Regulations Under Section 382(h) Related to Built-In Gain and Loss, 47455-47473 [2019-18152]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 84, Number 175 (Tuesday, September 10, 2019)]
[Proposed Rules]
[Pages 47455-47473]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-18152]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-125710-18]
RIN 1545-BP07


Regulations Under Section 382(h) Related to Built-In Gain and 
Loss

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations 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 (Code), and reflecting numerous changes made to the Code by the 
enactment of recent tax legislation. These proposed regulations would 
affect corporations that experience an ownership change for purposes of 
section 382. This document also proposes to withdraw the following IRS 
notices and incorporate their subject matter, as appropriate, into 
these proposed regulations under section 382: Notice 87-79, Notice 90-
27, Notice 2003-65, and Notice 2018-30.

DATES: Written or electronic comments must be received by November 12, 
2019. Written or electronic requests for a public hearing and outlines 
of topics to be discussed at the public hearing must be received by 
November 12, 2019.

ADDRESSES: Submit electronic submissions via the Federal eRulemaking 
Portal at www.regulations.gov (indicate IRS and REG-125710-18) by 
following the online instructions for submitting comments. Once 
submitted to the Federal eRulemaking Portal, comments cannot be edited 
or withdrawn. The Department of the Treasury (Treasury Department) and 
the IRS will publish for public availability any comment received to 
its public docket, whether submitted electronically or in hard copy. 
Send hard copy submissions to: Internal Revenue Service, CC:PA:LPD:PR 
(REG-125710-18), Room 5203, Post Office Box 7604, Ben Franklin Station, 
Washington, DC 20044. Submissions may be hand-delivered Monday through 
Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (indicate 
REG-125710-18), Courier's Desk, Internal Revenue Service, 1111 
Constitution Avenue NW, Washington, DC 20224.

FOR FURTHER INFORMATION CONTACT: Concerning proposed regulations, Kevin 
M. Jacobs at (202) 317-5332 or Marie C. Milnes-Vasquez at (202) 317-
7700; concerning submissions of comments or requests for a public 
hearing, Regina L. Johnson at (202) 317-6901 (not toll free numbers).

SUPPLEMENTARY INFORMATION: 

Background

I. Overview

    This document contains proposed amendments to the Income Tax 
Regulations (26 CFR part 1) under section 382 of the Code.

A. Section 382 Generally

    Section 382 imposes a value-based limitation (section 382 
limitation) on the ability of a ``loss corporation'' to offset its 
taxable income in periods subsequent to an ``ownership change'' with 
losses attributable to periods prior to that ownership change. A loss 
corporation is defined under section 382 as a corporation that has one 
or more of the following tax items: (i) Certain carryovers (including 
net operating loss (NOL), capital loss, disallowed business interest 
under section 163(j), and certain credit carryovers), (ii) certain 
attributes (including an NOL, net capital loss, and certain credits) 
for the taxable year during which an ownership change occurs, or (iii) 
a net unrealized built-in loss (NUBIL) as of the ownership change. (Any 
recognized built-in loss (RBIL) associated with a NUBIL, as well as 
each of the items in (i) and (ii) is referred to herein as a pre-change 
loss.) For purposes of section 382, an ownership change occurs if the 
percentage of the loss corporation's stock owned by any ``5-percent 
shareholders'' (that is, a shareholder that owns at least five percent 
of the loss corporation's stock) increases by more than 50 percentage 
points during a specified testing period. The section 382 limitation 
imposed on a loss corporation's use of pre-change losses for each year 
subsequent to an ownership change generally equals the fair market 
value of the loss corporation immediately before the ownership change, 
multiplied by the applicable long-term tax-exempt rate as defined in 
section 382(f).
    Section 382(m) requires the Secretary to prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of section 
382 (as well as section 383, which limits the use of certain credits 
after an ownership change).
    The existing regulations under section 382, which have developed 
over the past three decades, provide detailed guidance on numerous (but 
not all) aspects of the relatively detailed statutory rules set forth 
in section 382. However, in some cases, the Treasury Department and the 
IRS have found it appropriate to provide guidance to the public through 
the issuance of notices or other sub-regulatory guidance.

B. Built-In Gains and Losses Generally

    Section 382(h) provides rules relating to the determination of a 
loss corporation's built-in gains and losses as of the date of the 
ownership change (change date). In general, built-in gains recognized 
during the five-year period beginning on the change date (recognition 
period) allow a loss corporation to increase its section 382 
limitation, whereas built-in losses recognized during the recognition 
period are subject to the loss corporation's section 382 limitation. 
These rules exist to implement the ``neutrality principle'' underlying 
the statute, which is discussed in more detail in part II.B.2. of the 
Explanation of Provisions. Under this principle, the built-in gains and 
losses of a loss corporation, if recognized during the recognition 
period, generally are to be treated in the same manner as if they had 
been recognized before the ownership change.
    Specifically, section 382(h)(1)(A) provides that, if a loss 
corporation has a net unrealized built-in gain (NUBIG), the section 382 
limitation for any taxable year ending during the recognition period is 
increased by the recognized built-in gain (RBIG) for the taxable year, 
with cumulative increases limited to the amount of the NUBIG. Section 
382(h)(3)(A) defines NUBIG with respect to a loss corporation as the 
amount by which the fair market value of its assets immediately before 
an ownership change exceeds the aggregate adjusted basis of such assets 
at such time. Section 382(h)(2)(A) defines RBIG as any gain recognized 
during the recognition period on the disposition of any asset of the 
loss corporation, to the extent the loss corporation establishes that 
(i) the loss corporation held the asset on the change date, and (ii) 
such gain does not exceed the asset's built-in gain on the change date. 
Section 382(h)(6)(A) also treats as RBIG ``[a]ny item of income which 
is properly taken into account during the recognition period . . . but 
which is attributable to periods before the change date.'' Because RBIG 
can increase the section 382 limitation only up to the amount of NUBIG, 
section 382(h)(6)(C) provides that NUBIG is increased to reflect 
amounts that would be treated as RBIG under section 382(h)(6)(A) if 
such amounts were taken into account during

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the recognition period. This adjustment can cause (i) an increase in 
NUBIG, (ii) a decrease in NUBIL, or even (iii) a change from NUBIL to 
NUBIG status.
    Section 382(h)(1)(B) provides that, if a loss corporation has a 
NUBIL, the use of any RBIL recognized during the recognition period is 
subject to the section 382 limitation. Section 382(h)(3)(A) defines 
NUBIL with respect to a loss corporation as the amount by which the 
aggregate adjusted basis of the loss corporation's assets immediately 
before an ownership change exceeds the fair market value of such assets 
at such time. Section 382(h)(2)(B) defines RBIL as any loss recognized 
during the recognition period on the disposition of any asset of the 
loss corporation, except to the extent the loss corporation establishes 
that (i) the loss corporation did not hold the asset on the change 
date, or (ii) such loss exceeds the asset's built-in loss on the change 
date. Section 382(h)(6)(B) also treats as RBIL ``[a]ny amount which is 
allowable as a deduction during the recognition period (determined 
without regard to any carryover) but which is attributable to periods 
before the change date.'' In addition, section 382(h)(6)(C) provides 
that a loss corporation's NUBIL is properly adjusted for amounts which 
would be treated as RBIL under section 382(h)(6)(B) if such amounts 
were properly allowable as a deduction during the recognition period.
    Finally, section 382(h)(3)(B) provides that if a loss corporation's 
NUBIG or NUBIL is not greater than the lesser of (i) 15 percent of the 
fair market value of the loss corporation's assets immediately before 
the ownership change, or (ii) $10,000,000, then the loss corporation's 
NUBIG or NUBIL is zero.

II. Notice 2003-65

    The rules for identifying RBIG and RBIL under sections 382(h)(6)(A) 
and 382(h)(6)(B) are sufficient for determinations regarding 
dispositions of assets. Section 382(h)(6)(A) and (B) provide that 
income and deduction items that constitute RBIG and RBIL are those tax 
items that are ``attributable to periods before the change date'', but 
are not taken into account for tax purposes until a later time. 
However, taxpayers historically have expressed uncertainty regarding 
how to integrate into their RBIG/RBIL and corresponding NUBIG/NUBIL 
calculations the effects of (i) discharge of indebtedness income, (ii) 
contingent liabilities, (iii) bad debt deductions, and (iv) cost-
recovery deductions. In many instances, the fact-specific 
characteristics of those items have presented significant complications 
for such taxpayers in determining whether those items were attributable 
to periods before the change date. The Treasury Department and the IRS 
agree with taxpayers that sections 382(h)(6)(A) and 382(h)(6)(B) do not 
provide sufficient guidance regarding identification of other items of 
RBIG and RBIL.
    To provide interim guidance regarding the identification of those 
built-in gains and losses under section 382(h), the IRS published 
Notice 2003-65 (2003-2 C.B. 747). This notice permits taxpayers to rely 
on safe harbor approaches for applying section 382(h) to an ownership 
change ``prior to the effective date of temporary or final regulations 
under section 382(h).'' Notice 2003-65, section V. In addition, the IRS 
announced its intent in the notice to publish proposed regulations to 
``provid[e] a single set of rules for identifying built-in items for 
purposes of section 382(h).'' Id., section VII. In particular, the 
notice requested comments regarding ``whether one of the two approaches 
described in th[e] notice should be adopted and to what extent, if any, 
the approaches should be combined or modified to produce a set of rules 
that is both reflective of statutory intent and administrable.'' Id.
    Notice 2003-65 provides, among other things, a single safe harbor 
for computing the NUBIG or NUBIL of a loss corporation, which (i) is 
based on principles underlying the calculation of net recognized built-
in gain under section 1374 for purposes of the tax imposed on C 
corporations that elect to be S corporations, and (ii) analyzes a 
hypothetical sale or exchange of all assets of the loss corporation to 
a third party who assumed all of the loss corporation's liabilities. In 
addition, Notice 2003-65 provides two safe harbors for the computation 
of a loss corporation's RBIG or RBIL: the 1374 approach and the 338 
approach. These safe harbors specifically inform the identification of 
built-in income and deduction items under section 382(h)(6)(A) and (B), 
and the adjustments to NUBIG or NUBIL that would result under section 
382(h)(6)(C).
    The 1374 approach identifies RBIG and RBIL at the time of the 
disposition of a loss corporation's assets during the recognition 
period. Generally, this approach relies on accrual method of accounting 
principles to identify built-in income and deduction items at the time 
of the ownership change, with certain exceptions. In contrast, the 338 
approach identifies items of RBIG and RBIL generally by comparing the 
loss corporation's actual items of income, gain, deduction, and loss 
recognized during the recognition period with those that would have 
been recognized if an election under section 338 (section 338 election) 
had been made with respect to a hypothetical purchase of all of the 
outstanding stock of the loss corporation on the change date. Section 
V. of Notice 2003-65 provides that taxpayers may rely on either the 338 
approach or the 1374 approach until the Treasury Department and the IRS 
issue temporary or final regulations under section 382(h).
    Prior to the issuance of Notice 2003-65, the Treasury Department 
and the IRS issued Notice 87-79 (1987-2 C.B. 387) and Notice 90-29 
(1990-1 C.B. 336), which provided much more limited guidance regarding 
the determination of built-in gains and losses. Notice 87-79, which 
Notice 2003-65 modified, discussed anticipated regulations regarding 
the interplay of section 382(h) and discharge of indebtedness income. 
Notice 90-29 set forth an approach that Notice 2003-65 adopted as part 
of its section 1374 safe harbor, and similarly discussed anticipated 
regulations (regarding the application of section 382(h) to gains 
reported using the installment method under section 453). As discussed 
in more detail in part I.B.2 of this Explanation of Provisions, the 
Treasury Department and the IRS published Notice 2018-30 (2018-21 
I.R.B. 610) following ``An Act to provide for reconciliation pursuant 
to titles II and V of the concurrent resolution on the budget for 
fiscal year 2018,'' Public Law 115-97, 131 Stat. 2054 (2017), commonly 
referred to as the Tax Cuts and Jobs Act (TCJA). Specifically, Notice 
2018-30 makes the section 338 safe harbor of Notice 2003-65 unavailable 
when computing items arising from bonus depreciation under section 
168(k).

III. Response to Notice 2003-65

    Over the past fifteen years, the Treasury Department and the IRS 
have received thoughtful formal and informal commentary highlighting 
numerous shortcomings of the interim guidance set forth in Notice 2003-
65. Examples of these shortcomings include: (i) The overstatement of 
NUBIG (or understatement of NUBIL) that occurs when a loss corporation 
has excluded discharge or cancellation of indebtedness income (COD 
income), (ii) the asymmetry that occurs if certain amounts are included 
in the NUBIG/NUBIL computation when those amounts cannot be treated as 
RBIG or RBIL (such as contingent liabilities under the 1374 approach), 
which appears to contravene section 382(h)(6)(C), and (iii) taxpayer

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uncertainty and tax administration challenges that arise from a lack of 
definitive guidance under section 382(h). Commenters and commentators 
(collectively, commentators) generally have emphasized the simplicity, 
objectivity, and administrability of the accrual-based 1374 approach, 
as well as that approach's close adherence to a plain reading of the 
statutory text of section 382(h) and section 382(h)'s legislative 
history. With regard to the 338 approach, commentators generally have 
appreciated that approach's attempt to quantify and capture items that 
were economically built-in at the time of the ownership change, rather 
than simply accrued under tax accounting principles. Commentators have 
also noted that the 338 approach will reduce the impact of the 
recognition period's limited duration, by not requiring taxpayers to 
dispose of certain assets within such period to be treated as RBIG. In 
sum, commentators have acknowledged merits, as well as weaknesses, 
unique to each of the 1374 and 338 approaches but have not reached 
consensus favoring a universal application of either approach during 
the 15 years since the IRS published Notice 2003-65.

IV. Enactment of the TCJA

    On December 22, 2017, Congress enacted the TCJA, which introduced 
substantial changes to the Code. These changes have generated 
significant, additional uncertainty regarding the application of 
section 382 in general, and Notice 2003-65 in particular. As described 
in greater detail in part II. of the Explanation of Provisions, the 
changes to various provisions of the Code made by the TCJA have 
exacerbated longstanding, unresolved issues regarding the application 
of section 382(h) and created new areas of complexity and ambiguity for 
taxpayers and the IRS. In particular, the Treasury Department and the 
IRS have identified numerous issues that would arise from the 
interaction of the 338 approach with various provisions of the Code 
following the TCJA's enactment. See Explanation of Provisions, part 
I.B.2.
    Consequently, the Treasury Department and the IRS are issuing these 
proposed regulations to provide clearer and more comprehensive guidance 
for taxpayers in applying section 382(h) than that currently provided 
by notice. The Treasury Department and the IRS have determined that the 
proposed regulations would (i) simplify the application of section 382, 
(ii) provide more certainty to taxpayers in determining built-in gains 
and losses for section 382(h) purposes, and (iii) ensure that difficult 
questions regarding the application of the TCJA do not further 
complicate the application of section 382(h). The Treasury Department 
and the IRS note that, as provided in Section V. of Notice 2003-65, 
taxpayers may rely on the approaches set forth in Notice 2003-65 for 
purposes of applying section 382(h) to an ownership change that 
occurred prior to the issuance of Notice 2003-65 or on or after the 
issuance of the notice and prior to the effective date of temporary or 
final regulations under section 382(h). After consideration of all 
comments regarding the proposed regulations set forth in this notice of 
proposed rulemaking, the Treasury Department and the IRS expect to 
issue final regulations to adopt the proposed regulations, which may 
include modifications in response to those comments. It is further 
expected that the Treasury decision adopting these proposed regulations 
as final regulations will withdraw and obsolete Notice 2003-65 and 
other administrative guidance associated with section 382(h) set forth 
in the Effect on Other Documents section of this notice of proposed 
rulemaking.

Explanation of Provisions

I. Proposed Adoption of NUBIG/NUBIL Safe Harbor and 1374 Approach

A. Overview

    With regard to the computation of NUBIG and NUBIL, these proposed 
regulations would adopt as mandatory the safe harbor computation 
provided in Notice 2003-65 based on the principles of section 1374, 
with modifications described in part II.B. of this Explanation of 
Provisions. Regarding the identification of RBIG and RBIL, based on 
study and taxpayer input, and as discussed further in part I.A. and 
part I.B. of this Explanation of Provisions, the Treasury Department 
and the IRS have concluded that the 1374 approach is more consistent 
with the text and the purpose of section 382 than the 338 approach and 
would simplify tax administration. Accordingly, these proposed 
regulations would adopt as mandatory the 1374 approach with certain 
modifications also described in part II.C. of this Explanation of 
Provisions.
    As previously highlighted, the Treasury Department and the IRS, 
along with numerous commentators, view favorably the simplicity, 
objectivity, and administrability of the 1374 approach. The accrual-
based 1374 approach to be used in determining RBIG and RBIL is simpler 
to apply than the 338 approach because, among other reasons, corporate 
taxpayers and their advisors are familiar with the accrual method of 
accounting. Indeed, a sizable volume of case law, Code provisions, and 
regulations govern the accrual method (for example, Schlude v. 
Commissioner, 372 U.S. 128 (1963), Brown v. Helvering, 291 U.S. 193 
(1934), and United States v. Anderson, 269 U.S. 422 (1926); sections 
446, 451, and 461; and the regulations under those Code provisions). In 
addition, the accrual-based 1374 approach avoids many facts-and-
circumstance inquiries by avoiding tracing, valuation uncertainties, 
and presumptions regarding whether items of income are realized for 
Federal income tax purposes.
    The Treasury Department and the IRS have determined that the 
certainty provided by the 1374 approach would streamline (i) the 
calculation of built-in gains and losses for taxpayers, as well as (ii) 
the administration of this area for the IRS. The 1374 approach turns on 
an accrual analysis of the loss corporation's actual transactions and 
circumstances, and consequently minimizes the importation of new issues 
arising from changes made by the TCJA, particularly those issues 
described in detail later in part I.B.2. of this Explanation of 
Provisions. The Treasury Department and the IRS welcome public comment 
on the proposed adoption of a modified 1374 approach for determining 
RBIG and RBIL.

B. Consideration and Proposed Elimination of the 338 Approach

    After study, and based on taxpayer input, the Treasury Department 
and the IRS have decided not to incorporate the 338 approach into these 
proposed regulations. As described in part I.B.1. of this Explanation 
of Provisions, the Treasury Department and the IRS have concluded that 
the 338 approach lacks sufficient grounding in the statutory text of 
section 382(h). Further, the Treasury Department and the IRS have 
determined that the mechanics underlying the 338 approach (i) are 
inherently more complex than the accrual-based 1374 approach, (ii) can 
result in overstatements of RBIG and RBIL, and (iii) as a result of the 
TCJA, would require substantial modifications to eliminate increased 
uncertainty and ensure appropriate results. By eliminating the 338 
approach, the Treasury Department and the IRS have determined that 
these proposed regulations would significantly reduce current and 
future complexity of section 382(h) computations for taxpayers and the 
IRS alike. The Treasury Department and the IRS welcome public comment 
on this proposed elimination of the 338

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approach for determining RBIG and RBIL.
1. Historical Weaknesses of the 338 Approach
    The 338 approach originated in subregulatory guidance set forth in 
Notice 2003-65, and possesses significantly less grounding in the 
statutory text of section 382(h) than the 1374 approach. The 
comparatively tenuous connection between the 338 approach and the plain 
meaning of the statutory text of section 382(h) is exemplified by the 
method by which the 338 approach identifies RBIG. Under the 338 
approach, depreciation deductions on certain built-in gain assets give 
rise to RBIG, even though no actual recognition of gain or income has 
occurred. However, sections 382(h)(2)(A) and 382(h)(6)(A) do not 
authorize RBIG treatment in the absence of actual gain or income 
recognized by the loss corporation.
    Further, commentators have noted that difficult questions arise 
regarding deemed tiered section 338 elections when the 338 approach is 
applied to a loss corporation that is the parent of other corporations. 
For example, there are often significant differences between the basis 
of stock held by a loss corporation in subsidiaries and the basis of 
the assets held by the subsidiaries, and those differences create 
disparate outcomes. Tiered section 338 elections, including with 
respect to controlled foreign corporations, could have significant 
impacts on the outcomes produced under this approach.
2. Additional Complications of the 338 Approach Following the TCJA
    The Treasury Department and the IRS introduced the 338 approach in 
2003 after substantial review of the manner in which then-applicable 
Code provisions would apply to a section 338 election. In the pre-TCJA 
environment, provisions of the Code largely would have applied to the 
taxpayer in the same manner under a hypothetical sale resulting from a 
section 338 election as those provisions would have applied to the 
taxpayer without that hypothetical-sale treatment. However, certain 
important changes under the TCJA have caused the treatment of newly 
purchased assets to diverge from the treatment of historic assets, thus 
potentially compromising the mechanics of the 338 approach.
    For example, the Treasury Department and the IRS have observed that 
TCJA amendments to section 168(k) invalidate the key assumption 
underlying application of the 338 approach to depreciable (``wasting'') 
assets, which is to reflect an estimate of income or expense generated 
by an asset during a particular period. Consequently, to prevent 
unintended collateral consequences of the additional first-year 
depreciation available under amended section 168(k), the Treasury 
Department and the IRS published Notice 2018-30 (2018-21 I.R.B. 610). 
Without the additional guidance set forth in Notice 2018-30, the 
Treasury Department and the IRS concluded that the 338 approach's 
hypothetical cost recovery deduction resulting from a hypothetical 
application of additional first-year depreciation under section 168(k) 
would fail to provide a reasonable estimate of the income or expense 
produced by a built-in gain or loss asset during the recognition 
period.
    Moreover, the Treasury Department and the IRS have identified 
additional issues that would arise from the interaction of the 338 
approach with other provisions of the TCJA, each of which would require 
extensive study and potentially the issuance of additional guidance. 
For example, the limitation on a loss corporation's interest deduction 
under amended section 163(j) and the modifications to the NOL deduction 
rules under amended section 172 are each based on variants of taxable 
income. However, a hypothetical sale of a loss corporation's assets 
under section 338 upon an ownership change would result in different 
taxable income computations than before the TCJA. Unanswered questions 
related to sections 163(j) and 172 would further complicate application 
of the 338 approach. Further, income inclusions under section 951A may 
increase existing concerns (including as a result of potential changes 
in hypothetical QBAI basis from deemed tiered section 338 elections) 
arising under the 338 approach. Taken as a whole, the Treasury 
Department and the IRS have determined that the continued application 
of the 338 approach likely would not be tenable after the changes to 
the Code enacted by the TCJA. The Treasury Department and the IRS 
request public comment on the proposed elimination of the 338 approach 
for determining RBIG and RBIL, including detailed comments with regard 
to whether it would be appropriate within the limits of the statute to 
consider special rules for insolvent or bankrupt loss corporations, and 
whether a redefinition of the date on which the recognition period 
begins would increase simplification.

II. Description of Proposed NUBIG/NUBIL Safe Harbor and Proposed 1374 
Approach

A. Overview

    The proposed approach described in this part II incorporates 
certain modifications to the NUBIG/NUBIL safe harbor and the 1374 
approach to ensure greater consistency between (i) amounts that are 
included in the NUBIG/NUBIL computation and (ii) items that could 
become RBIG or RBIL during the recognition period. These modifications 
would better implement the requirements of section 382(h)(6)(C). As 
described in this part II, the RBIG and RBIL rules remain closely based 
upon the 1374 approach set forth in Notice 2003-65. However, these 
proposed regulations would make the modifications described in this 
part II to improve accuracy, particularly with regard to COD income and 
deductions for the payment of contingent liabilities.

B. Proposed Rules for Computation of NUBIG or NUBIL

1. In General
    The proposed rules regarding the computation of NUBIG/NUBIL set 
forth in these proposed regulations would capture a range of items that 
closely tracks the NUBIG/NUBIL safe harbor computation under Notice 
2003-65. However, the proposed regulations would enhance the 
transparency and clarity of that computation by making its component 
steps more explicit. Specifically, the proposed NUBIG/NUBIL computation 
first takes into account the aggregate amount that would be realized in 
a hypothetical disposition of all of the loss corporation's assets in 
two steps treated as taking place immediately before the ownership 
change. In the first step, the loss corporation is treated as 
satisfying any inadequately secured nonrecourse liability by 
surrendering to each creditor the assets securing such debt. In the 
second step, the loss corporation is treated as selling all remaining 
assets pertinent to the NUBIG/NUBIL computation in a sale to an 
unrelated third party, with the hypothetical buyer assuming no amount 
of the seller's liabilities. That total hypothetical amount realized by 
the loss corporation pursuant to steps one and two is then decreased by 
the sum of the loss corporation's deductible liabilities (both fixed 
and contingent), and also decreased by the loss corporation's basis in 
its assets. Finally, the decreased hypothetical total is then increased 
or decreased, as applicable, by the following: (1) The net amount of 
the

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total RBIG and RBIL income and deduction items that could be recognized 
during the recognition period (excluding COD income); and (2) the net 
amount of positive and negative section 481 adjustments that would be 
required to be included on the previously-described hypothetical 
disposal of all of the loss corporation's assets.
    The Treasury Department and the IRS welcome public comment on all 
aspects of these proposed rules regarding the computation of NUBIG and 
NUBIL.
2. Proposed Adjustments To Account for Built-In COD Income
    Section 61(a)(12) of the Code provides that gross income includes 
COD income, except as provided by law. Section 108(a) provides, in 
part, that gross income of a C corporation does not include COD income 
of the taxpayer if the discharge occurs in a title 11 case, or the 
discharge occurs when the taxpayer is insolvent, but only to the extent 
of the insolvency (excluded COD income).
    If a taxpayer has excluded COD income, section 108(b)(1) requires 
the taxpayer to reduce its tax attributes by the amount excluded. In 
general, pursuant to section 108(b)(2), tax attributes are reduced in 
the following order: NOLs and NOL carryovers, general business credits 
under section 38, minimum tax credits under section 53(b), net capital 
losses and capital loss carryovers, asset basis, passive activity loss 
and credit carryovers under section 469(b), and foreign tax credits and 
foreign tax credit carryovers. Any amount of debt discharge that 
remains after attribute reduction is not includible in income. See H.R. 
Rep. No. 96-833 at 11 (1980); S. Rep. No. 96-1035 at 13 (1980).
    These provisions are designed to ``preserve the debtor's `fresh 
start' after bankruptcy.'' H.R. Rep. No. 96-833 at 9 (1980); see S. 
Rep. No. 96-1035 at 10 (1980). In addition, they are intended to 
``carry out the Congressional intent of deferring, but eventually 
collecting within a reasonable period, tax on ordinary income realized 
from debt discharge.'' H.R. Rep. No. 96-833 at 9 (1980); see S. Rep. 
No. 96-1035 at 10 (1980). By making attributes unavailable to offset 
income in later years, the provisions offer the debtor a temporary, 
rather than a permanent, deferral of tax.
    As discussed in part II of the Background section, significant 
uncertainty has existed with regard to administering the built-in gain 
and loss framework of section 382(h). However, in administering this 
area, the Treasury Department and the IRS have always sought to 
implement a guiding principle discussed in the section 382 legislative 
history, which is commonly referred to as the ``neutrality principle.'' 
Under this principle, the built-in gains and losses of a loss 
corporation, once recognized after an ownership change, generally are 
to be treated in the same manner as if they had been recognized before 
the ownership change. For example, it is the neutrality principle that 
causes RBIL to be limited in the same manner as a pre-change NOL 
carryforward or net capital loss carryforward. Similarly, in the built-
in gain context, the neutrality principle dictates that section 382-
limited losses be freely usable against RBIG because, had the gain been 
taken into account before the ownership change, use of the loss would 
not have been subject to (that is, limited by) section 382. Under 
section 382(h), RBIG results in a dollar-for-dollar increase in the 
loss corporation's section 382 limit in order to replicate this pre-
ownership change treatment. See S. Rept. 99-313 at 235; H.R. Rept. 99-
426 at 261.
    In Notice 2003-65, the Treasury Department and the IRS attempted to 
provide guidance integrating into the NUBIG/NUBIL computation the 
amount of insolvency of the loss corporation (the amount by which its 
liabilities exceed the value of its assets) and, therefore, the maximum 
possible amount of ``built-in'' COD income, as of the change date. 
However, Notice 2003-65 does not distinguish between the eventual 
excluded or included nature of COD income actually recognized by the 
loss corporation during the recognition period. After administrative 
experience under Notice 2003-65 and as highlighted by commentators, the 
Treasury Department and the IRS have determined that this failure to 
distinguish between includable and excludable COD income results in the 
overstatement of RBIG (or understatement of RBIL) in contravention of 
section 382(h)(6)(C). This failure also effectively provides for a 
duplicated benefit under the section 382(h) RBIG rules in certain 
cases. The Treasury Department and the IRS interpret section 
382(h)(6)(C) as requiring inclusion in the NUBIG/NUBIL computation only 
the amounts that would be treated as RBIG or RBIL if those amounts were 
properly taken into account during the recognition period.
    Further, the Treasury Department and the IRS have determined that 
the treatment of COD income under Notice 2003-65 violates the 
neutrality principle previously discussed. The Treasury Department and 
the IRS have determined that RBIG treatment (as well as the ancillary 
increase in NUBIG or decrease in NUBIL) should be available only to the 
extent that the neutrality principle requires an increase in the loss 
corporation's section 382 limitation.
    The application of the attribute reduction rules of section 108(b) 
to excluded COD income complicates the RBIG and NUBIG calculation. The 
Treasury Department and the IRS understand that most excluded COD 
income is offset under section 108(b) by reducing tax attributes of the 
loss corporation that are treated as pre-change losses under section 
382. To the extent that pre-change losses have already been used to 
offset this pre-change income, the neutrality principle prohibits an 
increase in the section 382 limitation. Indeed, such an increase could 
make excluded COD income more attractive than included COD income (or 
any other built-in gain item) for purposes of section 382. For this 
reason, the Treasury Department and the IRS have determined that the 
recognition of such excluded COD income should not generate RBIG. 
Because NUBIG functions as a ceiling on the amount of RBIG that may be 
claimed (and the corresponding amount of increase in the section 382 
limitation), there does not appear to be a policy need nor a statutory 
basis for adjusting the NUBIG/NUBIL computation if there is no need to 
increase the section 382 limitation.
    Inclusion of excludable COD income in the calculation of NUBIG/
NUBIL would be particularly distortive if a loss corporation 
deconsolidates from a group as a result of its ownership change, and 
recognizes excludable COD income on the change date. Under the 
consolidated return regulations, any excludable COD income recognized 
on the date of deconsolidation is treated as attributable to the 
taxable year of the transferor group (rather than post-change, in the 
loss corporation's separate taxable year). Therefore, such excludable 
COD income should not be treated as RBIG (pre-change income recognized 
in the post-change period).
    Accordingly, these proposed regulations generally would not allow 
COD income to be included in the calculation of NUBIG/NUBIL, but would 
provide certain exceptions. Includable COD by its nature is not 
complicated by the interaction of section 108(b). Therefore, to satisfy 
the neutrality principle, all includable COD income of the loss 
corporation that is recognized on recourse debt during the 12-month 
period following the change date would be eligible for inclusion in the 
NUBIG/NUBIL computation, subject to limitations discussed in part 
II.C.2 of this Explanation of Provisions.

[[Page 47460]]

However, these proposed regulations would permit excluded COD income 
items to be treated as RBIG (and thus affect NUBIG/NUBIL calculation) 
only to the extent described in part II.C of this Explanation of 
Provisions. The Treasury Department and the IRS welcome public comment 
on the proposed regulations' approach regarding excludible and 
includible COD income in calculating NUBIG and NUBIL, including 
comments with regard to whether it would be appropriate within the 
limits of the statute to consider special rules for insolvent or 
bankrupt loss corporations. Comments are also invited with regard to 
the possibility of redefining the recognition period to begin on the 
date after the ownership change, and any issues that might be 
eliminated or created by such a redefinition.

C. Proposed Rules for Identification of RBIG and RBIL Income and 
Deduction Items

1. In General
    These proposed regulations would apply a methodology for 
identifying RBIG or RBIL that closely tracks the 1374 approach 
described in Notice 2003-65. This approach is generally accrual based, 
with specific exceptions. Many of the special rules incorporated in 
these proposed regulations originate in regulations underlying section 
1374. However, these proposed regulations would make minor changes to 
improve the computational accuracy of the 1374 approach. For example, 
in response to comments on Notice 2003-65, these proposed regulations 
would provide an improved methodology for computing the amount of 
depreciation deductions treated as RBIL during the recognition period.
    In addition, these proposed regulations would significantly modify 
the 1374 approach set forth in Notice 2003-65 to include as RBIL the 
amount of any deductible contingent liabilities paid or accrued during 
the recognition period, to the extent of the estimated value of those 
liabilities on the change date. Commentators noted that Notice 2003-65 
appeared to include this estimated amount in its NUBIG/NUBIL 
computation, but did not treat deductible liability payments or 
accruals as RBIL. That incongruity contravenes section 382(h)(6)(C), 
which requires that items be included in the NUBIG/NUBIL computation if 
they would be treated as RBIG or RBIL if properly taken into account 
during the recognition period.
    Further, these proposed regulations would add a rule clarifying 
that certain items do not constitute RBIG. For example, the proposed 
regulations provide that dividends paid on stock during the recognition 
period are not RBIG, even if the loss corporation has a NUBIG and there 
is gain built into the pertinent stock immediately before the ownership 
change. On the other hand, gain recognized on the disposition of stock 
generally would be treated as giving rise to RBIG. However, gain 
taxable as a dividend under section 1248 would generally give rise to a 
deduction under section 245A, with no net income being generated. 
Because no losses would be required to offset this item of income, the 
Treasury Department and the IRS have determined that this income item 
should not give rise to RBIG.
    The Treasury Department and the IRS welcome public comment on the 
proposed regulations' identification of RBIG and RBIL. In particular, 
the Treasury Department and the IRS request comments regarding whether 
dividends paid on built-in gain stock should constitute RBIG, and 
whether final regulations should clarify the eligibility of other, 
similar income items for RBIG treatment.
2. Proposed Treatment of COD Income as RBIG
    These proposed regulations would provide limitations on the extent 
to which excluded COD income is treated as RBIG, and thus would impact 
the calculation of NUBIG/NUBIL. As discussed in part II.B.2 of this 
Explanation of Provisions, RBIG effectuates the neutrality principle in 
the post-change period and therefore COD income must be able to be 
taken into account during the post-change period in order to qualify 
for RBIG status. Thus, COD income that is taken into account during the 
pre-change period (for example, excluded COD income recognized by a 
consolidated group member on an ownership change that causes the member 
to deconsolidate) should not qualify as RBIG. The proposed regulations 
also provide that COD income recognized during the post-change period 
generally would not be treated as RBIG. However, these proposed 
regulations would provide taxpayers with the option to treat certain 
COD income recognized during the first 12 months of the recognition 
period as RBIG (and consequently to make corresponding adjustments to 
the taxpayer's NUBIG/NUBIL computation). For example, the proposed 
regulations provide that COD income on recourse debt that is included 
in a loss corporation's taxable income under section 61(a)(12) during 
the first 12 months of the post-change period would be treated as RBIG 
as described in part II.B.2. of this Explanation of Provisions. 
Therefore, the loss corporation's section 382 limitation would be 
increased by the amount of such COD income, and pre-change losses may 
be deducted in the amount of the COD income. The 12-month limitation on 
RBIG treatment is adopted from the 1374 approach under Notice 2003-65.
    Under the proposed regulations, excluded COD income recognized 
during the post-change period generally would not be treated as RBIG, 
in order to prevent the duplication of section 382 benefits. For 
example, if excluded COD income recognized during the post-change 
period (but not included in a loss corporation's income) is offset by 
pre-change losses, the loss corporation would receive the same benefit 
as a loss corporation that recognized included COD income: The ability 
to offset the COD income with pre-change losses. Therefore, the 
Treasury Department and the IRS have determined that extending the 
additional benefit of RBIG treatment (and the resulting increase in 
NUBIG or decrease in NUBIL) to post-change period excluded COD income 
generally would result in a duplication of section 382 benefits to the 
loss corporation.
    However, these proposed regulations would provide two exceptions to 
this general rule to address cases in which excluded COD income 
recognized by a loss corporation during the first 12 months of its 
post-change period is offset by post-change tax attributes under 
section 108(b) or by basis reduction in assets held as of the change 
date under section 1017. To the extent that excluded COD income is 
offset by post-change tax attributes, the loss corporation would not 
yet have used pre-change loss equal to the amount of that excluded COD 
income. Therefore, the excluded COD income would be treated as RBIG, 
and the loss corporation's NUBIG/NUBIL would be adjusted accordingly. 
Similarly, to the extent that excluded COD income is offset by 
reduction in the tax basis of assets held immediately before the 
ownership change, the loss corporation would not have used pre-change 
loss equal to that excluded COD income. Under these proposed 
regulations (as under Notice 2003-65), that basis reduction would be 
treated as occurring immediately before the ownership change. As a 
result of that basis reduction, the corresponding amount of excluded 
COD income would be included in the NUBIG/NUBIL computation, and no 
further adjustment would be necessary. Accordingly, the

[[Page 47461]]

excluded COD income would not be treated as RBIG, to avoid double-
counting. Any additional gain on the disposition of assets during the 
recognition period resulting from the basis adjustment would be treated 
as RBIG, to the extent of the NUBIG limitation.
    Different treatment is required, to the extent that excluded COD is 
offset by reduction in the tax basis of assets that were acquired after 
the ownership change. The basis adjustments to those assets would not 
result in an adjustment to NUBIG/NUBIL, nor could any RBIG be produced 
from those assets because assets not held at the time of the ownership 
change are not included in the NUBIG/NUBIL computation. Similarly, RBIG 
cannot be generated on the sale of assets that were not held at the 
time of the ownership change. Therefore, the excluded COD income would 
be treated as RBIG and the NUBIG/NUBIL would be adjusted accordingly.
    The Treasury Department and the IRS welcome public comment on the 
proposed regulations' approach regarding the treatment of excludible 
and includible COD income as RBIG. Further, the Treasury Department and 
the IRS request comments regarding what rules should govern the 
treatment of COD that is excluded under section 108(a)(1)(C) and (D) 
(qualified farm indebtedness and qualified real estate business 
indebtedness).
3. Overall Limitations on Amount of RBIL for COD on Recourse Debt
    These proposed regulations set forth two different RBIG ceilings 
with regard to COD on recourse debt. The first ceiling applies to 
taxpayers that are in bankruptcy at the time of the ownership change, 
and have COD income pursuant to that bankruptcy action during the first 
twelve months of the recognition period. The maximum RBIG for those 
taxpayers related to excluded COD income would be the amount of 
indebtedness discharged in that bankruptcy action. The second ceiling 
applies to all other taxpayers who recognize COD income during the 
first twelve months of the recognition period. The maximum RBIG for 
those taxpayers is the excess of liabilities over asset value 
immediately before the change date, with certain adjustments. 
Adjustments must be made to avoid double counting amounts of excluded 
COD that are offset by reductions in asset basis under sections 108(b) 
and 1017. The Treasury Department and the IRS welcome public comment on 
these two RBIG ceilings with regard to COD income on recourse debt.
4. Special Rules for Nonrecourse Debt
    RBIG status for COD income on nonrecourse debt recognized in the 
first 12 months of the recognition period is subject to rules similar 
to those previously described. However, such COD income is treated as 
built-in gain only to the extent that the nonrecourse debt was under-
secured immediately before the ownership change. Because a nonrecourse 
creditor has a claim only on the assets securing the indebtedness, the 
amount of the impairment at the time of the ownership change is the 
appropriate measure of built-in COD in the nonrecourse debt. Further, 
RBIG recognized on nonrecourse debt during the recognition period does 
not result in an adjustment to NUBIG/NUBIL, because the amount of the 
impairment to the nonrecourse debt is already built into the initial 
NUBIG/NUBIL computation with regard to the deemed disposition of 
assets. The Treasury Department and the IRS welcome public comment on 
the treatment of COD income on non-recourse debt, including comments on 
the treatment of accrued but unpaid interest.
D. Interactions Between Sections 163(j) and 382
    The addition of new section 163(j) under the TCJA has created 
numerous issues concerning the interaction of those interest deduction 
limitations with section 382. These proposed regulations attempt to 
eliminate the possibility of duplication of RBIL items, as well as to 
clarify the treatment under section 382 of certain items that are 
allocated from a partnership.
1. Elimination of Possible Duplicative Recognized Built-In Loss
    Proposed Sec.  1.382-7 addresses the possible duplicative 
application of section 382 to certain disallowed business interest 
expense carryforwards, including the portion of any disallowed business 
interest expense of the old loss corporation that is (i) paid or 
accrued in the taxable year of the testing date (as defined in Sec.  
1.382-2(b)(4)), (ii) attributable to the pre-change period, and (iii) 
carried forward into later years (collectively, a section 382 
disallowed business interest carryforward). Section 382 disallowed 
business interest carryforwards are subject to section 382 by virtue of 
section 382(d)(3), which treats any section 163(j)(2) carryover from a 
pre-change period as a pre-change loss. Additionally, such 
carryforwards are potentially subject to the section 382 limitation 
under section 382(h)(6) as RBIL. Section 382(h)(6)(B) provides that any 
amount allowable as a deduction during the recognition period (within 
the meaning of section 382(h)(7)), determined without regard to any 
carryover, that is attributable to periods before the change date is 
treated as a RBIL for the taxable year for which it is allowable as a 
deduction. Further, section 382(h)(6)(C) provides that the amount of 
NUBIG or NUBIL must be properly adjusted for amounts that would be 
treated as RBIG or RBIL under section 382(h)(6) if such amounts were 
properly taken into account or allowable as a deduction during the 
recognition period.
    Section 382 disallowed business interest carryforwards should not 
be counted twice for purposes of the application of section 382. 
Subjecting the same section 382 disallowed business interest 
carryforward to the section 382 regime in two different ways could 
result in a double reduction of the annual section 382 limitation. 
Moreover, because disallowed business interest expense carryforwards 
would be absorbed before NOL carryovers under proposed Sec.  1.383-
1(d), subjecting the same disallowed business interest expense 
carryforward to the section 382 regime twice could preclude taxpayers 
from utilizing their NOL carryovers or other attributes. In addition, 
treatment of disallowed business interest carryforwards as potential 
RBIL would result in an unwarranted increase in NUBIL (or decrease in 
NUBIG).
    Accordingly, proposed Sec.  1.382-7(d)(5) would provide that 
section 382 disallowed business interest carryforwards would not be 
treated as RBIL under section 382(h)(6)(B) if such amounts were 
allowable as a deduction during the recognition period.
2. Treatment of Excess Business Interest Expense of a Partnership
    Proposed Sec.  1.382-7 addresses the application of section 382(h) 
to excess business interest expense of a partnership to the extent that 
the item was not suspended under section 704(d) and is allocable to an 
old loss corporation (as partner) with regard to a period prior to an 
ownership change (section 382 excess business interest expense). 
Section 382(h)(3)(A)(i) provides that the amount of the old loss 
corporation's NUBIG or NUBIL includes the amount by which the aggregate 
fair market value of certain assets is more or less than the aggregate 
adjusted basis of such assets. As provided in section 163(j)(4)(B)(iii) 
and proposed Sec.  1.163-6(h)(3)(i), if a partner disposes of all or 
substantially all of its partnership interest, the adjusted basis of 
the partner in the partnership interest would be increased immediately 
before the

[[Page 47462]]

disposition to reflect the partner's section 382 excess business 
interest expense from the partnership, if any. Therefore, proposed 
Sec.  1.382-7(c)(3)(iii)(E) would provide that, for purposes of 
determining RBIL under section 382(h)(2)(B)(ii), as well as for 
computing NUBIG or NUBIL under section 382(h)(3)(A), a loss 
corporation's adjusted basis in a partnership interest is adjusted as 
if the loss corporation disposed of all or substantially all of its 
partnership interests immediately before the ownership change.
    During the recognition period, a deduction or loss equal to the 
section 382 excess business interest expense could be recognized either 
when the loss corporation is able to deduct the section 382 excess 
business interest expense, or when it sells all or substantially of its 
partnership interest. In either case, such amount is properly 
characterized as RBIL. However, in either case, no adjustment to the 
loss corporation's NUBIG or NUBIL computation would be necessary, 
because the positive adjustment to the basis of the partnership 
interest ensures that an amount equal to the section 382 excess 
business interest expense is included in the computation.
    A partner also can be allocated section 382 excess business 
interest expense that is characterized as negative section 163(j) 
expense. See Sec.  1.163(j)-6(h)(1) as proposed in REG-106089-18 (83 FR 
67490, 67556 (Dec. 28, 2018)). Negative section 163(j) expense does not 
reduce the partner's basis in the partnership and therefore would not 
be taken into account if the partner sold all or substantially all of 
its partnership interest. However, if the loss corporation were able to 
deduct the negative section 163(j) expense during the recognition 
period, then such expense presumably could be treated as RBIL pursuant 
to section 382(h)(6)(B). These proposed regulations do not address 
whether deductions resulting from negative section 163(j) allocations 
are RBIL.
    The Treasury Department and the IRS request comments as to whether 
a corporate partner's section 382 excess business interest expense and 
negative section 163(j) expense should be treated as a built-in item 
under section 382(h)(6) or as a section 382 disallowed business 
interest carryforward, and therefore be treated as a pre-change loss.

Applicability Dates

    Section 7805(b)(1)(A) and (B) of the Code generally provides that 
no temporary, proposed, or final regulation relating to the internal 
revenue laws may apply to any taxable period ending before the earliest 
of (A) the date on which such regulation is filed with the Federal 
Register, or (B) in the case of a final regulation, the date on which a 
proposed or temporary regulation to which the final regulation relates 
was filed with the Federal Register.
    Except as otherwise provided in the following sentence, these 
regulations are proposed to be effective for ownership changes 
occurring after the date the Treasury decision adopting these proposed 
regulations as final regulations is published in the Federal Register. 
However, taxpayers and their related parties, within the meaning of 
sections 267(b) and 707(b)(1), may apply these proposed regulations to 
any ownership change occurring during a taxable year with respect to 
which the period described in section 6511(a) has not expired, so long 
as the taxpayers and all of their related parties consistently apply 
the rules of these proposed regulations to such ownership change and 
all subsequent ownership changes that occur before the applicability 
date of final regulations.

Effect on Other Documents

    The following publications are proposed to be withdrawn and 
obsoleted effective the day after the date the Treasury decision 
adopting these proposed regulations as final regulations is published 
in the Federal Register:

Notice 87-79 (1987-2 C.B. 387)
Notice 90-27 (1990-1 C.B. 336)
Notice 2003-65 (2003-2 C.B. 747)
Notice 2018-30 (2018-21 I.R.B. 610)

Special Analyses

I. Regulatory Planning and Review--Economic Analysis

    Executive Orders 12866 and 13563 direct agencies to assess costs 
and benefits of available regulatory alternatives and, if regulation is 
necessary, to select regulatory approaches that maximize net benefits 
(including (i) potential economic, environmental, and public health and 
safety effects, (ii) potential distributive impacts, and (iii) equity). 
Executive Order 13563 emphasizes the importance of quantifying both 
costs and benefits, reducing costs, harmonizing rules, and promoting 
flexibility.
    These proposed regulations have been designated as subject to 
review under Executive Order 12866 pursuant to the Memorandum of 
Agreement (April 11, 2018) (MOA) between the Treasury Department and 
the Office of Management and Budget (OMB) regarding review of tax 
regulations. The Office of Information and Regulatory Affairs has 
designated these proposed regulations as significant under section 1(b) 
of the MOA. Accordingly, the OMB has reviewed these proposed 
regulations.

A. Background

    In general, section 382 limits the usage of a corporation's tax 
attributes after that corporation experiences an ownership change. 
Limited tax attributes include, among other items, NOLs and built-in 
losses. The limit equals the product obtained by multiplying a 
prescribed interest rate by the value of the stock of the corporation 
(referred to as the ``old loss corporation'') on the change date. This 
product represents a proxy for the amount of income created by the 
assets held by the corporation prior to the ownership change. The 
section 382 limit reflects Congress's intent that, generally, NOLs 
should not be more valuable to an acquirer than to the going concern 
that created them. In the conference report to the Tax Reform Act of 
1986, Congress expressed that the previously described formula ``is 
necessary to ensure that the value of NOL carryforwards to the buying 
corporation is not more than their value to the loss corporation.'' 
H.R. Rep. No. 99-841, at II-185 (1986).
    Section 382(h) specifies the treatment of gains and losses accrued 
by a corporation prior to a change in ownership. As explained in the 
legislative history, the rules are intended to treat built-in gains and 
losses that are recognized after the ownership change the same as if 
they had been recognized before the ownership change. As described by 
Congress, ``[i]f built-in losses were not subject to limitations, 
taxpayers could reduce or eliminate the impact of the general rules by 
causing a loss corporation (following an ownership change) to recognize 
its built-in losses free of the special limitations (and then invest 
the proceeds in assets similar to the assets sold).'' Joint Committee 
on Tax'n, General Explanation of the Tax Reform Act of 1986 (Pub. L. 
99-514) (May 4, 1987), JCS-10-87, at p. 298. The neutral treatment of 
gains and losses recognized before and after a change in ownership is 
accomplished by allowing the recognition of built in gain to increase 
the section 382 limitation whereas the recognition of built in loss is 
subject to the section 382 limitation.
    The following example (Example 1) illustrates this principle. 
Assume that a loss corporation (LossCorp), as of the change date, has 
$500 in NOL carryforwards and holds only one asset (Asset A) with a 
fair market value of $100 and a basis of $120. If LossCorp

[[Page 47463]]

disposed of Asset A immediately prior to the ownership change, a $20 
loss would be recognized. Additionally, assuming the taxpayer made a 
closing-of-the-books election under Sec.  1.382-6(b), the amount of the 
NOL carryforwards would be $520. If instead, Asset A was disposed of 
after the change date, then sections 382(h)(1) and 382(h)(2) recognize 
that the $20 loss is attributable to the period prior to the ownership 
change and therefore subject it to a section 382 limitation in the same 
manner as if it was an NOL carryforward (disregarding a de minimis 
threshold rule set forth in section 382(h)(3)(B)). In the language of 
section 382, the $20 loss would be RBIL (that is, recognized built-in 
loss). These rules operate to eliminate the significance of the 
disposition's timing and preserve neutrality.
    Alternatively, assume in this example (Example 2) that Asset A's 
fair market value on the change date were $150, and thus LossCorp had a 
built-in gain on the asset. If LossCorp disposed of Asset A prior to 
the change date, assuming the taxpayer made a closing-of-the-books 
election under Sec.  1.382-6(b), then the $30 in income would reduce 
its NOL carryforward to $470. If instead Asset A were disposed of after 
the change date, then sections 382(h)(1) and 382(h)(2) recognize that 
the $30 gain is attributable to the period prior to the ownership 
change and therefore increases LossCorp's section 382 limitation for 
the year (disregarding the de minimis threshold rule set forth in 
section 382(h)(3)(B)), thereby allowing LossCorp to freely use the pre-
change NOLs to offset the $30 in income. In the language of section 
382, the $30 in income would be RBIG (that is, recognized built-in 
gain). In this fact pattern, the rules under section 382 would 
eliminate the significance of the disposition's timing and preserve 
neutrality by allowing the NOLs to be applied following the ownership 
change with respect to gain that was ``built-in'' prior to the 
ownership change.
    Under section 382(h), the total amount of RBIL must not exceed 
NUBIL (that is, net unrealized built-in loss) and the total amount of 
RBIG must not exceed NUBIG (that is, net unrealized built-in gain). 
More precisely, at the change date, a loss corporation must compute the 
difference between the aggregate fair market value and aggregate basis 
of all of its assets. In general, (i) to the extent that this 
difference is positive, a NUBIG results; and (ii) to the extent that 
the difference is negative, a NUBIL results. Both NUBIG and NUBIL are 
adjusted by section 382(h)(6)(C), as discussed below. NUBIG and NUBIL 
act as limitations to the aggregate amount of RBIG and RBIL recognized 
during the recognition period. For illustration, if Example 2 were 
modified so that LossCorp owned additional assets such that it had 
NUBIL, the disposition of Asset A would not create RBIG.
    These proposed regulations would primarily address the 
subcomponents of RBIL, RBIG, NUBIL, and NUBIG that are provided for by 
section 382(h)(6). Specifically, section 382(h)(6)(A) provides that 
income items that are ``properly taken into account during the 
recognition period,'' but which are ``attributable to periods before 
the change date,'' are treated as RBIG. Section 382(h)(6)(B) provides a 
similar rule for deductions to be treated as RBIL. Section 382(h)(6)(C) 
provides that the amount of potential income items under section 
382(h)(6)(A) increases NUBIG (or reduces NUBIL), whether or not the 
income items were actually taken into account during the recognition 
period. Analogously, section 382(h)(6)(C) provides that the amount of 
potential deduction items under section 382(h)(6)(B) increases NUBIL 
(or reduces NUBIG), whether or not the deduction items were actually 
allowable as a deduction during the recognition period. The proposed 
regulations clarify the definition and calculation of these components.
    As is the case for section 382(h) generally, the rules under 
section 382(h)(6) are again intended to preserve neutrality between 
pre- and post-change date transactions. Income items recognized prior 
to the change date may have been freely offset with pre-change NOLs; 
thus, if those same income items were recognized after the change date, 
the neutrality principle requires that pre-change NOLs be allowed to 
freely offset it. RBIG treatment accomplishes this effect. Similar 
logic applies with respect to deduction items.
    In response to substantial uncertainty regarding which income and 
deduction items qualify under section 382(h)(6), the IRS issued Notice 
2003-65. Generally, Notice 2003-65 provides two safe harbors for 
computing these items. The first safe harbor, referred to as the ``1374 
approach'' (named after section 1374, which addresses tax consequences 
regarding built-in gains of C corporations that become S corporations), 
relies generally on accrual method of accounting principles. The second 
safe harbor, referred to as the ``338 approach,'' compares actual 
amounts of income and deductions to the amounts that would have been 
realized had a section 338 election been made with respect to a 
hypothetical stock purchase on the change date. Notice 2018-30 amended 
Notice 2003-65 by reversing an unintended change to both safe harbors 
that resulted from TCJA amendments to section 168(k).
    Broadly, for reasons discussed below, these proposed regulations 
would make mandatory the 1374 approach with certain adjustments. These 
adjustments include technical fixes to calculations involving COD 
income (that is, cancellation of indebtedness income), deductions for 
contingent liabilities, and cost recovery deductions. Additionally, 
these proposed regulations clarify that carryovers of section 163(j) 
disallowed business interest are counted only once for the purpose of 
section 382.

B. No-Action Baseline

    The Treasury Department and the IRS have assessed the benefits and 
costs of the proposed regulations relative to a no-action baseline 
reflecting anticipated Federal income tax-related behavior in the 
absence of these proposed regulations.

C. Economic Analysis of Proposed Regulations

1. Framework
    In evaluating the economic efficiency of these proposed 
regulations, this analysis considers two main factors. The first factor 
regards compliance and administration costs. Mergers and acquisitions 
can be very complicated transactions; thus, compliance with certain 
aspects of Federal income tax law can be onerous for taxpayers, and 
examination can be difficult for the IRS. As discussed further below 
the Treasury Department projects that the proposed regulations will 
reduce compliance and enforcement costs relative to the baseline 
primarily by eliminating duplicative and potentially complicated 
calculations required to apply the 338 approach. Greater efficiencies 
will also be gained under the proposed regulations by reducing taxpayer 
disputes with the IRS regarding the application of the 1374 approach.
    The second factor considered is whether changes in mergers and 
acquisitions potentially induced by the proposed regulations are likely 
to be efficiency-enhancing or efficiency-reducing. If a merger 
increases value only because of increased potential NOL usage, then 
that merger would be economically inefficient (even ignoring antitrust 
concerns). Section 382 attempts to ensure that the NOLs of the loss 
corporation can be used to the same extent whether or not the loss

[[Page 47464]]

corporation is acquired by another corporation, which implies that no 
transaction would take place solely to increase NOL use. However, 
currently issued guidance regarding section 382 may not strike that 
balance perfectly. It is the determination of the Treasury Department 
and the IRS that, for the reasons discussed below, the currently issued 
guidance on section 382(h) allows too much NOL usage relative to the 
neutral baseline. These proposed regulations would modestly restrict 
NOL usage by reducing the amount that would qualify as RBIG, reducing 
the incentive to engage in inefficient, tax-motivated mergers and 
acquisitions.
    The Treasury Department and the IRS have not quantified the 
expected gains to the U.S. economy arising from the discretionary 
aspects of the proposed regulations but expect them to be less than 
$100 million per year ($2019), a threshold established by the MOA and 
Executive Order 12866. For reasons discussed further in section C.2. of 
the analysis, the Treasury Department and IRS project that the effect 
of the proposed regulations on the number of mergers and acquisitions 
will be small. The Treasury Department and the IRS additionally project 
that the change (that is, reduction) in compliance costs will also be 
modest. The Treasury Department and the IRS solicit comments on this 
conclusion and particularly solicit comments that provide data, 
evidence, or models that would enhance the rigor by which the non-
revenue economic effects might be determined for the final regulations.
2. Making the 1374 Approach Mandatory
    The Treasury Department and the IRS have determined that the 1374 
approach would be simpler for taxpayers to comply with, and simpler for 
the IRS to administer. Under Notice 2003-65, as modified by Notice 
2018-30, taxpayers subject to section 382 would typically compute 
estimates of NUBIG/NUBIL and RBIG/RBIL under both the 1374 and 338 
approaches to determine which approach would provide the more favorable 
result. Such duplicative compliance costs are inherently economically 
wasteful, even if they may have been privately optimal (in other words, 
they generated expected tax savings for the corporation in excess of 
compliance costs). Under these proposed regulations, taxpayers would 
make computations under only one approach, thereby reducing inefficient 
compliance burdens.
    In addition, the 1374 approach has lower compliance costs than the 
338 approach. Under the 1374 approach, taxpayers need only record items 
of income and deductions that they already account for under well-known 
accrual method of accounting principles. Furthermore, the IRS can 
easily verify such amounts during an examination. Under the 338 
approach, taxpayers must consider a hypothetical transaction involving 
deemed asset sales. With respect to tiered corporate structures, an 
ownership change of the corporate parent would require the analysis of 
deemed asset sales not only at the corporate-parent level, but also an 
analysis of deemed asset sales at every lower corporate level. The 338 
approach would pose significant, iterative complexity for corporate 
structures with several tiers of subsidiaries.
    The Treasury Department and the IRS have determined that between 
7,000 and 15,000 firms per year will be affected by these proposed 
regulations, based on the checkbox on Line 16 of Form 1120, Schedule K 
and other tax attributes. These firms will see a reduction in 
compliance costs under the 1374 approach, if they were using the 338 
approach or performing calculations under both approaches under the 
baseline. The Treasury Department and the IRS request public comment on 
any anticipated changes in compliance costs due to the proposed 
elimination of the 338 approach.
    The Treasury Department and the IRS project that the adoption of 
the 1374 approach as the sole approach under section 382(h) will not 
have a large effect on the number of mergers and acquisitions that take 
place. Such adoption of the 1374 approach will make certain mergers and 
acquisitions somewhat less attractive. However, the Treasury Department 
and the IRS have determined that, historically, most acquiring 
corporations behave as if section 382 will limit the ability to utilize 
substantially all pre-change NOLs. This heuristic behavior implies that 
firms will not be highly responsive to the changes set forth by these 
proposed regulations.
    It is important to note that any merger or acquisition dissuaded by 
these proposed regulations would tend to have been economically 
inefficient not have been undertaken except for the purpose of reducing 
tax liability. Recall from Part C.1 of this section that the goal of 
section 382 is to ensure that NOL usage is approximately unaffected 
when a loss corporation is acquired by a profitable corporation. The 
Treasury Department and the IRS have determined that the ability to 
toggle between the 338 approach and the 1374 approach allows more NOL 
usage in the case of an acquisition than would be the case if the loss 
corporation continued independently. By eliminating the 338 approach, 
these proposed regulations move closer to a neutral, economically 
efficient position.
    In particular, the most notable feature of the 338 approach is that 
assets with built-in gains can generate RBIG even without a realization 
event. This is generally advantageous for taxpayers. This treatment 
follows from the logic that such built-in gain assets would have 
generated income in subsequent years; in the absence of an acquisition, 
such income could have been offset freely by the old loss corporation's 
NOLs. The 338 approach prescribes a proxy for that excess income 
amount: The extent to which cost recovery deductions (disregarding 
bonus depreciation under section 168(k), per Notice 2018-30) under a 
hypothetical purchase of each asset at its current fair market value 
exceed actual allowable cost recovery deductions.
    The Treasury Department and the IRS have determined that this 
treatment of built-in gain assets under the 338 approach is problematic 
for two reasons. First, the schedules for cost recovery deductions were 
never intended to match the production of income from each asset; 
rather, they were intended to accelerate cost recovery to stimulate 
investment. Thus, this proxy is likely to, on average, overstate income 
created by those assets, further increasing NOL usage beyond the 
neutral baseline. Second, such an adjustment for income created by 
built-in gain assets is unnecessary, as it is already taken into 
account by section 382. Section 382 provides that the NOLs of the old 
loss corporation can be used by the new loss corporation up to the 
annual limit. This annual limit is equal to a prescribed interest rate 
multiplied by the value of the stock of the old loss corporation, and 
serves as a proxy for the income created by the assets of the old loss 
corporation. Thus, to the extent that the appreciated value of a built-
in gain asset is reflected in the value of the stock, the general rule 
of section 382 allows for the NOLs of the old loss corporation to 
offset the flow of income created by that asset. Therefore, the 
treatment created by the 338 approach creates a double benefit. By 
eliminating this treatment, the proposed regulations reduce the 
attractiveness of inefficient, tax-motivated acquisitions, which 
enhances economic efficiency.
3. Modification to Treatment of COD Income
    The proposed regulations also modify the treatment of COD income 
under the 1374 approach. The baseline rules

[[Page 47465]]

provide that COD income enters into the NUBIG/NUBIL calculations 
without regard to whether that income was ultimately included in, or 
excluded from, income by the new loss corporation under the rules of 
section 108. This issue is especially relevant under the consolidated 
return regulations regarding the application of section 108. Such 
regulations provide that, generally, when a member leaves its 
consolidated group, excluded COD income will be taken into account by 
the consolidated group and not the new loss corporation. Therefore, 
inclusion of the COD amount in the NUBIG/NUBIL calculations does not 
reflect the economic reality of the taxpayer and may inappropriately 
influence a taxpayer's decision of whether to voluntarily enter into 
bankruptcy. The proposed regulations address this issue by ensuring 
that COD income enters into the RBIG and NUBIG/NUBIL calculations only 
to the extent actually taken into account by the new loss corporation. 
The Treasury Department and the IRS have determined that this revision 
will treat different types of transactions more neutrally. Such 
treatment will increase economic efficiency by causing taxpayers to 
choose transactions that are optimal for non-tax reasons rather than 
for tax reasons.
4. Modification to Treatment of Contingent Liabilities
    These proposed regulations would revise the 1374 approach with 
respect to the treatment of contingent liabilities. Under Notice 2003-
65, the estimated value of contingent liabilities (as of the change 
date) was included in the NUBIG/NUBIL calculation. However, the 
ultimate payment of such liability did not give rise to RBIL. This 
asymmetry violates the principle of neutrality between pre-change and 
post-change deductions. If the old loss corporation were able to pay a 
third party to assume the liability prior to the ownership change, it 
would generate a deduction that increases the pre-change NOLs, which 
would be limited after the ownership change. If the liability were not 
treated as RBIL, the post-change realization of that liability could 
freely offset other sources of income. This non-neutrality may distort 
decision-making and reduce economic efficiency.
    These proposed regulations would address this issue by providing 
that payments of contingent liabilities represent RBIL to the extent of 
the estimated value of the contingent liability as of the change date.
5. Modification to Treatment of Cost Recovery Deductions
    Section 382(h)(6)(B) provides that cost recovery deductions during 
the recognition period are treated as RBIL, except to the extent that 
the new loss corporation can establish that the deduction is not 
attributable to a built-in loss. Intuitively, RBIL includes cost 
recovery deductions taken against assets whose depreciation deductions 
are too large relative to the value of the asset. Under the baseline 
rules of Notice 2003-65, the suggested approach is to compare (1) 
actual depreciation deductions on a given asset to (2) the depreciation 
deductions that would be allowable (disregarding bonus depreciation 
under section 168(k), per Notice 2018-30) if the asset were 
hypothetically purchased at the change date from a third party at its 
fair market value. The excess of (1) over (2) is treated as RBIL. 
Because depreciation deductions under section 168 tend to be larger 
closer to the beginning of an asset's life, this approach can lead to 
absurd results. In particular, it is possible to create RBIL even when 
the fair market value is equal to the adjusted basis.
    These proposed regulations would abandon that approach. Instead, 
the hypothetical cost recovery deduction would be computed by applying 
the same depreciation schedule actually used by the corporation to the 
fair market value of the asset. This will generally narrow the role of 
such RBIL treatment to taxpayers with an asset with a fair market value 
that is less than adjusted basis. Given the front-loading of 
depreciation schedules (including under section 168(k)), the Treasury 
Department and the IRS project that the new rule will cause RBIL to be 
calculated for far fewer taxpayers and thus the change will reduce 
compliance burden. Additionally, the new rule will generally cause an 
increase in allowable NOLs by reducing RBIL, contrary to the other rule 
changes in these proposed regulations. However, the Treasury Department 
and IRS project that the effect of this change (in terms of generated 
RBIL/RBIG) will be quantitatively less significant than other 
modifications, such as the elimination of the section 338 approach.
6. Clarification of Treatment of Disallowed Business Interest Expense
    Section 382(d)(3) provides that carryovers of disallowed interest 
under section 163(j) (as amended by the TCJA) are to be treated 
analogously to NOLs, meaning that their use would be limited after an 
ownership change. Additionally, the general rules of section 382(h)(6) 
could be interpreted to cause such disallowed interest to be RBIL if 
recognized during the recognition period, as they may be ``allowable as 
a deduction during the recognition period'' but ``attributable to 
periods before the change date.'' Such treatment would cause section 
163(j) carryovers to be counted twice for the purpose of section 382.
    These proposed regulations would preclude this possibility by 
clarifying that the use of section 163(j) carryovers during the 
recognition period would not give rise to RBIL. This proposed 
clarification would provide certainty to taxpayers that section 382 
will operate as intended in this regard.

II. Paperwork Reduction Act

    Pursuant to Sec.  1.382-11, a loss corporation must include a 
statement on or with its tax return for each taxable year that it is a 
loss corporation in which an owner shift, equity structure shift, or 
other transaction described in Sec.  1.382-2T(a)(2)(i) occurs. The 
statement must include, among other things, attributes described in 
Sec.  1.382-2(a)(1)(i) that caused the corporation to be a loss 
corporation. One of the attributes described in Sec.  1.382-2(a)(1)(i) 
is a loss corporation's NUBIL (that is, net unrealized built-in loss), 
if any. The existing collection of information under Sec.  1.382-11 has 
been reviewed and approved by the OMB in accordance with the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3507(d)) (PRA) under OMB control 
number 1545-2019. The collection of information is necessary to enable 
the IRS to verify the amount of any attributes that are subject to 
section 382.
    These proposed regulations provide guidance regarding the 
calculation of built-in gains and losses under section 382, including 
whether a corporation has a NUBIL. Therefore, these proposed 
regulations could cause a corporation to have a NUBIL when they would 
not have had one in the absence of these proposed regulations. As a 
result, a corporation would have to file a statement under Sec.  1.382-
11, or include an item on its statement under Sec.  1.382-11, when the 
corporation would not have had to do so in the absence of these 
proposed regulations. The Sec.  1.382-11 statement is a one-time 
paperwork burden that is required to be filed in the taxable year 
during which an owner shift, equity structure shift, or other 
transaction described in Sec.  1.382-2T(a)(2)(i) occurs. On the other 
hand, these proposed regulations, if finalized, also could cause some 
firms to no longer have a NUBIL, thereby eliminating their

[[Page 47466]]

requirement to file a statement under Sec.  1.382-11. Furthermore, by 
eliminating the 338 approach, the Treasury Department and the IRS 
project that compliance burdens will fall for most existing filers of 
the Sec.  1.382-11 statement. The Treasury Department and the IRS have 
based this projection on their observations that (i) taxpayers 
currently incur costs to compute their NUBIG/NUBIL under each of the 
two methods in order to be able to choose the more beneficial method, 
and (ii) the 338 approach requires taxpayers to determine hypothetical 
amounts (for example, what depreciation would have been available in 
the case of a deemed asset sale under section 338). As a result, 
removing the hypothetical computations, as well as the optionality, 
will reduce compliance burden.
    For purposes of the PRA, the reporting burden associated with these 
proposed regulations will be reflected in the collection of information 
under Sec.  1.382-11 (OMB control number 1545-2019). The aggregate 
estimates for all collection of information conducted under OMB control 
number 1545-2019, including the Sec.  1.382-11 statement and other 
statements, are that 225,000 respondents will require 1 hour and 40 
minutes per response for a total annual reporting burden of 375,000 
hours and total annual monetized costs of $15,930,000 (2016 dollars). 
The Treasury Department and the IRS have not estimated the burden, 
including that of any new information collections, related to the 
requirements under these proposed regulations.
    Based on the checkbox on Line 16 of Form 1120, Schedule K and other 
tax attributes, the Treasury Department and the IRS estimate that 
between 7,000 and 15,000 firms per year will be affected by these 
proposed regulations. The Treasury Department and the IRS estimate that 
these proposed regulations will, if anything, cause a slight reduction 
in the total amount of paperwork burden for most affected taxpayers. 
This reduction in burden is driven by the elimination of the 338 
approach. As a result of such elimination, taxpayers may perform fewer 
calculations when complying with section 382. The Treasury Department 
and the IRS, however, have not estimated the burden, including that of 
any new information collections, related to the requirements under the 
proposed regulations.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless the collection of 
information displays a valid OMB control number.
    Books or records relating to a collection of information must be 
retained as long as their contents may become material in the 
administration of any internal revenue law. The IRS has posted 
information for taxpayers on their recordkeeping requirements at 
https://www.irs.gov/taxtopics/tc305. Generally, tax returns and tax 
return information are confidential, as required by 26 U.S.C. 6103.
    The Treasury Department and the IRS request comments on all aspects 
of information collection burdens relating to these proposed 
regulations, including (i) estimates for how much time it would take to 
comply with the paperwork burdens described earlier for each relevant 
form and (ii) ways for the IRS to minimize the paperwork burden. 
Proposed revisions to the information collections contained in these 
proposed regulations will not be finalized until after these 
regulations take effect and have been approved by OMB under the PRA. 
The Treasury Department and the IRS have not estimated the burden, 
including that of any new information collections, related to the 
requirements under the proposed regulations. The Treasury Department 
and the IRS estimate PRA burdens on a taxpayer-type basis rather than a 
provision-specific basis. Those estimates would capture both changes 
made by the TJCA and those that arise out of discretionary authority 
exercised in the proposed regulations.

III. Regulatory Flexibility Act

    As described in more detail in this section, pursuant to the 
Regulatory Flexibility Act (RFA), 5 U.S.C. chapter 6, the Treasury 
Department and the IRS hereby certify that these proposed regulations 
will not have a significant economic impact on a substantial number of 
small entities. Notwithstanding this certification, the Treasury 
Department and the IRS invite comments on any impact that these 
regulations would have on small entities.
    These proposed regulations, if finalized, would amend the 
calculation of certain items under section 382, which pertains to the 
tax attributes of certain acquired corporations (known as ``loss 
corporations'') in the hands of the acquiring corporation after an 
ownership change. Broadly, the proposed regulations, if finalized, 
would (i) eliminate one safe harbor under which firms were formerly 
entitled to calculate items of income and deduction under section 
382(h)(6), and (ii) make a number of other conforming changes. In 
particular, these regulations could change the amount of net unrealized 
built-in gain or loss (NUBIG and NUBIL, respectively) computed by the 
loss corporation. Importantly, section 382(h)(3)(B) provides a de 
minimis rule for which it is expected that substantially all small 
entities will qualify. Specifically, if a loss corporation's NUBIG or 
NUBIL is not greater than the lesser of (i) 15 percent of the fair 
market value of the loss corporation's non-cash corporate assets on the 
ownership change or (ii) $10 million, then the loss corporation's NUBIG 
or NUBIL is deemed to be zero. Furthermore, these proposed regulations 
would not change this de minimis rule. Therefore, to the extent that 
small firms understood that they historically qualified for the de 
minimis rule, substantially all of them could determine, with little 
burden, that they will qualify as well under these proposed regulations 
(if finalized). The Treasury Department and the IRS invite comments on 
the impact of these proposed rules on small entities.

Comments and Requests for Public Hearing

    Before the proposed regulations are adopted as final regulations, 
consideration will be given to any comments that are submitted timely 
to the IRS as prescribed in this preamble under the ADDRESSES heading. 
The Treasury Department and the IRS request comments on all aspects of 
the proposed regulations. All comments will be available at 
www.regulations.gov for public inspection and copying. A public hearing 
will be scheduled if requested in writing by any person that timely 
submits written comments. If a public hearing is scheduled, then notice 
of the date, time, and place for the public hearing will be published 
in the Federal Register.

Drafting Information

    The principal authors of this notice of proposed rulemaking are 
Kevin M. Jacobs and Marie C. Milnes-Vasquez of the Office of Associate 
Chief Counsel (Corporate). However, other personnel from the Treasury 
Department and the IRS participated in their development.

Statement of Availability of IRS Documents

    IRS Revenue Procedures, Revenue Rulings, notices, and other 
guidance cited in this document are published in the Internal Revenue 
Bulletin (or Cumulative Bulletin) and are available from the 
Superintendent of Documents, U.S. Government Printing Office, 
Washington, DC 20402, or by visiting the IRS website at https://www.irs.gov.

[[Page 47467]]

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by revising 
the entry for Sec.  1.382-7 to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *

    Section 1.382-7 also issued under 26 U.S.C. 382(h)(3)(B)(ii) and 
(m).
* * * * *
0
Par. 2. Section 1.382-1 is amended by:
0
a. Under Sec.  1.382-2, adding reserved entries for (a)(7) and (8) and 
entries for (a)(9) through (13), and (b)(4); and
0
b. Revising the entry for Sec.  1.382-7.
    The additions and revision read as follows:


Sec.  1.382-1  Table of contents.

* * * * *


Sec.  1.382-2  General rules for ownership change.

    (a) * * *
    (7) [Reserved]
    (8) [Reserved]
    (9) Net unrealized built-in gain.
    (10) Net unrealized built-in loss.
    (11) Recognized built-in gain.
    (12) Recognized built-in loss.
    (13) Section 382 regulations.
    (b) * * *
    (4) Rules provided in paragraphs (a)(9) through (13) of this 
section.
* * * * *


Sec.  1.382-7  Built-in gains and losses.

    (a) Overview.
    (b) Definitions.
    (1) Change year.
    (2) Cost recovery deduction.
    (3) First-year nonrecourse COD income.
    (4) First-year recourse COD income.
    (5) Inadequately secured nonrecourse liabilities.
    (6) Negative section 163(j) expense.
    (7) Nonrecourse liabilities.
    (8) Pre-change excess recourse liabilities.
    (9) Recognition period.
    (10) Section 382 asset.
    (11) Section 382 excess business interest expense.
    (12) Taxable income or timing limitation.
    (c) Net unrealized built-in gains and losses.
    (1) In general.
    (2) Consistency rules.
    (i) In general.
    (ii) Members of consolidated groups.
    (3) Computation of net unrealized built-in gain and net unrealized 
built-in loss.
    (i) In general.
    (ii) Adjustments related to discharge of indebtedness.
    (A) In general.
    (B) Exception for first-year recourse COD income.
    (1) Discharge of indebtedness income included in gross income.
    (2) Excluded discharge of indebtedness income reducing post-
ownership change attributes.
    (3) Excluded discharge of indebtedness income reducing basis.
    (iii) Additional operating rules.
    (A) Value of contingent liabilities.
    (B) Inventory.
    (C) Limitation on total amount of adjustment to NUBIL/NUBIG 
regarding recourse COD income.
    (D) Timing of adjustments described in paragraphs (c)(3)(ii)(B)(1) 
through (3) of this section.
    (E) Adjusted basis of the loss corporation's section 382 assets.
    (F) [Reserved]
    (d) Recognized built-in gain and loss.
    (1) In general.
    (2) Recognized built-in gain.
    (i) In general.
    (ii) Disposition of an asset.
    (iii) Income from discharge of indebtedness attributable to certain 
recourse liabilities.
    (iv) Income from discharge of indebtedness attributable to certain 
nonrecourse liabilities.
    (A) Treatment as RBIG.
    (B) Adjustment to basis.
    (C) Limitation on total amount of RBIG regarding nonrecourse COD 
income.
    (D) No adjustment to the NUBIG/NUBIL computation.
    (v) Installment method.
    (vi) Prepaid income.
    (3) Recognized built-in loss.
    (i) In general.
    (ii) Disposition of an asset.
    (iii) Cost recovery deductions.
    (iv) Bad debt expense.
    (v) Deductions for payments on certain liabilities.
    (vi) Deduction for section 382 excess business interest expense.
    (A) In general.
    (B) No adjustment to the NUBIG/NUBIL computation.
    (4) Additional recognized built-in gain and loss items.
    (5) Section 382 disallowed business interest carryforwards.
    (e) General operating rules.
    (1) Anti-duplication rule.
    (2) References to the principles of regulations under section 1374.
    (f) Examples.
    (g) Applicability dates.
    (1) In general.
    (2) Paragraph (d)(2)(vi) of this section.
* * * * *
0
Par. 3. Section 1.382-2 is amended by adding reserved paragraphs (a)(7) 
and (8) and paragraphs (a)(9) through (13) and (b)(4) to read as 
follows:


Sec.  1.382-2  General rules for ownership change.

    (a) * * *
    (7)-(8) [Reserved]
    (9) Net unrealized built-in gain. The term net unrealized built-in 
gain means a positive amount determined under Sec.  1.382-7(c)(3).
    (10) Net unrealized built-in loss. The term net unrealized built-in 
loss means a negative amount determined under Sec.  1.382-7(c)(3).
    (11) Recognized built-in gain. The term recognized built-in gain 
has the meaning provided in Sec.  1.382-7(d)(2).
    (12) Recognized built-in loss. The term recognized built-in loss 
has the meaning provided in Sec.  1.382-7(d)(3).
    (13) Section 382 regulations. The term section 382 regulations 
means this section and Sec. Sec.  1.382-3 through 1.382-12.
    (b) * * *
    (4) Rules provided in paragraphs (a)(9) through (13) of this 
section. The rules of paragraphs (a)(9) through (13) of this section 
apply to any ownership change occurring after date of publication of 
Treasury decision adopting these proposed regulations as final 
regulations in the Federal Register. However, taxpayers and their 
related parties, within the meaning of sections 267(b) and 707(b)(1), 
may apply the rules of paragraphs (a)(9) through (13) of this section 
to any ownership change occurring during a taxable year with respect to 
which the period described in section 6511(a) has not expired, so long 
as the taxpayers and their related parties consistently apply the rules 
of paragraphs (a)(9) through (13) of this section and Sec.  1.382-7 to 
such ownership change and all ownership changes occurring in subsequent 
taxable years.
0
Par. 4. Section 1.382-7 is revised to read as follows:


Sec.  1.382-7  Built-in gains and losses.

    (a) Overview. This section provides rules governing the 
determination of a loss corporation's net unrealized built-in gain or 
net unrealized built-in loss, as well as its recognized built-in gains 
and recognized built-in losses for purposes of section 382 and the 
section 382 regulations. Paragraph (b) of this section

[[Page 47468]]

provides definitions of terms used for purposes of this section. 
Paragraph (c) of this section provides the rules regarding the 
determination of a loss corporation's net unrealized built-in gain or 
net unrealized built-in loss. Paragraph (d) of this section provides 
the rules regarding the determination of a loss corporation's 
recognized built-in gain or recognized built-in loss. Paragraph (e) of 
this section provides an anti-duplication rule to prevent duplicate 
inclusion of items in the computation of net unrealized built-in gain 
or net unrealized built-in loss, or in the computation of recognized 
built-in gain or recognized built-in loss. Paragraph (f) of this 
section provides examples illustrating the rules of this section. 
Paragraph (g) of this section provides applicability dates for the 
rules of this section.
    (b) Definitions. The following definitions apply for purposes of 
this section.
    (1) Change year. The term change year has the meaning provided in 
Sec.  1.382-6(g)(1).
    (2) Cost recovery deduction. The term cost recovery deduction means 
any deduction for depreciation under section 167 or section 168, any 
deduction for the amortization of intangibles (for example, under 
section 167 or 197) and amortizable expenditures (for example, under 
section 195(b)(1)(B), section 248 or section 1245(a)(2)(C)), or any 
deduction for depletion under section 611.
    (3) First-year nonrecourse COD income. The term first-year non-
recourse COD income means any income from discharge of indebtedness 
that the loss corporation recognizes (including income that is excluded 
from gross income under section 108(a)(1)) during the first twelve 
months of the recognition period on inadequately secured nonrecourse 
liabilities.
    (4) First-year recourse COD income. The term first-year recourse 
COD income means any income from discharge of indebtedness (including 
from liabilities described in paragraph (c)(3)(i)(C) of this section) 
that the loss corporation recognizes (including income that is excluded 
from gross income under section 108(a)(1)) during the first twelve 
months of the recognition period on all of the loss corporation's 
liabilities immediately before the ownership change (excluding 
nonrecourse liabilities) to the extent of its pre-change excess 
recourse liabilities.
    (5) Inadequately secured nonrecourse liabilities. The term 
inadequately secured nonrecourse liabilities means any nonrecourse 
liability of which, immediately before the ownership change:
    (i) The adjusted issue price (within the meaning of Sec.  1.1275-
1(b)) of the nonrecourse liability; exceeds
    (ii) The fair market value of the property (determined without 
regard to section 7701(g) and Sec.  1.1001-2(a)(4)(i)) which secures 
such nonrecourse liability.
    (6) Negative section 163(j) expense. The term negative section 
163(j) expense has the meaning provided in Sec.  1.163(j)-6(h)(1).
    (7) Nonrecourse liabilities. The term nonrecourse liabilities has 
the same meaning as the term nonrecourse liability has in Sec.  1.1001-
2(a)(4)(i).
    (8) Pre-change excess recourse liabilities. The term pre-change 
excess recourse liabilities means:
    (i) If the loss corporation is under the jurisdiction of a court 
under title 11 of the United States Code on the change date, in an 
action that results in a discharge of recourse liabilities of the loss 
corporation, then the amount of all of the loss corporation's 
liabilities immediately before the ownership change (excluding 
nonrecourse liabilities) that are discharged by order of the court in 
that action; or
    (ii) In all other cases, an amount equal to the excess, if any, of:
    (A) The aggregate adjusted issue price (within the meaning of Sec.  
1.1275-1(b)) of the loss corporation's liabilities immediately before 
the ownership change, excluding--
    (1) Recourse liabilities to the extent that they would not be 
included in the determination of whether the loss corporation is 
insolvent within the meaning of section 108(d)(3), and
    (2) Nonrecourse liabilities; over
    (B) The sum of the fair market value of the assets that the loss 
corporation owns immediately before the ownership change, reduced, but 
not below zero, by the amount of nonrecourse liabilities that is 
secured by such assets immediately before the ownership change.
    (9) Recognition period. The term recognition period has the meaning 
provided in section 382(h)(7)(A).
    (10) Section 382 asset. The term section 382 asset means any asset 
that the loss corporation owns immediately before the ownership change, 
including goodwill and other intangible assets, but excluding those 
assets described in section 382(h)(3)(B)(ii). For purposes of this 
definition, all accounts receivable, other than those that were 
acquired in the ordinary course of the loss corporation's business, are 
treated as items described in section 382(h)(3)(B)(ii).
    (11) Section 382 excess business interest expense. The term section 
382 excess business interest expense means the amount of business 
interest expense of a partnership for a taxable year that was 
disallowed under Sec.  1.163(j)-2(b) but not suspended under section 
704(d).
    (12) Taxable income or timing limitation. The term taxable income 
or timing limitation means:
    (i) A limitation set forth in the Internal Revenue Code of 1986, as 
amended (Code), on the amount of a deduction that may otherwise be 
claimed by a loss corporation, based on, or derived from, any amount of 
a loss corporation's taxable income (see, for example, section 
170(b)(2)(A)); or
    (ii) A limitation set forth in the Code that defers the timing of a 
deduction that is otherwise allowable under the Code or regulations 
(see, for example, sections 267(a)(2) and 469).
    (c) Net unrealized built-in gains and losses--(1) In general. This 
paragraph (c) provides rules regarding the calculation of a loss 
corporation's net unrealized built-in gain or net unrealized built-in 
loss for purposes of section 382 and the section 382 regulations. See 
paragraph (e)(1) of this section (regarding anti-duplication).
    (2) Consistency rules--(i) In general. No amount is included in the 
calculation of net unrealized built-in gain or net unrealized built-in 
loss if the amount is properly allocable to the pre-change period 
(within the meaning of Sec.  1.382-6(g)(2)) pursuant to Sec.  1.382-6 
and is included in the determination of the loss corporation's taxable 
income or net operating loss for the change year.
    (ii) Members of consolidated groups. If a loss corporation enters 
or leaves a consolidated group on the date of an ownership change for 
purposes of section 382, the principles of Sec.  1.1502-76(b) apply in 
determining the treatment of any taxable item for purposes of this 
section. Accordingly, items that are includible (under the end of the 
day rule (within the meaning of Sec.  1.1502-76(b)(1)(ii)(A)) or 
otherwise) in the taxable year that ends as a result of the change in 
status of a loss corporation (S) are not treated as recognized or taken 
into account during the recognition period for purposes of section 382 
and the section 382 regulations. See Sec.  1.1502-28(b)(11) (regarding 
allocation of excluded COD income under end of the day rule 
principles). Moreover, no such item is included in the determination of 
net unrealized built-in gain or net unrealized built-in loss. For 
example, if income from the discharge of indebtedness is includable in 
the taxable year that ends as a result of S's

[[Page 47469]]

change in status, that income is neither treated as taken into account 
during the recognition period nor included in the determination of net 
unrealized built-in gain or net unrealized built-in loss. Further, the 
determination of net unrealized built-in gain or net unrealized built-
in loss excludes the fair market value and basis of any asset that is 
disposed of on the change date if the gain or loss from that asset is 
includible in the taxable year that ends as a result of S's change in 
status. In contrast, items that are includible (under the next day rule 
(within the meaning of Sec.  1.1502-76(b)(1)(ii)(B)) or otherwise) in 
the taxable year that begins as a result of S's change in status are 
treated as occurring in the recognition period, and those items (and 
the basis and fair market value of any assets that generate those 
items) are among the amounts included in the determination of net 
unrealized built-in gain or loss.
    (3) Computation of net unrealized built-in gain and net unrealized 
built-in loss--(i) In general. A loss corporation's net unrealized 
built-in gain, if positive, or net unrealized built-in loss, if 
negative, is the amount equal to--
    (A) The sum of the amount that would be realized (taking into 
account section 382(h)(8)) if, immediately before the ownership change, 
the loss corporation--
    (1) Had satisfied each inadequately secured nonrecourse liabilities 
by surrendering to the creditor all of the assets securing that debt; 
and
    (2) Had sold all of its section 382 assets (other than those assets 
described in paragraph (c)(3)(i)(A)(1) of this section) at fair market 
value to an unrelated third party with the hypothetical buyer assuming 
no liabilities; decreased by
    (B) The aggregate adjusted basis of the loss corporation's section 
382 assets immediately before the ownership change; decreased by
    (C) The amount of any non-contingent liability of the loss 
corporation immediately before the ownership change for which the loss 
corporation would be allowed a deduction (including a deduction for a 
capital loss) on payment of the liability (determined without regard to 
any taxable income or timing limitation); decreased by
    (D) The estimated value of any liability of the loss corporation 
that is contingent immediately before the ownership change, for which, 
upon the removal of the contingency, the loss corporation would be 
allowed a deduction (including a deduction for a capital loss) on 
payment or accrual (determined without regard to any taxable income or 
timing limitation); increased or decreased by
    (E) The loss corporation's section 481 adjustments that would be 
taken into account on the sale referred to in paragraph (c)(3)(i)(A) of 
this section; increased by
    (F) The amount that would be treated as recognized built-in gain 
under paragraph (d)(2) of this section if all amounts (except for 
amounts described in paragraph (d)(2)(ii) of this section) were 
properly taken into account during the recognition period; decreased by
    (G) The amount that would be treated as recognized built-in loss 
under paragraph (d)(3) of this section if all amounts (except for 
amounts described in paragraph (d)(3)(ii) of this section) were 
properly taken into account during the recognition period.
    (ii) Adjustments related to discharge of indebtedness--(A) In 
general. Except as provided in paragraph (c)(3)(ii)(B) of this section, 
no amount of discharge of indebtedness income recognized during the 
recognition period that is included in gross income under section 
61(a)(12) or excluded under section 108(a) is added to the computation 
of the loss corporation's net unrealized built-in gain or net 
unrealized built-in loss. See paragraphs (c)(2) and (c)(3)(iii)(C) of 
this section for limitations on amounts that can be included in the 
computation of net unrealized built-in gain and net unrealized built-in 
loss.
    (B) Exception for first-year recourse COD income. A loss 
corporation may apply the provisions of this paragraph (c)(3)(ii)(B) to 
all of its first-year recourse COD income, subject to the timing rules 
of paragraphs (c)(3)(iii)(D) of this section. An adjustment that is 
made pursuant to this paragraph (c)(3)(ii)(B) can cause a loss 
corporation that would otherwise have a net unrealized built-in loss to 
have a net unrealized built-in gain or to meet the requirements of 
section 382(h)(3)(B) such that the loss corporation's net unrealized 
built-in gain or net unrealized built-in loss is zero. See paragraphs 
(c)(2) and (c)(3)(iii)(C) of this section for limitations on amounts 
that can be included in the computation of net unrealized built-in gain 
and net unrealized built-in loss.
    (1) Discharge of indebtedness income included in gross income. The 
amount calculated under paragraph (c)(3)(i) of this section is 
increased by the amount of all first-year recourse COD income that is 
included in gross income under section 61(a)(12). This amount of first-
year recourse COD income is treated as recognized built-in gain. See 
paragraph (d)(2)(iii) of this section.
    (2) Excluded discharge of indebtedness income reducing post-
ownership change attributes. The amount calculated under paragraph 
(c)(3)(i) of this section is increased by the amount of all first-year 
recourse COD income that is excluded under section 108(a), to the 
extent section 108(b) reduces attributes that are not pre-change 
losses, as defined in Sec.  1.382-2(a)(2), including reduction under 
section 1017(a) of the basis of the loss corporation's assets that were 
not held at the time of the ownership change. This amount of first-year 
recourse COD income is treated as recognized built-in gain. See 
paragraph (d)(2)(iii) of this section. This paragraph (c)(3)(ii)(B)(2) 
does not apply to amounts of first-year recourse COD income 
corresponding to debt whose discharge results in reduction under 
section 1017(a) of the basis of the loss corporation's assets that were 
held at the time of the ownership change.
    (3) Excluded discharge of indebtedness income reducing basis. A 
loss corporation decreases the amount of basis that is described in 
paragraph (c)(3)(i)(B) of this section by the amount of first-year 
recourse COD income that is excluded under section 108(a), to the 
extent that section 1017(a) reduces the basis of the loss corporation's 
section 382 assets. No other adjustment to the computation in paragraph 
(c)(3)(i) of this section is made with respect to the first-year 
recourse COD income described in this paragraph (c)(3)(ii)(B)(3), and 
this amount of first-year recourse COD income is not treated as 
recognized built-in gain.
    (iii) Additional operating rules--(A) Value of contingent 
liabilities. If any liability described in paragraph (c)(3)(i)(C) of 
this section is reflected on the face of the most recently issued 
applicable financial statement, within the meaning of section 451(b)(3) 
and the regulations in this part under section 451 of the Internal 
Revenue Code (determined without regard to whether the taxpayer has 
another statement described in section 451(b)(3) and the regulations in 
this part under section 451 of the Internal Revenue Code), then the 
estimated value of a liability is the amount of such liability 
reflected on the most current applicable financial statement as of the 
change date. The estimated value of any liability described in 
paragraph (c)(3)(i)(C) of this section is not adjusted to reflect the 
actual amount of liability that is established on removal of the 
contingency.
    (B) Inventory. The principles of Sec.  1.1374-7 apply to determine 
the amount realized under paragraph

[[Page 47470]]

(c)(3)(i)(A) of this section with regard to inventory.
    (C) Limitation on total amount of adjustment to NUBIL/NUBIG 
regarding recourse COD income. The total amount of increases in the 
calculation of net unrealized built-in gain or loss under paragraph 
(c)(3)(i) of this section related to first-year recourse COD income 
under paragraph (c)(3)(ii)(B) of this section is limited to the loss 
corporation's liabilities immediately before the ownership change 
(excluding nonrecourse liabilities) to the extent of its pre-change 
excess recourse liabilities defined in paragraph (b)(8)(i) or (ii) of 
this section, as applicable.
    (D) Timing of adjustments described in paragraphs (c)(3)(ii)(B)(1) 
through (3) of this section. If a loss corporation chooses to apply the 
provisions of this paragraph (c)(3)(iii)(D) to all of its first-year 
recourse COD income, then it must make the adjustments described in 
paragraphs (c)(3)(ii)(B)(1) through (3) of this section, in their 
entirety as of the change date. However, a loss corporation may make 
these adjustments only if--
    (1) The statement described in Sec.  1.382-11 reflects such 
adjustments or;
    (2) The loss corporation files an amended return for the taxable 
year that includes the change date and includes an amended Sec.  1.382-
11 statement (entitled ``AMENDED STATEMENT PURSUANT TO Sec.  1.382-
11(a) BY [INSERT NAME AND EMPLOYER IDENTIFICATION NUMBER OF TAXPAYER], 
A LOSS CORPORATION,'') to reflect such adjustments.
    (E) Adjusted basis of the loss corporation's section 382 assets. 
The adjustments of this paragraph (c)(3)(iii)(E) apply for purposes of 
determining the adjusted basis of loss corporation's assets under 
section 382(h)(2)(A)(ii)(II) and (B)(ii)(I) and the computation of net 
unrealized built-in gain and loss under section 382(h)(6)(C) and 
paragraph (c)(3)(i)(B) of this section. The loss corporation's basis in 
its section 382 assets is adjusted immediately before the ownership 
change by the amount of any adjustment that would apply if the section 
382 asset were sold immediately before the ownership change. For 
example, the loss corporation's basis in a partnership interest is 
adjusted to the extent Sec.  1.163(j)-6(h)(3)(i) would have required an 
adjustment if the loss corporation had disposed of all or substantially 
all of its partnership interest immediately before the ownership 
change.
    (F) [Reserved]
    (d) Recognized built-in gain and loss--(1) In general. This 
paragraph (d) provides rules for determining whether an item is 
recognized built-in gain or recognized built-in loss for purposes of 
section 382(h) and the section 382 regulations . Except as expressly 
provided in this paragraph (d), no amount is treated as recognized 
built-in gain or recognized built-in loss if that amount was not 
properly included in the computation of the loss corporation's net 
unrealized built-in gain or net unrealized built-in loss pursuant to 
paragraph (c)(3) of this section.
    (2) Recognized built-in gain--(i) In general. Except as otherwise 
provided in this paragraph (d)(2) and in paragraph (d)(4) of this 
section, subject to section 382(h)(1)(A)(ii), an item of income that is 
properly taken into account during the recognition period is a 
recognized built-in gain only if the item would have been properly 
included in gross income before the change date by an accrual method 
taxpayer (disregarding any method of accounting for which an election 
by the taxpayer must be made unless the taxpayer actually elected that 
method). 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.
    (ii) Disposition of an asset. The gain recognized on the 
disposition of an asset during the recognition period is recognized 
built-in gain to the extent provided in section 382(h)(2)(A). Income 
included as a dividend under section 61(a)(7) (including amounts 
treated as dividends under section 1248) and inclusions of income with 
respect to stock (excluding gain recognized on the disposition of 
stock), for example under section 951(a) and 951A(a), are not treated 
as recognized built-in gain.
    (iii) Income from discharge of indebtedness attributable to certain 
recourse liabilities. If a loss corporation chooses to apply the 
provisions of paragraph (c)(3)(ii)(B) of this section, then the amounts 
described in paragraphs (c)(3)(ii)(B)(1) and (2) of this section are 
treated as recognized built-in gain on the date recognized. Otherwise, 
no income from the discharge of indebtedness attributable to recourse 
liabilities is recognized built-in gain.
    (iv) Income from discharge of indebtedness attributable to certain 
nonrecourse liabilities. Except as provided in this paragraph 
(d)(2)(iv), no income from the discharge of indebtedness attributable 
to nonrecourse liabilities is recognized built-in gain.
    (A) Treatment as RBIG. Notwithstanding paragraph (d)(2)(i) of this 
section, the amount of all first-year nonrecourse COD income that is 
included in gross income under section 61(a)(12) or first-year 
nonrecourse COD income that is excluded under section 108(a), to the 
extent section 108(b) reduces attributes that are not pre-change 
losses, as defined in Sec.  1.382-2(a)(2), is recognized built-in gain 
on the date recognized. This paragraph (d)(2)(iv)(A) does not apply to 
amounts of first-year nonrecourse COD income corresponding to debt 
whose discharge results in reduction of basis described in section 
1017(a).
    (B) Adjustment to basis. First-year nonrecourse COD income that is 
excluded under section 108(a) and reduces the basis of the loss 
corporation's assets that the loss corporation owned immediately before 
the ownership change is not recognized built-in gain. However, first-
year nonrecourse COD income that is excluded under section 108(a) and 
reduces the basis of assets that the loss corporation did not own 
immediately before the ownership change is recognized built-in gain.
    (C) Limitation on total amount of RBIG regarding nonrecourse COD 
income. The amount of first-year non-recourse COD income treated as 
recognized built-in gain under this paragraph (d)(2)(iv) is limited to 
the excess of adjusted issue price of debt over fair market value of 
property measured under paragraph (e)(5) of this section.
    (D) No adjustment to the NUBIG/NUBIL computation. The computation 
under paragraph (c)(3)(i) of this section is not adjusted to reflect 
recognized built-in gain amounts related to this paragraph (d)(2)(iv). 
Nonetheless, for purposes of determining the limitations on amounts of 
recognized built-in gain or loss under section 382(h)(2)(A)(ii)(II) and 
(B)(ii)(I), the adjusted basis of the loss corporation's section 382 
assets reflects the reduction, if any, described in paragraph 
(d)(2)(iv)(B) of this section.
    (v) Installment method. The amount of income reported under the 
installment method (see section 453) that is treated as recognized 
built-in gain is determined under the principles of Sec.  1.1374-4(h) 
(determined without regard to Sec.  1.1374-2(a)(2)). Further, if a loss 
corporation that is a member (selling or distributing member) of a 
consolidated group (as defined in Sec.  1.1502-1(h)) transfers a built-
in gain asset to a member of the same consolidated group (transferee 
member) before or during the recognition period, the gain is deferred 
under Sec.  1.1502-13,

[[Page 47471]]

and before the close of the recognition period, the transferee member 
sells the built-in gain asset in a sale reportable under the 
installment method, then any deferred gain is RBIG when taken into 
account by the selling or distributing member, even if the gain is 
taken into account after the close of the recognition period.
    (vi) Prepaid income. Any amount received prior to the change date 
that is attributable to performance occurring on or after the change 
date is not recognized built-in gain. Examples to which this paragraph 
(c)(2)(vi) applies include income received prior to the change date 
that is deferred under sections 451(c) or 455.
    (3) Recognized built-in loss--(i) In general. Except as otherwise 
provided in paragraphs (d)(3) and (4) of this section, subject to 
section 382(h)(1)(B)(ii), any deduction properly allowed during the 
recognition period is treated as recognized built-in loss if an 
accrual-method taxpayer would have been allowed a deduction for the 
item against gross income before the change date (taking into account 
any additional methods of accounting actually used by the loss 
corporation). For purposes of this paragraph (d)(3), in determining 
whether an accrual-method taxpayer would have been allowed a deduction 
before the change date, no taxable income or timing limitation applies. 
See paragraph (e) of this section for an anti-duplication rule.
    (ii) Disposition of an asset. The loss recognized on the 
disposition of an asset during the recognition period is treated as a 
recognized built-in loss to the extent provided in section 
382(h)(2)(B).
    (iii) Cost recovery deductions. The amount of cost recovery 
deductions with respect to any section 382 asset for any taxable year 
during the recognition period is treated as recognized built-in loss to 
the extent of the excess, if any, of--
    (A) The greater of the amount of cost recovery deductions allowed 
or allowable with respect to the period; over
    (B) The amount of cost recovery deductions that would have been 
allowable if the adjusted basis on the change date equaled the fair 
market value of the section 382 asset, taking into account the 
depreciation or amortization method, as applicable; the useful life; 
the recovery period or amortization period, as applicable; and the 
convention (cost recovery schedule) actually used by the loss 
corporation.
    (iv) Bad debt expense. Any bad debt deduction under section 166 
that arises during the recognition period from debt owed to the loss 
corporation immediately before the ownership change is a recognized 
built-in loss to the extent it does not exceed the amount described in 
section 382(h)(2)(B)(ii).
    (v) Deductions for payments on certain liabilities. A deduction for 
the payment of a liability that is described in paragraph (c)(3)(i)(C) 
or (D) of this section is a recognized built-in loss to the extent of 
the amount or the estimated amount of the liability, as applicable, 
immediately before the ownership change, that was included in the loss 
corporation's computation of net unrealized built-in loss or net 
unrealized built-in gain under paragraph (c)(3) of this section.
    (vi) Deduction for section 382 excess business interest expense--
(A) In general. A deduction attributable to section 382 excess business 
interest expense during the recognition period is recognized built-in 
loss to the extent the section 382 excess business interest expense is 
allocated to the loss corporation pursuant to Sec.  1.163(j)-6(f)(2) 
and is attributable to either a pre-change period (within the meaning 
of Sec.  1.382-6(g)(2)) or a taxable year prior to the ownership 
change. Solely for purposes of determining whether this paragraph 
(d)(3)(vi) applies;
    (1) The principles of Sec.  1.382-6(a) apply (unless the taxpayer 
made an election pursuant to Sec.  1.382-6(b), in which case the 
principles of Sec.  1.382-6(b) apply) to determine the extent the 
section 382 excess business interest expense is attributable to a pre-
change period and
    (2) Section 1.163(j)-6(g)(2)(i) applies to section 382 excess 
business interest expense that was allocated to the loss corporation in 
the order of the taxable years in which the section 382 excess business 
interest expense was allocated to the loss corporation pursuant to 
Sec.  1.163(j)-6(f)(2), beginning with the earliest taxable year.
    (B) No adjustment to the NUBIG/NUBIL computation. The computation 
of a loss corporation's net unrealized built-in gain or net unrealized 
built-in loss is not adjusted to reflect recognized built-in loss 
amounts related to this paragraph (d)(3)(vi).
    (4) Additional recognized built-in gain and loss items. The 
following additional items of income, gain, deduction, or loss are 
treated as recognized built-in gain or recognized built-in loss, as 
applicable:
    (i) Positive and negative section 481(a) adjustments, to the extent 
provided in Sec.  1.1374-4(d)(1);
    (ii) Any item of income properly taken into account during the 
recognition period under the completed contract method (as described in 
Sec.  1.460-4(d)) and similar items of deduction, to the extent 
provided in Sec.  1.1374-4(g); and
    (iii) The distributive share of a partnership item to the extent 
provided by the principles of Sec.  1.1374-4(i).
    (5) Section 382 disallowed business interest carryforwards. Section 
382 disallowed business interest carryforwards are not treated as 
recognized built-in losses.
    (e) General operating rules--(1) Anti-duplication rule. Appropriate 
adjustments must be made in applying the provisions of this section to 
ensure that no item of economic gain or loss is duplicated in the 
computation of net unrealized built-in gain or net unrealized built-in 
loss, or in the computation of recognized built-in gain or recognized 
built-in loss. Additionally, appropriate adjustments must be made in 
applying the provisions of this section to ensure that no amount of net 
unrealized built-in gain or net unrealized built-in loss is utilized in 
a duplicative manner, and that the limitations on the total amount of 
adjustment to net unrealized built-in loss and net unrealized built-in 
gain take into account amounts of income from discharge of indebtedness 
that are excluded under section 108(a) and reduce the basis of the loss 
corporation's assets.
    (2) References to the principles of other regulatory provisions 
under section 1374. All references in this section to the principles 
cross-referenced in other regulatory provisions in this part under 
section 1374 of the Internal Revenue Code must be interpreted, as 
necessary, to be consistent with the requirements and principles of 
this section.
    (f) Examples. The examples in this paragraph (f) illustrate the 
application of the provisions of this section. For purposes of the 
examples in this paragraph (f), LossCo is a loss corporation that files 
its return on a calendar year basis, that uses the accrual method of 
accounting, and that has an ownership change on the last day of the 
taxable year (Year 0). Further, LossCo satisfies the threshold 
requirement of section 382(h)(3)(B)(i). Additionally, the stated facts 
of the example include all relevant corporate activity, property, and 
taxable items.

    (1) Example 1. Impact of certain liabilities on computation of 
net unrealized built-in loss and amount treated as recognized built-
in loss--(i) Facts. Immediately before the ownership change, LossCo 
has a section 382 asset with a fair market value of $100 and an 
adjusted basis of $90, a liability of $30 for which LossCo will be 
allowed a deduction upon payment (fixed liability), and an estimated 
contingent liability of $20, for

[[Page 47472]]

which, upon removal of the contingency and payment, LossCo will be 
allowed a deduction (contingent liability). In Year 1, LossCo 
settles and pays off the contingent liability for $25. In Year 2, 
LossCo pays off the fixed liability for $30.
    (ii) Analysis--(A) Computation of net unrealized built-in loss. 
Under paragraph (c)(3)(i) of this section, LossCo has a net 
unrealized built-in loss of $40 ($100, the amount LossCo would 
realize if it sold all its assets to an unrelated third party 
(paragraph (c)(i)(A)(2) of this section), decreased by $140 (the sum 
of the fixed liability ($30) (paragraph (c)(i)(B) of this section), 
the estimated value of the contingent liability ($20) (paragraph 
(c)(i)(C) of this section) and the aggregate adjusted basis in the 
asset ($90) (paragraph (c)(i)(D) of this section)).
    (B) Settlement of the contingent liability. Upon settlement and 
payment of the contingent liability in Year 1, LossCo is entitled to 
a deduction of $25 (disregarding application of any limitation). 
Under paragraph (d)(3)(vi) of this section, $20 of the deduction 
(the estimated value of the liability at the time of the ownership 
change) is recognized built-in loss and $5 is not subject to section 
382. After Year 1, pursuant to section 382(h)(1)(B)(ii), the maximum 
amount of recognized built-in loss that LossCo can have is $20 ($40 
net unrealized built-in loss, less the $20 recognized built-in loss 
in Year 1).
    (C) Payment of the fixed liability. Upon paying the fixed 
liability in Year 2, LossCo is entitled to a deduction of $30 
(disregarding application of any limitation). Under paragraph 
(d)(3)(vi) of this section, $30 of the deduction would have been 
recognized built-in loss, but the amount of recognized built-in loss 
is limited by section 382(h)(1)(B)(ii). As a result, of the $30 
deduction, $20 is a recognized built-in loss and $10 is not subject 
to section 382.
    (2) Example 2.  Cost recovery deductions--(i) Facts. Immediately 
before the ownership change, LossCo has a net unrealized built-in 
loss of $300 that is attributable to a non-depreciable asset with a 
fair market value of $500 and an adjusted basis of $650, and a 
patent with a fair market value of $125 and an adjusted basis of 
$275. The patent is an ``amortizable section 197 intangible'' as 
defined in section 197(c) and has a 15-year amortization period. As 
of the change date in Year 0, the patent has a remaining 
amortization period under section 197 of 5 years. For Year 1, LossCo 
calculates a $55 amortization deduction for the patent.
    (ii) Analysis. Under paragraph (d)(3)(iii) of this section, the 
amount of cost recovery deduction on the patent that is a recognized 
built-in loss is the excess, if any, of the amount of cost recovery 
deductions allowed or allowable over the amount of cost recovery 
deductions that would have been allowable if the adjusted basis on 
the change date had equaled the fair market value of the patent, 
taking into account the amortization method, amortization period, 
and convention (cost recovery schedule) actually used by the loss 
corporation. LossCo would have been allowed a cost recovery 
deduction of $25 if the adjusted basis of the patent on the change 
date had equaled its fair market value taking into account the cost 
recovery schedule actually used by LossCo, ($125 fair market value 
divided by remaining amortization period of 5 years). Accordingly, 
$30 of the Year 1 cost recovery deduction is recognized built-in 
loss ($55 allowed and allowable cost recovery deduction, less the 
$25 cost recovery deduction that would have been allowable if the 
adjusted basis on the change date equaled the fair market value of 
the patent). The remaining $25 is not subject to section 382.
    (3) Example 3. Forgiveness of pre-change excess recourse 
liabilities--(i) Facts. On Date 1, immediately before the ownership 
change, LossCo has two assets: Asset 1, which has a fair market 
value of $100, an adjusted basis of $80, and is subject to a 
nonrecourse liability with an adjusted issue price of $120 
(Liability 1); and Asset 2, which has a fair market value of $100, 
an adjusted basis of $90, and is subject to a nonrecourse liability 
with an adjusted issue price of $60 (Liability 2). Additionally, 
LossCo has a recourse liability with an adjusted issue price of $60. 
On Date 2, eleven months after the change date, the creditor 
forgives $20 of the recourse liability, which gives rise to 
discharge of indebtedness income that is excluded under 108(a), and 
for which LossCo elects to reduce the basis of Asset 1 and Asset 2 
pursuant to section 108(b)(5).
    (ii) Analysis--(A) Calculation of net unrealized built-in gain. 
The nonrecourse liability to which Asset 1 is subject is an 
inadequately secured nonrecourse liability, because the adjusted 
issue price of the liability ($120) exceeds the fair market value of 
the property securing the liability ($100). As a result, pursuant to 
paragraph (c)(3)(i)(A)(1) of this section, in determining its net 
unrealized built-in gain, LossCo is treated as satisfying Liability 
1 by surrendering to the creditor Asset 1, resulting in an amount 
realized of $120. Additionally, pursuant to paragraph 
(c)(3)(i)(A)(2) of this section, LossCo is treated as selling Asset 
2 and having an amount realized of $100. As a result, LossCo has a 
net unrealized built-in gain of $50 ($120 amount realized on Asset 
1, plus the $100 amount realized on Asset 2, less the $170 aggregate 
adjusted basis of LossCo's section 382 assets). See paragraph 
(c)(3)(i) of this section.
    (B) Forgiveness of the recourse liability. Pursuant to paragraph 
(c)(3)(ii)(A) of this section, the forgiveness of the recourse 
liability will not impact the calculation of LossCo's net unrealized 
built-in gain, unless it chooses to apply the provisions of 
paragraph (c)(3)(ii)(B) of this section to all of its first-year 
recourse COD income. The recourse liability is a pre-change excess 
recourse liability to the extent its adjusted issue price ($60) 
exceeds the fair market value of LossCo's section 382 assets, 
reduced, but not below zero, by the amount of nonrecourse liability 
that is secured by such assets immediately before the ownership 
change ($0 for Asset 1 and $40 for Asset 2), or $20. As a result, 
the first-year recourse COD income is $20 (the $20 income to the 
extent of the pre-change excess recourse liability). If LossCo 
chooses to apply the provisions of (c)(3)(ii)(B) of this section, 
then, pursuant to paragraph (c)(3)(ii)(B)(3) of this section, LossCo 
decreases by $20 the amount of basis it uses to compute its net 
unrealized built-in gain. As a result, LossCo has a net unrealized 
built-in gain of $70 ($120 amount realized on Asset 1, plus $100 
amount realized on Asset 2, less $150 aggregate adjusted basis of 
LossCo's section 382 assets. See paragraph (c)(3)(i)(D) of this 
section. The first-year recourse COD income is not recognized built-
in gain.
    (4) Example 4. Forgiveness of a recourse liability that is not a 
pre-change excess recourse liability--(i) Facts. The facts are the 
same as in paragraph (f)(3)(i) (Example 3) of this section, except 
that, as of the date of the ownership change, LossCo also owns Asset 
3, which has a fair market value of $80 and an adjusted basis of 
$50. Additionally, LossCo includes the $20 of cancellation of 
indebtedness income in gross income that was recognized on Date 2 
under section 61(a)(12).
    (ii) Analysis--(A) Calculation of net unrealized built-in gain. 
As in paragraph (f)(3)(ii)(A) (Example 3) of this section, the 
nonrecourse liability on Asset 1 is an inadequately secured 
nonrecourse liability, and as a result, pursuant to paragraph 
(c)(3)(i)(A)(1) of this section, the amount realized with respect to 
Asset 1 is $120. Additionally, pursuant to paragraph (c)(3)(i)(A)(2) 
of this section, LossCo is treated as selling Asset 2 and Asset 3 
for an amount realized of $180 ($100, plus $80). As a result, LossCo 
has a net unrealized built-in gain of $80 ($120 amount realized on 
Asset 1, plus $100 amount realized on Asset 2, plus $80 amount 
realized on Asset 3, less $220 aggregate adjusted basis of LossCo's 
section 382 assets. See paragraph (c)(3)(i)(D) of this section.
    (B) Forgiveness of the recourse liability. The forgiveness of 
the recourse liability will not impact the calculation of LossCo's 
net unrealized built-in gain under paragraph (c)(3)(ii)(A) of this 
section. The adjustment provided under paragraph (c)(3)(ii)(B) of 
this section for certain recourse liabilities is not available (and 
the cancellation of indebtedness is not recognized built-in loss) 
because the recourse liability does not constitute a pre-change 
excess recourse liability. See paragraph (b)(4) and (8) of this 
section. The recourse liability is not a pre-change excess recourse 
liability because its adjusted issue price ($60) does not exceed the 
fair market value of the LossCo's section 382 assets, reduced, but 
not below zero, by the amount of nonrecourse liability that is 
secured by such assets immediately before the ownership change ($0 
for Asset 1, $40 for Asset 2, and $80 for Asset 3).
    (5) Example 5.  Computing net unrealized built-in gain or loss 
of a partner that is allocated section 382 excess business interest 
expense--(i) Facts. LossCo and unrelated Corp A are equal partners 
in partnership PRS. LossCo has a basis of $100 in its PRS interest, 
which has a fair market value of $90. In Year 1, PRS pays or accrues 
$100 of section 382 excess business interest expense, which is 
allocated equally to LossCo and Corp A. At the end of Year 1, LossCo 
has an ownership change. In Year 2, PRS has $80 of excess taxable 
income (within the meaning of Sec.  1.163(j)-1(b)(15)), of which $40 
is allocated

[[Page 47473]]

to LossCo pursuant to Sec.  1.163(j)-6(f)(2). LossCo's section 
163(j) limitation (within the meaning of Sec.  1.163(j)-1(b)(31)) 
for Year 2 is $25, and LossCo pays or accrues $60 of other business 
interest expense in Year 2. LossCo's section 382 limitation for Year 
2 is $30.
    (ii) Analysis--(A) Year 1--(1) Basis reduction to reflect 
allocation of excess business interest expense. Pursuant to section 
163(j)(4) and Sec.  1.163(j)-6, a partner in a partnership reduces 
its adjusted basis in its partnership interest by the amount of 
excess business interest expense allocated to that partner. As a 
result, LossCo's basis in its PRS interest is reduced from $100 to 
$50 in Year 1.
    (2) Calculation of net unrealized built-in gain or loss. LossCo 
experiences an ownership change at the end of Year 1. Paragraph 
(c)(3)(iii)(E) of this section provides that, in computing a loss 
corporation's net unrealized built-in gain or loss, the amount of 
the corporation's basis in its section 382 assets is adjusted 
immediately before the ownership change by the amount of any 
adjustment that would apply if the section 382 asset were sold 
immediately before the ownership change. If LossCo had sold its PRS 
interest immediately before the ownership change, Sec.  1.163(j)-
6(h)(3)(i) would have required LossCo to increase its basis in the 
PRS interest by $50, the amount of its remaining excess business 
interest expense. As a result, for purposes of section 382(h)(6)(C) 
and paragraph (c)(3)(i)(B) of this section, LossCo's basis in its 
PRS interest is adjusted by the same amount. Thus, for purposes of 
computing LossCo's net unrealized gain or loss, LossCo's basis in 
its PRS interest is increased to $100 immediately before the 
ownership change.
    (B) Year 2--(1) Treatment of excess business interest expense as 
paid or accrued. Pursuant to Sec.  1.163(j)-6(g)(2)(i), because 
LossCo is allocated $40 of excess taxable income from PRS in Year 2, 
LossCo treats $40 of its excess business interest expense (from Year 
1) as paid or accrued in Year 2. LossCo's remaining $10 of excess 
business interest expense from Year 1 continues to be characterized 
as excess business interest expense in succeeding years. See Sec.  
1.163(j)-6(g)(2)(ii).
    (2) Section 163(j) deduction. In Year 2, LossCo is treated as 
having paid or accrued $100 of business interest expense ($40 of 
excess business interest expense that is treated as business 
interest expense under Sec.  1.163(j)-6(g)(2)(i), and $60 of 
business interest expense that LossCo actually paid or accrued in 
Year 2). Because LossCo has a section 163(j) limitation of $25, 
LossCo can deduct only $25 of its $100 Year 2 business interest 
expense (see Sec.  1.163(j)-2(b)). Pursuant to Sec.  1.383-
1(d)(1)(ii), LossCo is treated as deducting $25 of its section 382 
excess business interest expense that is treated as business 
interest expense in Year 2, because this amount is a recognized 
built-in loss. No adjustment is made to the computation of LossCo's 
net unrealized built-in gain or loss to reflect the $25 of LossCo's 
recognized built-in loss. See paragraph (c)(3)(vi) of this section. 
Both LossCo's $15 of Year 1 excess business interest expense that 
was treated as business interest expense in Year 2 and the $60 of 
other business interest expense that was paid or accrued in Year 2 
is disallowed in Year 2 under Sec.  1.163(j)-2(b). These amounts are 
treated as disallowed business interest expense carryforwards into 
Year 3 under Sec.  1.163(j)-2(c), with the $15 carryforward being 
subject to section 382 limitation. See paragraph (d)(3)(vi) of this 
section.

    (g) Applicability dates--(1) In general. This section applies to 
any ownership change occurring after date of publication of Treasury 
decision adopting these proposed regulations as final regulations in 
the Federal Register. For ownership changes occurring on or before the 
date the Treasury decision adopting these proposed regulations as final 
regulations is published in the Federal Register, see Sec.  1.382-7 as 
contained in 26 CFR part 1, revised April 1, 2019. However, taxpayers 
and their related parties, within the meaning of sections 267(b) and 
707(b)(1), may apply the rules of this section to any ownership change 
occurring during a taxable year with respect to which the period 
described in section 6511(a) has not expired, as long as the taxpayers 
and their related parties consistently apply the rules of this section 
and Sec.  1.382-7(a)(9) through (13) to such ownership change and all 
subsequent ownership changes that occur before the applicability date 
of final regulations.
    (2) Paragraph (d)(2)(vi) of this section. Paragraph (d)(2)(vi) of 
this section applies to loss corporations that have undergone an 
ownership change on or after June 11, 2010. For loss corporations that 
have undergone an ownership change before June 11, 2010, see Sec.  
1.382-7T as contained in 26 CFR part 1, revised April 1, 2009.

Kirsten Wielobob,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2019-18152 Filed 9-9-19; 8:45 am]
 BILLING CODE 4830-01-P