ABA Tax Section Offers Comments on Proposed Built-In Gain and Loss Regs

ABA Tax Section Offers Comments on Proposed Built-In Gain and Loss Regs

American Bar Association Section of Taxation

The American Bar Association Section of Taxation has warned the IRS that proposed regulations (<a href="/lr/resolve//29xfw">REG-125710-18</a>) on the items of income and deduction that are included in the calculation of built-in gains and losses under <a href="/research/federal/usc26/382" resolve="/lr/resolve//cnnl">section 382</a> “would significantly change the landscape of current law and would do so in ways that are inconsistent with the neutrality principle.” Under the neutrality principle, the built-in gains and losses of a loss corporation, once recognized after an ownership change, generally are treated in the same manner as if they had been recognized before the ownership change. To implement the neutrality principle, <a href="/research/federal/usc26/382#cnnl-0000055" resolve="/lr/resolve//cnnl#cnnl-0000055">section 382(h)</a> provides rules for the treatment of built-in gain or loss recognized during the five-year period beginning on the change date regarding assets owned by the loss corporation immediately before the ownership change. The tax section recommends that the rule for computing recognized built-in gain (RBIG) should incorporate items of income that are deferred due to a timing limitation. Because costs to perform and prepaid income are so inexorably linked, section members suggest that the net of the two items for any particular tax year be treated as RBIG or recognized built-in loss (RBIL), as appropriate, for that year. Members also propose that only the present value of deductible liabilities be taken into account as RBIL. The tax section suggests using either the accumulated benefit obligation method or the vested benefit obligation method for purposes of calculating the amount of pension benefit liabilities attributable to qualified defined benefit plans. If post-change contributions to a qualified defined benefit plan are treated as giving rise to RBIL, section members recommend that the final regs provide a methodology to determine the amount of the contributions that give rise to RBIL. Members also believe that only a payment resulting in an increase in the aggregate funding level should be treated as giving rise to RBIL. The tax section recommends that the period during which bad debt deductions give rise to RBIL match the period during which discharge of indebtedness income (COD) can give rise to RBIG. Section members further propose that the period for both be the full recognition period. However, if the decision is made to retain RBIG treatment for COD for only one year, members suggest a similar treatment for bad debt deductions. Section members also believe that the <a href="/research/federal/usc26/1248" resolve="/lr/resolve//cpmt">section 1248</a> exclusion from RBIG on the sale of controlled foreign corporation stock should not be included in the final regulations. The tax section asks that the IRS clarify that the recognition period begins at the end of the change date. Section members also request confirmation that items recognized on the change date that would be RBIG if recognized on a subsequent date in the change year are treated as RBIG and allocated under <a href="/research/federal/usc26/382#cnnl-0000098" resolve="/lr/resolve//cnnl#cnnl-0000098">section 382(h)(5)(A)</a> to the post-change period (or items that would be RBIL if recognized on a subsequent date in the change year are treated as RBIL and similarly allocated to the post-change period). Lastly, members suggest that specific grandfathering rules be applied to two types of loss corporations.

The American Bar Association Section of Taxation has warned the IRS that proposed regulations (REG-125710-18) on the items of income and deduction that are included in the calculation of built-in gains and losses under section 382 “would significantly change the landscape of current law and would do so in ways that are inconsistent with the neutrality principle.”

The American Bar Association Section of Taxation has warned the IRS that proposed regulations (REG-125710-18) on the items of income and deduction that are included in the calculation of built-in gains and losses under section 382 “would significantly change the landscape of current law and would do so in ways that are inconsistent with the neutrality principle.” Under the neutrality principle, the built-in gains and losses of a loss corporation, once recognized after an ownership change, generally are treated in the same manner as if they had been recognized before the ownership change. To implement the neutrality principle, section 382(h) provides rules for the treatment of built-in gain or loss recognized during the five-year period beginning on the change date regarding assets owned by the loss corporation immediately before the ownership change. The tax section recommends that the rule for computing recognized built-in gain (RBIG) should incorporate items of income that are deferred due to a timing limitation. Because costs to perform and prepaid income are so inexorably linked, section members suggest that the net of the two items for any particular tax year be treated as RBIG or recognized built-in loss (RBIL), as appropriate, for that year. Members also propose that only the present value of deductible liabilities be taken into account as RBIL. The tax section suggests using either the accumulated benefit obligation method or the vested benefit obligation method for purposes of calculating the amount of pension benefit liabilities attributable to qualified defined benefit plans. If post-change contributions to a qualified defined benefit plan are treated as giving rise to RBIL, section members recommend that the final regs provide a methodology to determine the amount of the contributions that give rise to RBIL. Members also believe that only a payment resulting in an increase in the aggregate funding level should be treated as giving rise to RBIL. The tax section recommends that the period during which bad debt deductions give rise to RBIL match the period during which discharge of indebtedness income (COD) can give rise to RBIG. Section members further propose that the period for both be the full recognition period. However, if the decision is made to retain RBIG treatment for COD for only one year, members suggest a similar treatment for bad debt deductions. Section members also believe that the section 1248 exclusion from RBIG on the sale of controlled foreign corporation stock should not be included in the final regulations. The tax section asks that the IRS clarify that the recognition period begins at the end of the change date. Section members also request confirmation that items recognized on the change date that would be RBIG if recognized on a subsequent date in the change year are treated as RBIG and allocated under section 382(h)(5)(A) to the post-change period (or items that would be RBIL if recognized on a subsequent date in the change year are treated as RBIL and similarly allocated to the post-change period). Lastly, members suggest that specific grandfathering rules be applied to two types of loss corporations.

Sec. 382 Limitation on net operating loss carryforwards and certain built-in losses following ownership change

United States

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ABA Tax Section Offers Comments on Proposed Built-In Gain and Loss Regs