🚨 Impacts for Corporations Undergoing Ownership Changes

🧾 Background

In September 2019, the IRS issued proposed regulations (Reg-125710-18) under Internal Revenue Code Section 382(h) to provide new rules on how net unrealized built-in gains (NUBIG) and losses (NUBIL) should be treated when a corporation changes ownership.But as of July 2025, the IRS has formally withdrawn these proposed regulations.

⚙️ What the Withdrawn Regulations Tried to Do

The IRS had aimed to codify and update guidance from:

📜 Notice 2003-65 – Provided the original safe harbor methods for computing NUBIG/NUBIL using the
🔁 “1374 approach” (based on S-corp rules under IRC Section 1374).

🔍 The 2019 Proposed Regs sought to:

• – ✅ Adopt the 1374 approach formally
• – 🔄 Modify treatment of depreciation deductions (only treated as built-in gains when actual gain is recognized)
• – 🚫 Exclude:
  • – Non-recourse and certain recourse liabilities from NUBIG/NUBIL
  • – Prepaid income and dividends during the recognition period
  • – Disallowed business interest under Section 382

💼 Post-change cancellation-of-debt income: would be counted as recognized gain only in limited situations
📌 A consistency rule was added to limit manipulation of pre-change items

⚖️ Why the IRS Withdrew the Proposal

💬 The tax community—including corporate taxpayers, private equity firms, and advisors—pushed back hard:

• – ⏳ Uncertainty around effective date made it difficult to plan business deals
• – 🧾 The alternative approach under IRC Section 338 was considered too complex
• – 📈 Risk of overstated gains/losses under some methods
  

⚠️ Taxpayers requested transition relief for ongoing deals

🧠 Key Insights from Industry Leaders

🔍 KPMG warned of “substantial pushback”
🔍 EY welcomed the move away from the Section 338 method
📢 Many called for delayed applicability and clarity to reduce deal-closing risks

🏛️ What’s Next?

🔄 The IRS and Treasury are “continuing to study” the issues
📢 A new proposed rulemaking package may be issued — stay tuned

✅ For Now: What You Should Do

📌 Notice 2003-65 remains applicable
If your corporation undergoes an ownership change before new regulations are finalized, you can continue relying on the 2003 safe harbor methods.

📊 This gives stability and predictability for:

• – Loss corporations
• – PE-backed firms
• – Tax planning and structuring teams

💼 Why It Matters to You

Whether you’re in M&A, private equity, or corporate finance, the rules on recognizing built-in gains/losses under Section 382 determine:

• – 💰 How much NOL (Net Operating Loss) carryforward your business can use
• – 🧾 Tax liabilities after acquisitions or restructuring

📉 Valuation impact in high-stake deals

📚 References

Internal Revenue Code Section 382(h)

IRS Notice 2003-65

Withdrawn Proposed Regs: Reg-125710-18

KPMG & EY commentary (2019–2025)