required to be made in the interim (for example, to claim or forego bonus depreciation).

There are precedents for this type of effective date provision from the world of Section 355 and the “active trade or business” requirement regulations [Prop. Reg. § 1.355-9(e)(2); 81 Fed. Reg. 46004, 46018–19.] This transition rule provided that pending transactions that had been described in public announcements and/or filings with the SEC would not be disturbed by the finalization of the proposed regulations even if such transactions were not complete as of the date the proposed rules were finalized.

Prop. Regs. §1.382–7

Built-in gains and losses

Transition rules for Prop Regs. §1.382-7(g) applicability

See discussion in Prop. Regs. §1.382-2(b), above.

 

Prop. Regs. §1.382–7(d)

Recognized built-in gain and loss

Wasting assets

To preserve the “neutrality principle” a proxy for the recognized built-in gain from wasting assets must be added to the proposed regulations.

The current rules of Notice 2003-65 are not overly complicated for taxpayers and provide a reasonable approach to ensuring that some portion of built-in-gains existing as of an ownership change are being considered. If changes are deemed necessary, consideration should be given to modifying or simplifying the assumed cost recovery periods for wasting assets rather than complete abandonment of the §338 approach to counting wasting assets.

Prop. Regs. §1.382-7(d)(2)(i) provides that recognized built-in gain should only include an item that would have been properly included in gross income before the change date by an accrual method taxpayer. “As a result, for example, cost recovery deductions on an appreciated asset claimed during the recognition period are not treated as generating recognized built-in gain.”

The removal of recognized built-in gain on wasting assets (under §338 approach) goes against the “neutrality principle” underlying the statute. Built-in gain assets generate income in subsequent years, and, in the absence of an acquisition, such income would have been freely offset by the old loss corporation's NOLs.

The proposed approach discriminates against capital- intensive taxpayers who have a change in ownership.

1 Unless otherwise noted, all section references are to the Internal Revenue Code of 1986, as amended,

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