On July 2, 2025, Department of the Treasury and the Internal Revenue Service (IRS) withdrew controversial proposed regulations under section 382(h), which would have adversely impacted the ability of certain acquiring corporations to utilize pre-acquisition target losses. The formal withdrawal acknowledged that the proposed regulations were abandoned in response to comments "critical" of the 2019 proposed regulations. The IRS Office of Associate Chief Counsel (Corporate) previously announced that it intends to re-propose the 2019 rules. However, the July 2 withdrawal states only that Treasury and the IRS "continu[e] to study the issues" and expect to issue a revised notice of proposed rulemaking at an unspecified date in the future. In the interim, taxpayers are expressly permitted to rely on the safe harbors provided by Notice 2003-65.

Under section 382(h), a loss corporation's annual section 382 limitation may be increased or decreased to reflect certain items of built-in gain or built-in loss of the loss corporation at the time of the ownership change. For a loss corporation with a "net unrealized built-in gain" (NUBIG) at the time of the ownership change, the section 382 limitation is increased to reflect any "recognized built-in gain" (RBIG) arising in a taxable year within five years of the ownership change. Notice 2003-65 offers two safe harbor approaches to determine the adjustment under section 382(h): the "section 338 approach" and the "section 1374 approach." Under the section 338 approach, a loss corporation's section 382 limitation may be increased for certain "wasting assets" with built-in gain, without having to sell or dispose of those assets during the recognition period. If finalized, the 2019 proposed regulations would have eliminated the section 338 approach and required taxpayers to apply a modified version of the section 1374 approach.

For more information, please contact:

Jeffrey M. Tebbs, jtebbs@milchev.com, 202-626-1480

David W. Zimmerman, dzimmerman@milchev.com, 202-626-5876

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