IRS withdraws proposed regs. governing built-in losses and gains

The IRS on Tuesday withdrew proposed regulations on the treatment of built-in items of income, gain, deduction, and loss that a loss corporation considers following an ownership change under Sec. 382(h).

The action, effective Wednesday when it’s published in the Federal Register, withdraws the notice of proposed rulemaking (REG-125710-18) issued in 2019 and a notice issued in 2020 that modified certain provisions of the 2019 proposed regulations.

To provide “clearer and more comprehensive guidance” on the application of Sec. 382(h), the IRS issued proposed regulations to simplify the application of Sec. 382 and provide more certainty in determining built-in gains and losses under Sec. 382(h). The proposed regulations also were meant to ensure that changes in the Tax Cuts and Jobs Act, P.L. 115-97, did not further complicate the application of Sec. 382(h).

Sec. 382 limits a loss corporation’s ability to offset its taxable income after an ownership change with earlier losses. Under Sec. 382(h), built-in gains recognized during the five-year period beginning on the ownership change date (the recognition period) increase the loss corporation’s Sec. 382 limitation, while built-in losses are subject to the limitation.

The IRS said Tuesday that it received several comments in response to the 2019 proposed regulations, many of which were critical of its view that the proposed regulations would streamline the calculation of built-in gains and built-in losses for taxpayers. The IRS withdrew the regulations in response to those comments, it said.

The IRS expects to issue a revised notice of proposed rulemaking after it studies the issues addressed in the 2019 proposed regulations. Under Notice 2003-65, taxpayers may continue to rely on the approaches set forth in the 2019 proposed regulations for purposes of applying Sec. 382(h) to an ownership change that occurs before the effective date of temporary or final regulations under Sec. 382(h).

— To comment on this article or to suggest an idea for another article, contact Martha Waggoner at Martha.Waggoner@aicpa-cima.com.