Final rules define loss importation property.

• Author: Schreiber, Sally P.

The IRS issued final rules that prevent taxpayers from transferring losses to corporations by implementing a framework for determining basis when property with a built-in loss is transferred to a corporation (T.D. 9759). The regulations finalize proposed regulations issued in 2013 (REG-161948-05) with a few clarifications, most pertaining to partnerships.

Under Sec. 362(e)(1), if property with a built-in loss is transferred to a corporation (meaning its adjusted basis in the transferee's hands is greater than its fair market value (FMV)), the property's basis in the transferee's hands is its FMV. This is called the loss importation rule, and the regulations provide rules for determining what is loss importation property.

Loss importation property exists if (1) a transferor's gain or loss on a sale of an individual property immediately before the transfer would not be subject to federal income tax, and (2) the acquiring corporation's gain or loss on a sale of the transferred property immediately after the transfer would be subject to federal income tax. Under the regulations, this determination is made by reference to the tax treatment of a hypothetical sale of the transferred or acquired property, that is, whether a hypothetical seller would take the gain or loss into account in determining its federal income tax liability, under all the relevant facts and circumstances.

A lookthrough rule applies when the transferor is a grantor trust, a partnership, or an S corporation. In these cases, determining whether gain or loss from a hypothetical sale is subject to federal income tax is done by looking at the tax treatment of the gain or loss in the hands of the grantors, the partners, or the S corporation shareholders. If an organizing instrument allocates gain or loss in different amounts, including under a partnership agreement, determining whether gain or loss from a hypothetical sale is subject to federal income tax is done by reference to the person to whom, under the terms of the instrument, the gain or loss on the entity's hypothetical sale would actually be allocated, taking...