Prop. regs. require NUBIG and NUBIL redetermination for consolidated Sec. 382 purposes.

• Author: Keith, Bryan D.
• Position: Net unrealized built-in gains, net unrealized built-in losses

The IRS recently proposed revisions (REG-133002-10) to the consolidated return regulations on the application of Sec. 382 and calculation of net unrealized built-in gains (NUBIGs) and losses (NUBILs). The proposed regulations would modify the current regulations under Regs. Sec. l,1502-91(g) by requiring corporations filing consolidated returns to redetermine consolidated NUBIG and NUBIL on certain unduplicated gain or loss in the stock of included subsidiaries taken into account during the recognition period.

Background to Sec. 382

Sec. 382 was enacted to prevent trafficking in tax net operating losses. Sec. 382(b)(1) limits the ability of a loss corporation to utilize its net operating losses that arose before an ownership change against income earned in postchange tax years. The amount of prechange loss that can be used in a postchange year is limited by the loss corporation's Sec. 382 limitation, which is defined under Sec. 382(b) (1) as the value of the loss corporation immediately before the ownership change, multiplied by the long-term tax-exempt rate. A loss corporation with a NUBIG in its assets immediately before an ownership change may generally increase its Sec. 382 limitation to the extent of its NUBIG by built-in gains recognized during the five-year postchange recognition period under Sec. 382(h)(1)(A). A loss corporation with a NUBIL in its assets immediately before an ownership change, on the other hand, must generally treat built-in losses recognized during the five-year postchange recognition period as if such losses, to the extent of NUBIL, were prechange losses subject to the Sec. 382 limitation.

NUBIG/NUBIL is measured under Sec. 382(h) (3) (A) (i) as the amount by which the fair market value (FMV) of the loss corporation's assets immediately before the ownership change is more than or less than the aggregate adjusted tax basis of such assets. The calculated NUBIG or NUBIL is treated as if it is zero unless it exceeds a threshold requirement under Sec. 382(h )(3) (B), which is the lesser of $10 million or 15% of the FMV of the loss corporation's assets (not including cash and cash-like items) immediately before the ownership change. Thus, corporations seeking to maximize the use of losses generally prefer a NUBIG to a NUBIL, or if the corporation is in a NUBIL position, such corporations prefer the smallest NUBIL possible.

Current Regulations

The current regulations under Regs. Sec. 1.1502-91 (g) provide that the determination of whether a consolidated group has a NUBIG or NUBIL is based on the aggregate amount of...