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Company Seeks Change to Applicability of Loss Limitation Regs

MAR. 16, 2020

Company Seeks Change to Applicability of Loss Limitation Regs

DATED MAR. 16, 2020
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March 16, 2020

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: Revised Applicability Dates for Regulations under Section 382(h) Related to Built-ln Gain and Loss

YRC Worldwide Inc. ("YRCW" or the "Company") appreciates the opportunity to submit comments on REG-125710-18, guidance regarding the items of income and deduction included in the calculation of built-in gains and losses under Section 382 of the Internal Revenue Code. The guidance was published in the Federal Register on September 10, 2019, with modifications to the applicability dates published in the Federal Register on January 4, 2020 (collectively, the Proposed Regulations).1 While we commend the Treasury Department and the Internal Revenue Service for broadening the transition relief, we also want to make you aware that, even with the revised effective date, the Proposed Regulations (if finalized in their current form) would be substantially adverse to the business of YRCW and many other similarly situated companies that incur a post effective date ownership change.

As a company that provides a wide-range of freight transportation service for industrial, commercial and retail goods throughout the United States, our business is both core to the economic vitality and wellbeing of the U.S. economy and highly sensitive to changes in the business cycle. While our economics have benefited significantly from the post-financial crisis economic recovery, we now face further economic uncertainty due to the impact on the economy of COVID-19. Even before the economic slowdown that Americans are currently experiencing and that is likely to worsen, we believe that the Proposed Regulations create an unnecessary and punitive effect on our company by substantially limiting the ability to offset against built-in income all net operating losses (NOLs), including those arising before final regulations are issued, if an ownership change occurs after such regulations are final (a "cut-off approach").

We understand the government's desire for simplification in this area, but the application of the Proposed Regulations if finalized without change will be highly damaging to our business that is critical to the supply chain of goods and services throughout the United States. The Proposed Regulations, as currently drafted, would result in the immediate diminution of the value of any pre-effective date NOLs, which could only be ameliorated through, for example, asset sales that would be nonsensical, particularly in this economic environment. Creating an equitable and fair transition period for the use of pre-effective date NOLs is incredibly important at this time. We believe that a transition rule that distinguishes between pre-effective date tax attributes and post-effective attributes is an equitable and practical solution.

General Description of the Business and our Operations

YRCW was incorporated in Delaware in 1983 and is headquartered in Overland Park, Kansas, with approximately 29,000 employees as of December 31, 2019. YRCW is a holding company that, through its operating subsidiaries, offers its customers a wide range of transportation services. We have one of the largest, most comprehensive less-than-truckload ("LTC) networks in North America with local, regional, national and international capabilities. Through our team of experienced service professionals, we offer expertise in LTL shipments and flexible supply chain solutions, ensuring customers can ship industrial, commercial and retail goods with confidence.

Our companies operate in a highly competitive environment. Our competitors include global, integrated freight transportation services providers, global freight forwarders, national freight services providers (including intermodal providers), regional or interregional carriers, third-party logistics providers, and small, intraregional transportation companies. The entire trucking industry also faces emerging competition from online technology firms that specialize in load-matching services and large customers that may use their significant scale advantages to offer transportation solutions to their suppliers and customers.

Our business is subject to a number of general economic factors that may have a material adverse effect on the results of our operations, many of which are largely out of our control. These include the impact of recessionary economic cycles and downturns in our customers business cycles, particularly in market segments and industries, such as retail and manufacturing, where we have a significant concentration of customers. Economic conditions may adversely affect our customers' business levels, the amount of transportation services they need and their ability to pay for our services. We operate in a highly price-sensitive and competitive industry, making industry pricing actions, quality of customer service, effective asset utilization and cost control major competitive factors. While we are experiencing the same economic impact as the world over from expected and unexpected forces (like the widespread impact of COVID-19), we strive to continue providing timely shipping of critical supplies and products where our customers need them to go.

During 2019, the Company launched a multi-year enterprise transformation strategy to achieve long-term profitability and cash flow by ratifying a new labor agreement, refinancing a term loan and reorganizing our field leadership and sales forces.

The primary focus for the next phase of the enterprise transformation strategy in 2020 is to transform our movement of freight and use of technology. We expect these efforts to result in cost savings in our linehaul and pick-up and delivery operations by improving density, increasing asset utilization, and optimizing route planning and labor resources.

Because of certain debt covenants, achievement of 1) targeted EBITDA, 2) specified leverage ratios and 3) free cash flow amounts (as prescribed in our debt agreements) constitutes a substantial factor in management of our company. While we have complied with those covenants, since 2009 we have generated GAAP basis financial income in only one year, 2018. Correspondingly, we have generated tax basis NOLs in every year over that same period, except 2018 when we utilized NOL carryforwards.

In 2003 and 2005, we acquired two of our largest competitors, virtually tripling our gross revenue to $10 billion, but incurring over $3 billion of high-interest-rate debt. After some initial operational adjustments, those acquisitions became accretive. However, YRCW suffered the adverse effects of the "Great Recession" of the late 2000s, with both our revenue and our employee headcount being cut in half, while we dealt with what became a relatively large debt burden, generating substantial annual taxable losses. Addressing our capital structure (without involving any takeover by another consolidated corporate group) during that period resulted in ownership changes (within the meaning of Section 382) in 2009, 2011 and 2014. In 2013, we incurred another ownership change due to cumulative trading in our common stock. Virtually all the Company's 2009 and prior NOLs were carried back to prior years, but most of the NOLs incurred in every year from 2010 through 2017 were carried forward. The economic resurgence in 2018 allowed us to generate substantial taxable income, which we were able to fully offset with NOL carryforwards, in accordance with the multiple Section 382 limits computed pursuant to the "Sec. 338 approach" of Notice 2003-65.

However, even after the utilization of NOLs in 2018, we incurred an additional NOL in 2019 and now have cumulative NOL carryforwards that remain substantial. Nevertheless, the available limits computed pursuant to the guidance prior to the Proposed Regulations are such that we expect to utilize all the pre-2018 NOLs before they expire, presuming we return to historic levels of annual profitability in the near term.

We continue to monitor financial markets relative to our capital structure and seek alternatives to mitigate our debt burden. Any recapitalization involving equity, either in and of itself or in conjunction with cumulative changes in the composition of our public stockholders over the three-year lookback period of Section 382, could lead to an ownership change that would be subject to the Proposed Regulations. The application of the Proposed Regulations would impose a limit that devalues our NOL carryforwards despite the continuing built-in gain that exists in our assets.

Punitive impact of the Proposed Regulations

The Proposed Regulations, if finalized, would create an unanticipated and potentially inequitable result for a corporate taxpayer with NOLs that were valued under the Section 338 approach of Notice 2003-65. Currently, the NUBIG/NUBIL computations for each of our ownership changes reveal substantial gain in our assets. Under the Proposed Regulations, use of our NOLs can be realized only through a sale/leaseback or outright sale replaced with new leases of our assets. The Section 338 approach allows use of our NUBIGs because of the increase in the annual section 382 limitation for recognized built-in gain ("RBIG") without being forced to undertake a transaction that would not otherwise be a business necessity.

We support the many comments requesting some form of continued allowance of an RBIG benefit consistent with the Section 338 approach under Notice 2003-65 in computing the Section 382 limit. In addition, we believe that a transition rule that permits Notice 2003-65 to continue to apply to pre-effective date NOLs and other tax attributes (i.e., a vintage approach) will avoid the draconian effects of destroying the ability to use such attributes under the cut-off approach. Under the vintage approach, the provisions of the Proposed Regulations, if finalized, would apply to tax attributes arising after the effective date.

Section 382 already has rules that distinguish between tax attributes based on when they arose. Under the successive ownership change rules of Treas. Reg. §1.382-5(d), if a loss corporation has two or more ownership changes, any losses incurred prior to the previous ownership change are treated as pre-change losses with respect to both or more ownership changes. Therefore, the later ownership change(s) may result in a lower Section 382 limitation but never a greater Section 382 limitation for such losses. If the Proposed Regulations are finalized as currently structured to eliminate the Section 338 approach for calculating NUBIG and RBIG, any Section 382 limitation for ownership changes post-issuance of the final regulations will likely be much smaller than the limitation applicable to ownership changes that occurred prior to the issuance of the final regulations. As a result of the successive ownership rules of Treas. Reg. §1.382-5(d), the latest (post-final regulations) Section 382 limitation would then be applied to all remaining NOLs from prior, pre-final regulations Section 382 limitations. Without an extended transition period, these pre-existing NOLs will be likely subject to significantly lower Section 382 limit(s) when there are ownership changes occurring after the final regulations are issued. This has the effect of making the final regulations retroactive with respect to those pre-change losses.

Recommendations

A more equitable solution would be to subject only NOLs incurred subsequent to the effective date of the final regulations to the limitation under the final regulations. For example, if the regulations are issued effective for ownership changes after June 30, 2020, any NOLs attributable to periods up through June 30, 2020 would be limited under Section 382 per the prior regulations and Notice 2003-65, and all NOLs incurred beginning July 1, 2020 would be subject to limitation under Section 382 as determined under the final regulations, presuming a Sec. 382 change of ownership post June 30, 2020.

For purposes of applying Treas. Reg. §1.382-5(d) to ownership changes occurring after the final regulations are issued and for NOLs incurred prior to July 1, 2020, the Section 382 limitation for the post-final regulations ownership change would be calculated under the prior regulations and Notice 2003-65. For example, assume an ownership change on December 31, 2018 and another ownership change on December 31, 2020. Pre-change NOLs from the December 31, 2018 ownership change would be subject to the lower of the Section 382 limitation determined for the December 31, 2018 ownership change under Notice 2003-65 and the Section 382 limitation as of the December 31, 2020 ownership change date also calculated under Notice 2003-65. Any NOL attributable to the period January 1, 2019 through June 30, 2020 would be subject to the Section 382 limitation as of the December 31, 2020 ownership change date again calculated under the prior regulations and Notice 2003-65. Any NOLs incurred beginning July 1, 2020 would be subject to the Section 382 limitation as of the December 31, 2020 ownership change date as calculated pursuant to the final regulations.

We recognize and generally applaud an attempt at simplification, as referenced in the Proposed Regulations, and we note that the rule that we request is not as simple as a cut-off approach based on whether the ownership change occurs before or after the effective date of final regulations. However, the change in law envisioned by the Proposed Regulations is qualitatively different from the incremental changes to the administration of Section 382 that have been made in the past. In this case, implementation of the drastic change in the rules for determining RBIG on a cut-off basis would uproot settled expectations about how Section 382 applies, which expectations have been solidified through almost two decades of practice and planning. Moreover, taxpayers are already familiar with how to apply more than one limitation under Section 382 simultaneously, as required under Treas. Reg. §1.382-5(d).

We think that any complexity engendered by a vintage approach in this area is far better than the disruption that a cut-off would inflict.2

YRCW appreciates the opportunity to provide this feedback on REG-125710-18 and we look forward to working with you to address these issues. Thank you for your time and attention.

Sincerely,

Terry Gerrond
Vice President-Taxation
YRC Worldwide Inc.
Terry.Gerrond@vrcw.com
913-696-6170 Office
913-488-4381 Cell
Overland Park, KS

Copies to:

Mr. David J. Kautter
Assistant Secretary for Tax Policy
U.S. Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, DC 20220

Mr. Krishna Vallabhaneni
Tax Legislative Counsel
U.S. Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, DC 20220

Mr. Brett York
Deputy Tax Legislative Counsel
U.S. Department of the Treasury
1500 Pennsylvania Avenue, N.W.
Washington, DC 20220

Mr. Michael Desmond
Chief Counsel
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, DC 20224

Mr. Jonathan R. Neuville
Internal Revenue Service
Office of Associate Chief Counsel (Corporate)
1111 Constitution Avenue, NW
Washington, DC 20224

Mr. Kevin M. Jacobs
Internal Revenue Service
Office of Chief Counsel (Corporate)
1111 Constitution Avenue, N.W.
Washington, DC 20224

FOOTNOTES

1All "Section" references are to the Internal Revenue Code of 1986, as amended, (the "Code") and "Treas. Reg." to the regulations promulgated thereunder.

2We note that the Code itself adopts a vintage approach under Section 172(a)(2), which allows post-2017 NOLs to offset only 80 percent of taxable income, while applying no such limitation to pre-2018 NOLs.

END FOOTNOTES

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