X
X

Find Your Specialist

X

Contact Us

    Go Back

    IRS Delays Regs on Loss Limits That Apply to Corporate Ownership Changes

    When a significant number of tax groups and businesses comment on regulations, the IRS appears to listen. Six months ago, the IRS proposed regulations on computing built-in gains and losses for the Sec. 382 loss limitation that applies after a change in corporate ownership. After receiving comments from organizations such as the AICPA, the American Bar Association Tax Section and the American Investment Council, the IRS issued new proposed regulations that withdraw some of the earlier rules, delay the effective date and provide transition relief for pending transactions.

    The comments expressed concern that the effective date would impose a significant burden on taxpayers due to the uncertainty about when transactions will close and when the proposed regulations would be finalized. Taxpayers and practitioners also noted that transition relief for binding agreements would be inadequate, because pending transactions regularly are modified or delayed prior to closing.

    The IRS addressed these concerns in the new regulations, as described below.

    Sec. 382 Loss Limitation Basics

    To understand the changes, it is important to review how the Sec. 382 loss limitation works. To limit corporate takeovers done solely to acquire losses, Congress enacted Sec. 382, which limits a corporation from using net operating losses after an “ownership change.” An ownership change occurs if, immediately after any owner shift or any equity structure shift, there is a 50% increase in ownership by 5% shareholders during a three-year period.

    How the Limitation is Calculated

    When there is an ownership change, the amount of the loss limitation depends on whether the loss corporation has built-in gains or losses. If a loss corporation has net unrealized built-in gains immediately before an ownership change, the Sec. 382 limitation is increased. If the loss corporation has a net unrealized built-in loss immediately before an ownership change, any built-in loss recognized within five years after the ownership change date is subject to the loss limitation.

    The limit on loss deductions is calculated for any post-ownership change year as the fair market value of the loss corporation immediately before the ownership change multiplied by the applicable long-term tax-exempt rate set by the IRS. For example, if a loss corporation has a value of $1,000,000 and the tax-exempt rate is 5.78%, the loss limitation would be $57,800.

    Proposed Regulations: Effective Date Later than Adoption Date

    The proposed regulations establish one method of determining net built-in gains and losses and recognized built-in gains and losses. These numbers affect both the net-operating loss limitation and the disallowed business interest expense under Code Sec. 163. The earlier regulations would have applied to ownership changes that occurred after the date the proposed rules were adopted as final. The new proposed regulations delay the applicability date of the rules until 30 days after the proposed rules are finalized.

    The new rules also include transition relief for some transactions that are in progress before the delayed effective date. The final regulations will not apply to ownership changes that occur:

    • Under a binding agreement in effect on or before the delayed applicability date and at all times thereafter;
    • Pursuant to a specific transaction described in a public announcement made on or before the delayed applicability date;
    • Pursuant to a specific transaction described in a filing with the Securities and Exchange Commission submitted on or before the delayed applicability date;
    • By order of a court in a Title 11 or similar case bankruptcy case if the taxpayer was a debtor in the case on or before the delayed applicability date; or
    • Pursuant to a transaction described in a private letter ruling request submitted to the IRS on or before the delayed applicability date.

    Less Disruption

    The new regulations give corporations advance notice and some time to comply with the revised computation of built-in gains and losses. The rules also eliminate the possible duplicative application of Sec. 382 to some disallowed business interest expense carryforwards. Finally, the changes made by the IRS should cause less disruption in negotiations and transactions that are underway when the proposed rules become final.

    Related Articles

    • 01.25.2023

      A New Year Means New Privacy Laws

      Ever since the General Data Protection Regulation (GDPR) came into effect in May 2018, US state privacy laws have been passed in Virginia, Colorado, Connecticut, Utah and, most pressing of them all, California. The California Privacy Rights Act (CPRA) went…

      Continue Reading
    • 01.19.2023

      The New Rules Under Section 174

      Internal Revenue Code Section 174 has long been used by taxpayers to deduct certain expenses related to research and experimentation (R&E) in the current year.  The code section was originally enacted in 1954 to eliminate uncertainty in the tax accounting…

      Continue Reading
    • 12.20.2022

      IRS Customer Service May Improve in 2023

      With 4,000 new customer service representatives and plans to hire 700 new Taxpayer Assistance Center (TAC) employees, taxpayers soon may get relief from endless hold times, no in-person help and unresolved problems.

      Continue Reading
    • 12.12.2022

      Reduce Taxable Income with IRA Distributions Transfers

      IRA owners who are age 70½ or over can transfer up to $100,000 per year to charity to reduce their taxable income. These transfers, known as qualified charitable distributions or QCDs, offer end-of-the year tax savings and can count toward required minimum distributions (RMDs) that taxpayers who are age 72 must make each year. Think of it as a tax-free charitable rollover of IRA funds.

      Continue Reading
    • 12.02.2022

      UK R&D Tax Reliefs – Where Are We Now?

      In the November 2022 Autumn Statement, the Chancellor announced significant changes to the current Research and Development (R&D) tax reliefs. The key announcements were a change to the applicable rate of the Research and Development Expenditure Credit (RDEC) and a…

      Continue Reading
    • 12.01.2022

      1099s Required for 2022 Tax Year

      Taxpayers earning income from selling goods or providing services may receive a Form 1099-K, Payment Card and Third-Party Network Transactions, for the first time in early 2023, when the 2022 forms are due. The requirement to file Forms 1099 have…

      Continue Reading
    • 11.28.2022

      IRS Uncovers $3.1 Billion in COVID Fraud

      The IRS Criminal Investigation department (IRS-CI) has partnered with the Justice Department to uncover and prosecute fraudulent activities related to the federal government’s COVID relief programs. To date, the IRS has conducted 840 investigations involving fraud amounts totaling more than…

      Continue Reading
    • 10.25.2022

      IRS Inflation Reduction Act Increases Funds

      The Inflation Reduction Act of 2022, enacted in August, increased funding for the IRS by $80 billion through 2031 for enforcement activities, operations support, systems modernization and taxpayer services. The legislative language, Treasury Secretary Janet Yellen and IRS Commissioner Charles…

      Continue Reading

    Privacy Overview

    When you use or access the Site, we use cookies, device identifiers, and similar technologies such as pixels, web beacons, and local storage to collect information about how you use the Site. We process the information collected through such technologies, which may include Personal Information, to help operate certain features of the Site (e.g., to prevent online poll participants from voting more than once), to enhance your experience through personalization, and to help us better understand the features of the Site that you and other users are most interested in.

    You can enable or disable our use of cookies per category.
    Always Enabled