Todd B. Reinstein, a tax partner with Pepper Hamilton, was quoted in the January 30, 2019 Tax Notes Today article, "IRS Built-In Gain and Loss Rules Eliminate a Safe Harbor Option."
The government provided a thorough explanation of the rationale for its decision, Todd Reinstein of Pepper Hamilton LLP told Tax Notes. But for companies with a built-in gain — such as research-and-development-intensive businesses like life science or technology companies — the mandated approach yields a less favorable "mathematical answer," according to Reinstein.
Under the 2003 notice, corporations with built-in gains generally favored the section 338 hypothetical method over the section 1374 accrual accounting method that was adopted from the S corporation rules for conversions to C corporations, Reinstein explained.
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But Reinstein pointed out that under that section, "income inclusions with respect to stock... under section 951(a) and 951A(a) are not treated as recognized built-in gain."
Reinstein pointed out that one issue that arose post-TCJA is what happens when a loss corporation sells an asset of a foreign subsidiary that results in GILTI income. He said practitioners have wondered whether that asset sale would be considered recognized built-in gain, with most thinking that the rules would match pre-change losses with the post-change gains if the asset is sold after the ownership change.
But the proposed section 382 rules seem inconsistent with the look-through approach applied to foreign corporations to determine U.S. income inclusion and taxes, Reinstein said.
For example, if a U.S. company without CFCs has a truck worth $100 with a tax basis of $10 and sells it for $100 following an ownership change, the section 382 limitation would increase by $90, Reinstein said. However, the proposed regs surprisingly suggest that if that asset resided in a foreign corporation, the gain would be excluded from the loss limitation, he said.
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