Final Regulations Address Limits on Transfer of Built-in Losses

The IRS issued final regulations providing guidance on the determination of basis in nonrecognition transactions involving built-in losses. This involves tax-free transfers of property such as incorporating a business or transfers to existing corporations. The purpose of these rules is to prevent taxpayers from generating multiple tax losses from one economic loss and to prevent importation of losses from entities not subject to US taxation . These rules function through an adjustment to tax basis effectively preventing a corporation from benefiting from the built-in losses, The IRS recently issued final regulations that clarify the treatment of these transactions and provide numerous examples.