AMT consequences of an ownership change.

• Author: Weck, L. Casey
• Position: Alternative minimum tax

In the current economic environment, there will likely be more ownership changes of corporations with built-in losses (BILs). Whereas most tax planning routinely contemplates the impact of the Sec. 382 limitation on the use of a corporation's net unrealized built-in losses (NUBILs) following an ownership change, the corresponding impact of Sec. 56(g)(4)(G) for adjusted current earnings (ACE) is often overlooked and may have a significantly different effect than Sec. 382. Under Sec. 382, tax basis in assets is restricted only when an actual loss is recognized, whereas under Sec. 56, the ACE basis in assets is adjusted to remove the NUBIL for ACE purposes. In addition, in situations in which there is an 80% or greater change in control of the value of the corporation, there is ambiguity under Sec. 56 about which allocation methodology should be used in reducing the assets basis for ACE purposes.

Sec. 382: Built-In Losses

In general, under Sec. 382(h)(3), a corporation has a NUBIL if aggregate tax bases in its assets exceed the fair market value (FMV) of the assets immediately prior to the ownership change and the difference is larger than the lesser of $10 million or 15% of the FMV of the assets (excluding cash and certain cash-like items). In determining the FMV of the assets, Sec. 382(h)(8) applies in situations with 80% or more changes in ownership of the value of the loss corporation (i.e., the maximum value of the internal assets of the loss corporation is the grossed-up amount paid for the stock adjusted for liabilities of the loss corporation). In situations with less than an 80% change in ownership of the value of the loss corporation, the taxpayer is not required to use the Sec. 382(h)(8) grossed-up values.

If a corporation has a NUBIL that exceeds the aforementioned threshold, any recognized BIL (up to the amount of the NUBIL) in the five-year recognition period is not deductible; instead it is treated as a pre-closing net operating loss (NOL) subject to the annual Sec. 382 limit. However, if no loss is recognized on the ultimate sale of the asset, the full amount of the pre-closing basis is unrestricted. As such, the bases in assets are not affected unless an actual loss is recognized, and then only the realized loss is restricted.

Sec. 56: Built-In Losses

In contrast to Sec. 382's treatment of a NUBIL, under Sec. 56(g)(4)(G) the corporation's adjusted basis of each asset for ACE purposes is adjusted to its proportionate share of...