Understanding the Built-in Gain and Loss Rules of Section 382-and Possible Significant Changes on the Horizon

Unprecedented NOLs have accompanied unprecedented times As we all welcome the new year, companies look forward to the future and hope to leave 2020 to the history books. Because of the lingering economic effects of COVID-19 and the expansion by the Tax Cuts and Jobs Act (TCJA) of the application of the Section 168(k) first-year bonus depreciation,1 corporations have to carry forward an unprecedented number of federal income tax losses (net operating losses, or NOLs).2 The increase in NOLs, coupled with the TCJAs inclusion of disallowed business interest expense carryforwards under Section 163(j) as an attribute subject to Section 382, the universe of "loss corporations" for purposes of Sections 382 and 383, and understanding the limitations of having an "ownership change," are particularly important. The Section 1374 approach may help loss corporations with a NUBIL, because it generally treats only built-in items of deduction as RBIL if an accrual-method taxpayer would have deducted the expense prior to the change date. 2019 Regulations Over the years, the Treasury Department and the IRS have voiced concerns regarding Notice 2003-65, including the view that the Section 338 approach violated the neutrality principle by overstating RBIG (attributable to the hypothetical cost recovery deductions) and have felt that taxpayers should have only one method to determine whether an item of income or deduction is RBIG or RBIL. [...]all other liabilities are disregarded in the hypothetical sale to determine the gross asset value. To qualify for transaction relief, the ownership change must result from a specific transaction, in which on or before the applicability date (taking into account the thirty-day delayed applicability date): * a binding agreement is in effect, or a public announcement is made or is described in a submitted filing with the SEC; * the taxpayer is a debtor in a bankruptcy case and the transaction occurs pursuant to an order of a court (or pursuant to a plan confirmed, or a sale approved, by order of a court) in a