Safe harbors for identifying Sec. 382 RBIG or RBIL.

• Author: Yecies, Mark
• Position: Recognized built-in gains and losses

The Service intends to publish regulations on identifying built-in income and deduction items for Sec. 382(h) purposes. In the interim, Notice 2003-65 provides two alternative safe-harbor methods that loss corporations can rely on to identify such items, provided that either approach is consistently applied to an ownership change. The notice states that the two safe harbors are not the exclusive methods by which a taxpayer may identify built-in items; the merits of alternative approaches will be determined on a case-by-case basis.

Background

Under Sec. 382, after an ownership change, the amount of a loss corporation's taxable income for any post-change year that may be offset by pre-change losses cannot exceed the Sec. 382 limit for that year. The Sec. 382 limit generally equals the fair market value (FMV) of the loss corporation's stock multiplied by the long-term tax-exempt rate, although certain adjustments to the stock's FMV may be required.

Sec. 382(h) applies to loss corporations that have significant built-in gains (BIGs) or losses (BILs) at the time of an ownership change. If a loss corporation has a net unrealized built-in gain (NUBIG) (i.e., the gross FMV of its assets just before an ownership change exceeds such assets' aggregate tax basis), it may offset recognition of such gain during the 60-month period following the ownership change with pre-change losses, without limit by Sec. 382. Conversely, if a loss corporation has a net unrealized built-in loss (NUBIL) (i.e., the aggregate tax basis in its assets exceeds the assets' gross FMV just before an ownership change), any such loss recognized during the 60-month period following the ownership change is treated as a pre-change loss that can offset taxable income, to the extent of the Sec. 382 limit.

Under Sec. 382(h)(6)(A), any item of income properly taken into account during the recognition period is treated as recognized built-in gain (RBIG) if the item is attributable to periods before the change date. Likewise, Sec. 382(h)(6)(B) provides that any item of deduction allowable as a deduction during the recognition period is treated as recognized built-in loss (RBIL) if the item is attributable to periods before the change date. Also, allowable depreciation, amortization or depletion deductions are treated as RBIL except to the extent the loss corporation establishes that the amount of the deduction is not attributable to the asset's built-in loss on the change date.

Notice...