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IRS Business Code

IRS Delays Applicability of Proposed 382 Loss Limitation Rules, Provides Transition Reliefs

Thomson Reuters Tax & Accounting  

Thomson Reuters Tax & Accounting  

The IRS has issued new proposed regs that delay the applicability date of the September 2019 proposed Code Sec. 382 loss limitation rules. The new proposed regs also provide transition relief and withdraw a portion of the September 2019 proposed regs.


Code Sec. 382 imposes a value-based limitation (382 limitation) on a “loss-corporation’s” ability to offset its taxable income, after an “ownership change,” with losses attributable to pre-ownership change periods. Generally, the 382 limitation equals the fair market value of the loss corporation immediately before the ownership change, multiplied by the applicable long-term tax-exempt rate under Code Sec. 382(f).

Under Code Sec. 382, an “ownership change” occurs when a loss corporation’s shareholder owning at least 5% of the loss corporation’s stock (5% shareholder) increases its stock ownership by more than 50% during a specified testing period.

Generally, a “loss corporation” is a corporation entitled to use a net operating loss carryover or having a net operating loss for the tax year in which an ownership change occurs. (Code Sec. 382(k)(1)) The term “loss corporation,” with certain exceptions, includes a corporation with a net unrealized built-in loss (NUBIL). A corporation has a NUBIL when the aggregate tax basis in the corporation’s assets exceeds the assets’ gross fair market value at the time of an ownership change. (Code Sec. 382(h)(3)(A)(i))

Code Sec. 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).


Notice 2003-65, 2003-2 CB 747, provides, among other things, a safe harbor for computing a loss corporation’s net built-in gains and net built-in losses. Taxpayers can use the safe harbor in the Notice to apply Code Sec. 382(h) to an ownership change “prior to the effective date of temporary or final regs under Code Sec. 382(h).” See IRS provides safe harbors for treatment of loss corporation’s built-in gain and loss after ownership change (09/25/2003)

Background—proposed regs

On September 10, 2019, the IRS proposed revisions to the rules in Reg §1.382-2 and Reg §1.382-7 (September 2019 proposed regs). Those revisions would have affected the determination of

  1. Net built-in gains and losses and
  2. Recognized built-in gains and losses under Code Sec. 382(h) that, in turn, affect the net-operating loss limitation under Code Sec. 382 and the disallowed business interest expense under Code Sec. 163(j).

Prop Reg §1.382-2(b)(4) and Prop Reg §1.382-7(g)(1) would have applied to ownership changes that occurred after the date the September 2019 proposed regs were adopted as final. See Proposed reliance regs on calculating built-in gains and losses (09/10/2019)

After the September 2019 proposed regs were issued, the IRS received comments expressing concern that the applicability date in the September 2019 proposed regs would impose a significant burden on taxpayers evaluating and negotiating business transactions due to the uncertainty regarding when those transactions would close and when the September 2019 proposed regs would be finalized. (Preamble to Prop Reg REG-125710-18)

What’s new

To address the concerns expressed about the September 2019 proposed regs, the IRS has withdrawn the text of Prop Reg §1.382-2(b)(4) and Prop Reg §1.382-7(g) as it appeared in the September 2019 proposed regs and has proposed new text

  1. Modifying the applicability date of the September 2019 proposed regs, and
  2. Providing transition relief. (Preamble to Prop Reg REG-125710-18)
  • Delay of applicability date and applicability of pre-existing guidance. Generally, the new text provides that the applicability date of the final regs would be 30 days after the date the September 2019 proposed regs are published as final (delayed applicability date). (Prop Reg §1.382-2(b)(4)) Notice 2003-65 will remain applicable to ownership changes to which the final regs do not apply. (Preamble to Prop Reg REG-125710-18)
  • Limiting duplicate application of section 382. The IRS will finalize Prop Reg §1.382-7(d)(5) before the rest of the September 2019 proposed regs as part of the final Code Sec. 163(j) regs, and taxpayers will be permitted to apply that rule to prior periods. Prop Reg §1.382-7(d)(5), one of the September 2019 proposed regs, would eliminate the possible duplicate application of Code Sec. 382 to certain disallowed business interest expense carryforwards.
  • Transition relief provisions. After the delayed applicability date, for an ownership change to qualify for transition relief, the ownership change must occur immediately after an owner shift or equity structure shift that occurs under one or more of the following circumstances:

(i) Pursuant to a binding agreement in effect on or before the delayed applicability date and at all times thereafter;

(ii) Pursuant to a specific transaction described in a public announcement made on or before the delayed applicability date;

(iii) Pursuant to a specific transaction described in a filing with the Securities and Exchange Commission submitted on or before the delayed applicability date;

(iv) By order of a court (or pursuant to a plan confirmed, or a sale approved, by order of a court) in a title 11 or similar case (as defined in Code Sec. 382(l)(5)(F)), provided that the taxpayer was a debtor in a case before such court on or before the delayed applicability date; or

(v) Pursuant to a transaction described in a private letter ruling request submitted to the IRS on or before the delayed applicability date. (Prop Reg §1.382-7(g)(2))

The relevant owner shift or equity structure shift must be a specific, identifiable transaction. For example, a stock buyback pursuant to an announced, on-going program would not qualify. (Preamble to Prop Reg REG-125710-18)

Taxpayers may continue to rely on Notice 2003-65 with respect to any ownership change qualifying for transition relief, even though that Notice will be obsoleted on the delayed applicability date. (Preamble to Prop Reg REG-125710-18) Alternatively, a taxpayer may choose to apply the final regs to such an ownership change. (Preamble to Prop Reg REG-125710-18)

To continue your research on limitations on the net operating loss carryforwards and certain built-in losses following ownership change, see FTC 2d/FIN ¶F-7201; United States Tax Reporter ¶3824.


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