The IRS has concluded in a heavily redacted legal memorandum (ILM 2013-08-026) that a taxpayer improperly determined that a subsidiary was a net unrealized built-in gain (NUBIG) company at the time of acquisition. The acquisition was a Section 382 ownership change, and as a result, the IRS concluded that the taxpayer's alternative minimum taxable income calculation was incorrect, because the basis of the acquired subsidiary's assets should have been reduced under Section 56(g)(4)(G).
Section 382(a) limits the extent to which a loss corporation can use its losses to offset income after an ownership change. Section 382(h)(1)(A) provides that if a loss corporation has NUBIG in its assets, the Section 382 limitation during a five-year recognition period will be increased by any recognized built-in gains for such taxable year. Conversely, Section 382(h)(1)(B) provides that if a loss corporation had a net unrealized built-in loss (NUBIL) in its assets at the time of the ownership change, any recognized built-in loss for a five-year recognition period is subject to the Section 382 limitation in the same manner as if it were a prechange loss.
Under Section 56(g)(4)(G), when a corporation is a NUBIL company, the corporation is required to step down its basis in assets to the fair market value of the assets immediately prior to the ownership change for purposes of determining the corporation's adjusted current earnings (ACE). Notice 2008-83 originally provided that any deduction otherwise allowable to a bank related to losses on loans or bad debts should not be treated as recognized built-in loss if the loss corporation is a bank within the meaning of Section 581. But Congress enacted legislation in 2009 that terminated the application of this notice prospectively.
The taxpayer addressed by ILM 2013-08-026 appears to have taken the position that, in reference to Notice 2008-83, certain bank loans should be excluded from its calculation of whether the acquired subsidiary was a NUBIG or NUBIL company at the time of the ownership change. As a result, the taxpayer determined that the subsidiary was a NUBIG company. Upon review, however, the IRS asserted that Notice 2008-83 addressed only the recognition of built-in gains and losses, and therefore should not affect the NUBIG or NUBIL determination. The IRS concluded that the taxpayer was a NUBIL company when the excluded assets were taken into account and therefore Section 56(g)(4)(G) should apply to reduce the subsidiary's basis in assets for ACE purposes.
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