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TAX CLINIC

of $0 (Property 5). On Jan. 1, 2021, prevent the use of any of the combined F’s NOLs to offset), and $25 million that
the combined corporation purchased corporation’s preacquisition NOLs so can be offset by using either set of NOLs
a piece of property for $500 million that the corporation would have to recog- (in which case normal NOL ordering
in a taxable transaction, so that the nize the entire $50 million of gain. This rules would apply). Therefore, since the
property is acquired with $500 mil- interpretation appears inconsistent with corporation only has $10 million of Corp
lion of basis (Property 6). During the the purpose of Sec. 384. F’s NOLs and $15 million of income
tax year ending Dec. 31, 2022, the A second interpretation of Sec. 384 attributable to the RBIG of Property 5
new combined corporation sells both would be to prorate the income between (so that it can only be offset using Corp
Property 4 and Property 5 for $250 the RBIG of Property 4 and Property 5. F’s preacquisition NOLs), $5 million of
million each and sells Property 6 for Since there was $100 million of RBIG on the net income cannot be offset using any
$50 million. Thus, the combined Property 4 and $150 million of RBIG on NOLs. The corporation would then use
corporation recognizes gain on the Property 5, this interpretation would treat all of Corp F’s preacquisition NOLs (to
sale of Property 4 of $250 million, $20 million of the total income as attrib- offset $10 million of the $15 million of
gain on the sale of Property 5 of utable to Property 4 RBIG, which cannot income attributable to RBIG of Property
$250 million, and loss on the sale of be offset by Corp F’s preacquisition 5), and $35 million of Corp E’s preacqui-
Property 6 of $450 million. There- NOLs, and $30 million of the income as sition NOLs (offsetting the entire $10
fore, the combined corporation has attributable to Property 5 RBIG, which million of income attributable to RBIG
combined net income of $50 million cannot be offset using Corp E’s preac- of Property 4 and the $25 million attrib-
for the tax year ended Dec. 31, 2022 quisition NOLs. Thus, the corporation utable to post-acquisition appreciation).
(this example assumes that no Sec. 382 would use $20 million of Corp E’s NOLs Therefore, the combined corpora-
limit applies to the use of any of the and the entire $10 million of Corp F’s tion would still recognize $5 million of
NOLs). NOLs, recognizing $20 million of in- income in the tax year ended Dec. 31,
come in the tax year ended Dec. 31, 2022. 2022, because there were insufficient
In Example 3, the corporation A third interpretation of Sec. 384 is Corp F NOLs to offset the entire $15
recognized a $250 million gain on to prorate the net $50 million of gain million of income that was attributable to
Property 4, $100 million of which was between the RBIG of Property 4 and the RBIG of Property 5. However, since
attributable to RBIG; a $250 million Property 5 and the post-transaction some of the income was treated as attrib-
gain on Property 5, $150 million of appreciation of both properties. Under utable to post-acquisition appreciation,
which was attributable to RBIG; and this interpretation, there was $500 this interpretation still permits a greater
a $450 million loss on Property 6, for million of total gain on Property 4 use of preacquisition NOLs than the
total net income of $50 million for the and Property 5 — $100 million (20%) second interpretation.
tax year ending Dec. 31, 2022. This attributable to the RBIG of Property While Sec. 384 has been in the Code
scenario seems to offer three potential 4, $150 million (30%) attributable to for over 35 years, significant guidance is
interpretations of Sec. 384. post-transaction appreciation of still needed in interpreting the provision.
First, since there was $100 million of Property 4, $150 million (30%) at- The IRS has addressed several specific
RBIG on Property 4 and only $50 mil- tributable to RBIG of Property 5, and issues in the application of Sec. 384 (see
lion total income to offset with NOLs, $100 million (20%) attributable to post- Letter Ruling 201806005, Technical Ad-
there is an interpretation of Sec. 384 that transaction appreciation of Property 5. vice Memorandum 200447037, and No-
the entire $50 million is attributable to Under this interpretation, of the $50 tice 90-27) but has yet to address one of
the RBIG of Property 4, and, therefore, million of income, $10 million is attrib- the more fundamental issues: What does
no preacquisition NOLs from Corp F utable to the RBIG of Property 4, $15 “to the extent attributable to recognized
could be used. In addition, the same in- million is attributable to the RBIG of built-in gains” mean in the application of
terpretation would apply to the Sec. 384 Property 5, and $25 million is attribut- the Sec. 384 limit? As discussed above,
limit on Property 5. Since there was $150 able to post-transaction appreciation of there appear to be several logical interpre-
million of RBIG from Property 5, there Property 4 and Property 5. tations of this phrase, and guidance from
is an interpretation of Sec. 384 that the Thus, Sec. 384 would work to prevent the IRS would be helpful to address what
entire $50 million of income is attribut- $10 million of the income from being it means to be “attributable to RBIG” and
able to the RBIG of Property 5, and, offset using Corp F’s NOLs (only per- the application of Sec. 384 when multiple
therefore, no NOLs from Corp E could mitted to use Corp E’s NOLs to offset), Sec. 384 limits apply in the same tax year.
be used. Together, if interpreted this way, $15 million from being offset by Corp From Jack Stringfield, J.D., LL.M.,
the two separate Sec. 384 limits, arguably, E’s NOLs (only permitted to use Corp Washington D.C.

16 February 2023 The Tax Adviser