Todd B. Reinstein, a tax partner with Pepper Hamilton, was quoted in the September 16, 2019 Law360 article, "IRS' Built-In Loss Rules Could Mar Sheen of Distressed Cos."
The Section 338 approach identifies the value of realized built-in gains or losses by creating a hypothetical in which one assumes all the assets of the loss company were sold. The Section 1374 approach, which is based on a complicated accrual-based accounting method, typically doesn't yield the same increases in the Section 382 limitations as the 338 approach does, according to Todd B. Reinstein, a partner at Pepper Hamilton LLP.
The proposed rules will affect companies with tax loss carryforwards because getting rid of the 338 approach may limit the amount of NOLs that can be used to offset future taxable income, which means that potential buyers may place a lower value on the loss companies when the rules are finalized, Reinstein said.
"Intellectually, I can understand that and I think the IRS explained in the preamble why they are doing that," Reinstein said. "But if you take a step back, [this] will affect M&A transactions because I think what'll happen is, if you have a built-in gain ... there will be a lower 382 limitation, because 338 is no longer available."