Proposed section 382 regulations.

On March 19, 1993, Tax Executives Institute submitted the following comments to the Internal Revenue Service on proposed regulations under section 382 relating to the rules for allocating net operating losses or taxable income and net capital gain or loss for the taxable year during which a loss corporation undergoes an ownership change that does not trigger an automatic closing of the year. The letter was prepared under the aegis of TEI's Federal Tax Committee, whose

chair is David F. Nitschke of Amerada Hess Corporation. Contributing materially to the preparation of TEI's comments was John P. Orr, Jr. of Finlay Fine Jewelry.

On November 18, 1992, the Internal Revenue Service issued proposed regulations under section 382 of the Internal Revenue Code, concerning the rules for allocating net operating losses or taxable income and net capital gain or loss for the taxable year during which a loss corporation undergoes an ownership change that does not trigger a closing of the tax year. The proposed regulations (CO-49-88) were published in the Federal Register on November 19, 1992 (57 Fed. Reg. 54535), and in the Internal Revenue Bulletin (1992-50 I.R. B. 30).(1) A public hearing on the proposed rules originally scheduled for February 25, 1993, was canceled. Tax Executives Institute is pleased to submit the following comments on the proposed regulations.

Overview

Following an "ownership change" that satisfies certain threshold requirements, section 382 generally limits the amount of taxable income that may be offset by operating losses arising prior to such ownership changes (so-called pre-change losses). Under section 383, similar rules apply with respect to certain tax credits that arise before the ownership change. The purpose of both statutes is to limit the amount of prechange tax attributes that may be used following the change.

With respect to a taxable year of a corporation that straddles an ownership change date, section 382(b)(3) provides a general rule that requires a ratable daily allocation of the income or loss for the year to the pre-and post-change portions of the year. That section also states that the IRS may issue regulations affording a loss corporation the option to allocate year-of-change income or loss by some method other than the generally applicable ratable daily allocation method. The legislative history states that the regulations may provide an option for corporations to determine change-year income or loss as if...