Firm Seeks Transition Relief Under Loss Limitation Regs

November 8, 2019

CC:PA:LPD:PR (REG-125710-18)
Courier's Desk
Internal Revenue Service
1111 Constitution Avenue NW
Washington, DC 20224

Re: REG-125710-18, Regulations Under Section 382(h) Related to Built-In Gain and Loss

To Whom It May Concern:

On behalf of T-Mobile US, Inc. (“T-Mobile”),¹ Miller & Chevalier Chartered respectfully requests that the Department of the Treasury and the Internal Revenue Service ("IRS") issue binding, transition relief guidance to the proposed regulations promulgated under the Notice of Proposed Rulemaking, REG-125710-18, Regulations Under Section 382(h) Related to Built-In Gain and Loss, as published in the Federal Register on September 10, 2019 (the “Proposed Regulations”).² We appreciate the time and resources that have been dedicated in developing the Proposed Regulations, but as discussed below, the decision in the Proposed Regulations to withdraw and obsolete Notice 2003-65,³ including the so-called “338 Approach,” is a significant departure from established administrative guidance that taxpayers have relied upon for the past sixteen years.

Although we have significant technical and policy concerns regarding the approach taken by the Proposed Regulations in determining the calculation of net unrealized built-in gains and losses under Section 382 of the Internal Revenue Code⁴ and the recognition of built-in items following an ownership change, we limit our comments in this letter to the time-sensitive and pressing need for immediate guidance on transition relief for pending publicly announced transactions. We respectfully reserve our rights to submit an additional comment letter regarding our technical and policy concerns regarding the approach taken by the Proposed Regulations given the significant and principally taxpayer-adverse changes made by that approach, which we believe are contrary to the statutory language and legislative history of Section 382(h).

Our concerns are particularly pronounced for the pending Combination and other transactions involving large, publicly traded corporations where the target corporation is a loss corporation (which is not uncommon for target corporations in capital intensive industries). Although the presence or absence of tax attributes, such as loss carryforwards, is not typically a motivating factor in strategic combinations of publicly traded corporations, the projected after-tax cash flows for the combined company is a material factor in virtually every aspect of a transaction — potentially influencing pricing, financing, fairness opinions, etc. Moreover, the time period between the public announcement of these transactions and their closing is generally highly uncertain due to factors such as the need to obtain regulatory approvals, shareholder consent and other customary closing conditions. Because the Proposed Regulations would apply to any ownership change occurring after the date of a Treasury decision adopting the Proposed Regulations as final regulations are published in the Federal Register,⁵ it is impossible to determine whether a pending transaction that was planned and developed based on the long-standing safe harbors provided in Notice 2003-65 may be able to rely on the 338 Approach.⁶

To eliminate this uncertainty, we respectfully request that the Department of the Treasury and the IRS issue binding guidance as soon as practicable to provide transition relief that would “grandfather” publicly announced transactions that close after the finalization and publication of the Proposed Regulations. Specifically, we believe that this guidance should provide that taxpayers may rely on, and the IRS will follow, Notice 2003-65 with respect to any ownership change (as defined in Section 382(g)) which occurs after the date of a Treasury decision adopting the Proposed Regulations as final regulations in the Federal Register, if such change is pursuant to (A) a written binding agreement entered into on or before such date, or (B) pursuant to a transaction that was described in a public announcement or filing with the Securities and Exchange Commission (“SEC”) on or before such date. It is important that these transactions receive such transition relief, particularly given the significant period of time that Notice 2003-65 has been in effect, so that the underlying cash flow and valuation expectations of such transactions are preserved.

Any transition relief that does not specifically cover publicly announced and/or publicly filed transactions (collectively, “publicly announced transactions”) will not provide the certainty that is required for pending transactions that have reached the requisite stage to require such an announcement or SEC filing. The operative agreements underlying merger and acquisition (“M&A”) transactions involving public companies are subject to a number of conditions (including federal and state regulatory approvals, which may require asset divestitures) and are frequently amended or modified in response to a variety of factors and conditions. As a result, it is often difficult to reach a high degree of comfort that the requirements of a typical “binding contract“ provision have been satisfied.⁷ Providing transition relief for publicly announced transactions would address this uncertainty and allow these transactions to rely on Notice 2003-65.

Specific transition relief for publicly announced transactions has been provided by statute, by regulations and by sub-regulatory guidance. For example, the most recent sets of proposed regulations addressing the “active trade or business” requirement and the “device” prohibition of Section 355 specify that these rules would not apply to transactions “[d]escribed in a public announcement or filing with the Securities and Exchange Commission on or before the date the Treasury decision adopting these regulations as final is published in the Federal Register.”⁸

It should be noted that Section 382(h) has also used a “publicly announced transaction” exception to grandfather ownership changes. Specifically, in the American Recovery and Reinvestment Act of 2009,⁹ when Congress revoked Notice 2008-83,¹⁰ transition relief was provided that allowed taxpayers to continue to rely on Notice 2008-83 with respect to any ownership change if such change, in relevant part, was pursuant to a written agreement that was entered into before the effective date that the notice was revoked and “was described . . . in a public announcement or in a filing with the Securities and Exchange Commission required by reason of such ownership change.”¹¹ Although Congress determined that Notice 2008-83 was inconsistent with Congressional intent and based on doubtful legal authority,¹² Congress also recognized that “taxpayers should generally be able to rely on guidance issued by the Secretary of the Treasury.”¹³ Therefore, transition relief was provided to publicly announced transactions that were pending prior to the effective date of the revocation of Notice 2008-83. We believe that it is appropriate to provide similar relief for publicly announced transactions to allow these transactions to rely on Notice 2003-65.

Finally, we urge you to issue the requested transition relief as soon as practically possible so that taxpayers with pending transactions will be able to make tax elections and capital investment decisions in the interim with certainty as to which rules will apply to their transaction. Issuance of the requested transition relief on an expedited basis will prevent taxpayers with pending transactions from artificially accelerating the closing of such transactions (to the extent possible) or engaging in other non-economic actions solely for tax purposes (i.e., to ensure that such transactions are not subject to the Proposed Regulations). Quickly issuing transition relief will also remove the uncertainty created by the Proposed Regulations and ensure the important M&A market continues to thrive while the controversial technical issues in the Proposed Regulations are debated. Given the timing concern, we respectfully recommend that the requested transition relief be issued as a notice, revenue ruling or other sub-regulatory guidance before the final regulations are promulgated.¹⁴

Thank you in advance for your consideration of this comment letter. We appreciate the opportunity to submit this comment letter and would welcome the opportunity to meet with the Treasury Department and the IRS to discuss it in greater detail or to answer any questions that you may have.

Respectfully submitted,

Marc J. Gerson

David W. Zimmerman

Miller & Chevalier Chartered
Washington, DC

cc:
The Honorable David Kautter, Assistant Secretary (Tax Policy), Department of the Treasury
Jeffrey Van Hove, Senior Advisor to the Assistant Secretary (Tax Policy), Department of the Treasury
Krishna Vallabhaneni, Tax Legislative Counsel, Department of the Treasury
Brett York, Associate International Tax Counsel, Department of the Treasury
Colin Campbell, Attorney-Advisor, Department of the Treasury

The Honorable Charles Rettig, Commissioner, Internal Revenue Service
The Honorable Michael Desmond, Chief Counsel, Internal Revenue Service
Robert Wellen, Associate Chief Counsel (Corporate), Internal Revenue Service
Lisa Fuller, Deputy Associate Chief Counsel (Corporate), Internal Revenue Service
Russell Jones, Senior Counsel, Associate Chief Counsel (Corporate), Internal Revenue Service
Marie Milnes-Vasquez, Special Counsel — Special Projects, Associate Chief Counsel (Corporate), Internal Revenue Service
Kevin Jacobs, Senior Technical Reviewer, Associate Chief Counsel (Corporate), Internal Revenue Service