Irs Proposes New Section 382 Regulations To Further Limit Use Of Tax Losses

IRS Delays Applicability of Proposed 382 Loss Limitation Rules, Provides Transition Reliefs

A reporting Model 2 FFI must use the definitions set forth in the applicable Model 2 IGA with respect to the accounts that it maintains in the Model 2 IGA jurisdiction, unless the Model 2 IGA jurisdiction permits the use of a definition provided in this agreement or §1.1471–1(b) in lieu of a definition set forth in the applicable Model 2 IGA, and such application does not frustrate the purposes of the Model 2 IGA. An entity that agrees to perform the due diligence, withholding, and reporting obligations of one or more FFIs pursuant to §1.1471–5(f)(1)(i)(F) or §1.1471–5(f)(2)(iii) may register with the IRS via the FATCA registration website to be treated as a sponsoring entity. If a sponsoring entity also seeks to obtain status as a participating FFI or reporting Model 2 FFI, the entity must separately register for participating FFI or reporting Model 2 FFI status and may do so via the FATCA registration website. The IRS intends to update the FATCA registration user guide to the FATCA registration website to provide information on the registration process for sponsored entities.

Congress Leaves for Summer Recess, With Little Progress on Pending Tax Issues

The IRS intends to update all relevant IRS forms to the extent necessary to incorporate and implement the changes described above in this section III. This includes, for example, Form W-8BEN-E which has been posted as a draft on the IRS.gov website and does not currently include a chapter 4 status for direct reporting NFFEs. The Treasury Department and the IRS intend to modify the definition of U.S. person in the chapter 4 regulations to include a foreign insurance company that is not a specified insurance company and that elects pursuant to section 953(d) to be subject to U.S. income tax as if it were a U.S. insurance company.

Immediately after the Partnership D Liquidation, Sub 1’s adjusted basis in the depreciable asset is $100x under § 732(b), the same as Sub 1’s outside basis in Partnership D prior to the Partnership D Liquidation, reflecting an increase of $80x to the adjusted basis of the depreciable asset in the hands of Sub 1. Also immediately after the Partnership D Liquidation, Sub 2’s adjusted basis in the nondepreciable land is $20x under § 732(b), the same as Sub 2’s outside basis in Partnership D prior to the Partnership D Liquidation, reflecting a decrease of $70x to the adjusted basis of the nondepreciable land in the hands of Sub 2. The distribution of the depreciable asset to Sub 1 as part of the Partnership D Liquidation on Date 3 was undertaken with a view to exploiting the disparity between Partnership D’s inside basis in the depreciable asset and Sub 1’s outside basis in Partnership D created before Date 3 and transferring basis from nondepreciable land distributed to Sub 2 to the depreciable asset distributed to Sub 1. C indirectly owns more than 50 percent of the stock of Sub 1 and Sub 2, both domestic corporations. Sub 1 and Sub 2 are the only partners in Partnership C with each having a 50 percent interest in the capital, profits, and losses of Partnership C. Partnership C owns 100 percent of the stock of Sub 3, a domestic corporation, a depreciable asset, and $100x of money deposited in a bank account.

• Pursuant to section 382(g)(4)(A), individual shareholders who own less than five percent of a loss corporation are aggregated and treated as a single 5-percent shareholder (a public group).
• For the avoidance of doubt, compliance with the terms of this agreement requires compliance with the requirement to recertify on the FATCA registration website that the reporting Model 2 FFI shall comply with the terms of any renewed agreement, including any modified terms pursuant to section 12.02 of this agreement.
• A reporting Model 2 FFI must use the definitions set forth in the applicable Model 2 IGA with respect to the accounts that it maintains in the Model 2 IGA jurisdiction, unless the Model 2 IGA jurisdiction permits the use of a definition provided in this agreement or §1.1471–1(b) in lieu of a definition set forth in the applicable Model 2 IGA, and such application does not frustrate the purposes of the Model 2 IGA.
• The proposed regulations are effective for ownership changes incurred after the publication of the regulations as final or temporary in the Federal Register.

Proposed Regulations May Significantly Impact Tax Assets in M&A Transactions

This revenue ruling provides various prescribed rates for federal income tax purposes for November 2013 (the current month). Table 1 contains the short-term, mid-term, and long-term applicable federal rates (AFR) for the current month for purposes of section 1274(d) of the Internal Revenue Code. Table 2 contains the short-term, mid-term, and long-term adjusted applicable federal rates (adjusted AFR) for the current month for purposes of section 1288(b).

Federal rates; adjusted federal rates; adjusted federal long-term rate and the long-term exempt rate. For purposes of sections 382, 642, 1274, 1288, and other sections of the Code, tables set forth the rates for November 2013. 1 A cumulative list of all revenue rulings, revenue procedures, Treasury decisions, etc., published in Internal Revenue Bulletins 2024–27 through 2024–52 is in Internal Revenue Bulletin 2024–52, dated December 30, 2024. Suspended is used in rare situations to show that the previous published rulings will not be applied pending some future action such as the issuance of new or amended regulations, the outcome of cases in litigation, or the outcome of a Service study. Supplemented is used in situations in which a list, such as a list of the names of countries, is published in a ruling and that list is expanded by adding further names in subsequent rulings. After the original ruling has been supplemented several times, a new ruling may be published that includes the list in the original ruling and the additions, and supersedes all prior rulings in the series.

Partnerships with related parties can create these characteristics through orchestrated contributions and distributions, as well as allocations under section 704(b) and (c). In most commercial transactions involving unrelated parties, the opportunity for abuse is limited because each party has separate, and often competing, economic and tax interests and the parties transact at arm’s length. In contrast, for related parties, basis can be manipulated to provide a material net tax benefit to the related parties, as illustrated in part IV.B, C, D and E of this Background section. Section 72(t)(2)(I)(vi) provides that the rules relating to repayment of emergency personal expense distributions should follow the rules for repayment of qualified birth or adoption distributions in section 72(t)(2)(H)(v). Therefore, an individual generally may, at any time during the 3-year period beginning on the day after the date on which the distribution was received, repay an emergency personal expense distribution (not to exceed the aggregate amount of the emergency personal expense distribution) to an applicable eligible retirement plan in which the individual is a beneficiary and to which a rollover can be made.

Proposed Regulations

The 338 approach identifies built-in gain by comparing the loss corporation’s actual items of income, gain, deduction, and loss with the items of income, gain, deduction, and loss that would result if a Section 338 election had been made for a hypothetical purchase of all of the corporation’s assets. Once an ownership change is triggered, the amount by which the corporation’s post-change taxable income can be offset with pre-change NOLs is subject to limitation. The amount of the limitation generally equals the fair market value of the corporation’s equity immediately before the ownership change multiplied by a federal long-term tax-exempt rate.

• The newly proposed transition guidance, unlike the overall proposed section 382 built-in gain and loss regulations, appears both noncontroversial and sensible.
• Technology companies in particular could be significantly impacted by the c…
• Due to the noncontroversial nature of this rule, the Treasury Department and the IRS have determined that proposed §1.382-7(d)(5) should be finalized before the remainder of the rules in the September 2019 proposed regulations, and that taxpayers should be allowed to retroactively apply this rule.
• A direct reporting NFFE will be required to register with the IRS to obtain a GIIN and to agree to comply with the provisions to be provided in the modified chapter 4 regulations on reporting information about its substantial U.S. owners directly to the IRS on Form 8966.

SECTION 3. COVERED TRANSACTIONS

The qualified intermediary (QI), withholding foreign partnership (WP), and withholding foreign trust (WT) agreements are being modified to address new requirements under chapter 4 in addition to chapter 3, and these requirements will be incorporated into all QI, WP, and WT agreements that are in effect on or after June 30, 2014. The updated QI agreement will incorporate by reference the requirements of the FFI agreement (including the modifications to the terms of the FFI agreement that are applicable to a reporting Model 2 FFI) and shall apply to any foreign branch of the QI that is treated as a participating FFI or reporting Model 2 FFI. In the case of an FFI that is a participating FFI or reporting Model 2 FFI and is also a WP or WT, the updated WP or WT agreement, as applicable, will incorporate by reference the requirements of the FFI agreement (including the modifications to the terms of the FFI agreement that are applicable to a reporting Model 2 FFI).

Effects on Other Areas Including Ordering Rules

The Section 382 limitation is determined by multiplying the value of the loss corporation’s equity before the ownership change by a specified rate that is determined each month by Treasury and the IRS. While §382 primarily addresses NOL usage, it can also restrict capital loss utilization in certain scenarios. A corporation with substantial capital loss carryovers might see limitations on offsetting future capital gains if those losses arose before the ownership change. Multiple ownership changes within a short period can further restrict NOL usage. Consequently, if a corporation changes hands frequently over multiple transactions, the compounding effect of limitations can severely reduce the practical value of old NOLs. Without §382, businesses with large accumulated losses could sell equity stakes to third parties seeking to exploit those losses to shield unrelated income from taxation.

(3) Additional U.S. Account Reporting Requirement for a Trustee of a Trustee-Documented Trust. In addition to the accounts required to be reported under section 6.02(A)(1) of this agreement, a participating FFI that is the trustee of a trustee-documented trust (as defined in an applicable Model 1 or 2 IGA) must report each U.S. account maintained by the trust as if the participating FFI maintained the account. On a Irs Proposes New Section 382 Regulations To Further Limit Use Of Tax Losses calendar-year basis, a participating FFI must report each U.S. account that it maintains in the manner described in section 6.02(B) of this agreement. The participating FFI is also required to report accounts held by an FFI that it has agreed to treat as an owner-documented FFI under §1.1471–3(d)(6) to the extent required under this section 6.02. “FFI group” means an expanded affiliated group (as defined in §1.1471–5(i)) that includes one or more participating FFIs or, in the case of a reporting Model 2 FFI, a group of related entities as defined in an applicable Model 2 IGA. A branch maintains an account if the rights and obligations of the participating FFI and the account holder with regard to such account (including any assets held in the account) are governed by the laws of the jurisdiction in which the branch is located.

However, this approach is typically not recommended except in limited scenarios and can create a trap for the unwary due to the complexities of Section 382. Although there has been recent consideration by Congress to repeal or revise these new capitalization rules, the need to understand the potential Section 382 limitations on a corporation’s NOLs will continue regardless of the underlying causes that require future NOL utilization. To determine if these tax attributes are available to use, an Internal Revenue Code (IRC) Section 382 analysis is required.