Closing of the books election pursuant to regs. sec. 1.382-6.
A loss corporation that undergoes a change in ownership may find the amount of taxable income Under the federal tax law, gross income reduced by adjustments and allowable deductions. It is the income against which tax rates are applied to compute an individual or entity's tax liability. The essence of taxable income is the accrual of some gain, profit, or benefit to a taxpayer. that may be offset by its net operating losses Net operating losses
Losses that a firm can take advantage of to reduce taxes. (NOLs) is subject to limitation under Sec. 382. Unless the change date occurs exactly on the date of the corporation's year-end year-end also year·end
The end of a year.
Occurring or done at the end of the year: a year-end audit.
Noun 1. , the corporation will have to allocate To reserve a resource such as memory or disk. See memory allocation. its income or loss during the change year between the "prechange" and "postchange" periods. This allocation The apportionment or designation of an item for a specific purpose or to a particular place.
In the law of trusts, the allocation of cash dividends earned by a stock that makes up the principal of a trust for a beneficiary usually means that the dividends will be treated as can have tremendous significance in determining the NOL NOL - Never Offline subject to the limitations of Sec. 382.
Sec. 382(b)(3)(A) provides the general rule that taxable income or loss must be allocated ratably to each day in the year of the ownership change. The IRS An abbreviation for the Internal Revenue Service, a federal agency charged with the responsibility of administering and enforcing internal revenue laws. announced in Notice 87-79 its intention to issue regulations that would allow a taxpayer to make a closing of the books election with respect to taxable income or loss in the change year. However, the Service mandated that the ratable That which can be appraised, assessed, or adjusted through the application of a formula or percentage.
Ratable property is that which is taxable or capable of being appraised or assessed.
ratable adj. allocation method must be used until regulations were issued, unless a letter ruling had been requested.
Several letter rulings were issued, stipulating that a taxpayer could use a closing of the books method. However, as a condition, the IRS mandated that the amount of income or loss that could be allocated to the prechange period could not exceed the amount of taxable income or loss for the entire year. The significance of this limitation can be seen in Example 1, below.
Example 1: Loss corporation L, a calendar-year taxpayer, has an ownership change on July 1, 19X5. L has an NOL carryforward carryforward
1. A business operating loss that, for tax purposes, may be claimed a certain number of years in the future, often up to 15 years. of $1,500,000 to 19X5.
Prechange income $1,000,000 Postchange loss (750,000) Entire year $ 250,000
The $250,000 is allocated entirely to the prechange period. The allocation to the postchange period is $0. The NOL subject to the Sec. 382 limitation is $1,250,000.
As a result of the Service's position, L would only be able to offset $250,000 of taxable income against the NOL, leaving a $1,250,000 carryforward subject to the Sec. 382 limitation. The IRS alleviated al·le·vi·ate
tr.v. al·le·vi·at·ed, al·le·vi·at·ing, al·le·vi·ates
To make (pain, for example) more bearable: a drug that alleviates cold symptoms. See Synonyms at relieve. this negative result in regulations proposed in 1992, by allowing for an increase to the Sec. 382 limitation to the extent that postchange losses were offset against prechange income. L would increase its Sec. 382 limitation by $750,000.
Final regulations issued on June 22, 1994 (which minimally modified the proposed regulations) are effective for ownership changes occurring on or after that date. Significantly, however, the limitation increase rule did not make it into the final regulations.
The regulations maintain the general rule of ratable allocation but allow for a closing of the books election made on a timely filed return. The election is made as part of the information statement required by Temp. Regs. Sec. 1.382-2T, and is irrevocable Unable to cancel or recall; that which is unalterable or irreversible.
IRREVOCABLE. That which cannot be revoked.
2. A will may at all times be revoked by the same person who made it, he having a disposing mind; but the moment the testator is . The election does not terminate the loss corporation's tax year as of the change date.
In the year of the ownership change, the taxable income or loss is determined, for purposes of allocating income to the pre- pre- word element [L.], before (in time or space).
1. Earlier; before; prior to: prenatal.
2. and postchange periods, without regard to capital gains or losses capital gains or losses n. particularly when calculating the tax liability of an individual or business, this is the difference between the original cost plus the cost of capital improvements, excluding maintenance, called "basis" and the sales price. . Thus, capital items are tracked separately from ordinary income or loss. The regulations allow for offset of similar items in the pre-and postchange periods without respect to the Sec. 382 limitation. However, recognized built-in gains or losses must be allocated entirely to the postchange period. Also, any income or gain recognized during the postchange period on the disposition of assets transferred to the loss corporation for purposes of ameliorating a·mel·io·rate
tr. & intr.v. a·me·lio·rat·ed, a·me·lio·rat·ing, a·me·lio·rates
To make or become better; improve. See Synonyms at improve.
[Alteration of meliorate. the Sec. 382 limitation is allocated entirely to the postchange period.
The regulations mandate adjustments after the initial allocation to each period. First, any modified capital gain net income (MCGNI) allocated to each period is offset by any recognized built-in capital losses and any capital loss carry-overs, subject to the Sec. 382 limitation. MCGNI is defined in Regs. Sec. 1.382-6(g)(4) as the excess of capital gains over capital losses for the change year, excluding any capital loss carryover carryover n. in taxation accounting, using a tax year's deductions, business losses or credits to apply to the following year's tax return to reduce the tax liability. (See: carryback) from a preceding year. Finally, any NOL allocated to each period is reduced by any remaining MCGNI in the same period, and then by the MCGNI remaining in the other period.
Examples 2 and 3 demonstrate the differing results that may be obtained if a loss corporation elects a closing of the books rather than a daily ratable allocation. In Example 2, above, the loss corporation will obtain a better result by making the closing of the books election. This is a result of the Sec. 382 limitation, which serves to reduce the amount of postchange period taxable income that may be offset by the prechange loss.
Example 2: Closing of the Books Election
L Corp.: NOL carryforward from 12/31/94 $1,000,000 Change date July 1, 1995 Annual Sec. 382 limitation 200,000 Prechange income 1,000,000 Postchange loss (500,000) Taxable income--change year $ 500,000 Ratable Closing of allocation the books Prechange $ 250,000 $ 500,000 Postchange 250,000 0 Taxable income before NOL 500,000 500,000 NOL (350,000)(*) (500,000) Taxable income after NOL 150,000 0 NOL carryforward to 1996 (subject to Sec. 382 limitation) $ 650,000 $ 500,000
(*)$250,000 prechange + $200,000/2 annual Sec. 382 limitation.
Example 3: Daily Ratable Allocation Election
L Corp.: NOL carryforward from 12/31/94 $1,000,000 Change date July 1, 1995 Sec. 382 limitation 200,000 Preschange loss (400,000) Postchange income 200,000 Taxable income--change year $ (200,000) Ratable Closing of allocation the books Prechange $ (100,000) $ (200,000)(*) Postchange (100,000) 0 Taxable income before NOL (200,000) (200,000) NOL carryforward to 1996 (subject to Sec. 382 limitation) 1,100,000 1,200,000 Postchange NOL $ 100,000 $ 0
(*)$400,00 prechange loss limited to the total loss for the year.
In Example 3, on page 81, while the taxpayer ends up with the same amount of NOL carryforward, the ratable allocation method yields $100,000 as a postchange loss, which is not limited by Sec. 382.
Obviously, the regulations do not contemplate situations in which corporations are unable to generate the information necessary to accurately close the books as of a given change date. Assuming this information exists, a loss corporation must factor in the amount of the Sec. 382 limitation in relation to the tax attributes being carried forward, as well as the amount of any postchange losses that can be used in the future without limitation.
From Adam Yalowich, CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , Fort Lauderdale Fort Lauderdale (lô`dərdāl), residential, commercial, and resort city (1990 pop. 149,377), seat of Broward co., SE Fla., on the Atlantic coast; settled around a fort built (c.1837) in the Seminole War, inc. 1911. , Fla.