BIGs and items of income under sec. 382.

• Author: McManus, Richard F.
• Position: Built-in gains; Internal Revenue Code

The special rules for built-in gains (BIGs) under Sec. 382(h) must be considered when advising a corporation with net operating loss (NOL) carryovers that has experienced an ownership change within the meaning of Sec. 382. These rules apply when such a corporation has substantially appreciated assets or substantial accrued, but not yet recognized, income.

While the general rule for BIGs under Sec. 382(h) is relatively straightforward, the scope of the "item of income" in Sec. 382(h)(6)(A), added by Congress in 1988, remains unclear; little guidance is available beyond vague statutory language and the legislative history. The IRS has not issued regulations explaining BIGs or items of income for Sec. 382 purposes, nor are any being developed actively (according to informal discussions with the Service). However, several rulings provide guidance on the meaning of "item of income" under Sec. 382, including two noteworthy administrative releases last year. Note: There are parallel rules to the item of income and BIG rules that deal with built-in losses and deduction items. These equally important rules, which apply if a corperation has depreciated assets or significant accrued but unclaimed deductions at the time of an ownership change, are not addressed herein.

Statutory Overview

The purpose of Sec. 382 is to thwart "trafficking" of NOLs. The statute is based on the principle that tax-beneficial items should be a neutral factor in the decision to acquire a corporation with NOLs.

In general, Sec. 382 is triggered (i.e., an ownership change occurs) when more than 50% of a corporation with NOLs changes hands during a three-year period. Once this happens, Sec. 382 limits the amount of the loss corporation's taxable income for any subsequent year that can be offset by NOLs generated prior to the ownership change. The annual limit is the corporation's total equity value multiplied by a long-term tax-exempt rate published quarterly by the IRS. Thus, the Sec. 382 limit denies any incremental NOL benefit to new owners that did not bear the economic burden of the losses.

NUBIGs and RBIGs

Sometimes, an upward adjustment to the annual Sec. 382 limit is allowed for BIGs. If a corporation with NOLs has a net unrealized built-in gain (NUBIG) above a certain threshold and has an ownership change, it may increase its Sec. 382 limit for the five-year period after the ownership change to the extent of recognized built-in gain (RBIG).

NUBIG is the amount by which...