House passed Senate version of fiscal cliff bill!

On the evening of January 1 2013, the House passed the Senate's version of the fiscal cliff bill.  Now it goes to President Obama.  Text is at http://1.usa.gov/UkNnw7  and runs 154 pages, covering many areas.  I suspect that individual tax rates will be getting most of the attention in the press, but there are many other items (e.g., business incentives being extended that had expired; international tax issues, etc.) that are very important.

Stay tuned for more!

• TITLE I—GENERAL EXTENSIONS
• Sec. 101. Permanent extension and modification of 2001 tax relief.
• Sec. 102. Permanent extension and modification of 2003 tax relief.
• Sec. 103. Extension of 2009 tax relief.
• Sec. 104. Permanent alternative minimum tax relief.
• TITLE II—INDIVIDUAL TAX EXTENDERS
• Sec. 201. Extension of deduction for certain expenses of elementary and secondary school teachers.
• Sec. 202. Extension of exclusion from gross income of discharge of qualified principal residence indebtedness.
• Sec. 203. Extension of parity for exclusion from income for employer-provided mass transit and parking benefits.
• Sec. 204. Extension of mortgage insurance premiums treated as qualified residence interest.
• Sec. 205. Extension of deduction of State and local general sales taxes.
• Sec. 206. Extension of special rule for contributions of capital gain real property made for conservation purposes.
• Sec. 207. Extension of above-the-line deduction for qualified tuition and related expenses.
• Sec. 208. Extension of tax-free distributions from individual retirement plans for charitable purposes.
• Sec. 209. Improve and make permanent the provision authorizing the Internal Revenue Service to disclose certain return and return information to certain prison officials.
• TITLE III—BUSINESS TAX EXTENDERS
• Sec. 301. Extension and modification of research credit.
• Sec. 302. Extension of temporary minimum low-income tax credit rate for nonfederally subsidized new buildings.
• Sec. 303. Extension of housing allowance exclusion for determining area median gross income for qualified residential rental project exempt facility bonds.
• Sec. 304. Extension of Indian employment tax credit.
• Sec. 305. Extension of new markets tax credit.
• Sec. 306. Extension of railroad track maintenance credit.
• Sec. 307. Extension of mine rescue team training credit.
• Sec. 308. Extension of employer wage credit for employees who are active duty members of the uniformed services.
• Sec. 309. Extension of work opportunity tax credit.
• Sec. 310. Extension of qualified zone academy bonds.
• Sec. 311. Extension of 15-year straight-line cost recovery for qualified leasehold improvements, qualified restaurant buildings and improvements, and qualified retail improvements.
• Sec. 312. Extension of 7-year recovery period for motorsports entertainment complexes.
• Sec. 313. Extension of accelerated depreciation for business property on an Indian reservation.
• Sec. 314. Extension of enhanced charitable deduction for contributions of food  inventory.
• Sec. 315. Extension of increased expensing limitations and treatment of certain real property as section 179 property.
• Sec. 316. Extension of election to expense mine safety equipment.
• Sec. 317. Extension of special expensing rules for certain film and television productions.
• Sec. 318. Extension of deduction allowable with respect to income attributable to domestic production activities in Puerto Rico.
• Sec. 319. Extension of modification of tax treatment of certain payments to controlling exempt organizations.
• Sec. 320. Extension of treatment of certain dividends of regulated investment companies.
• Sec. 321. Extension of RIC qualified investment entity treatment under FIRPTA.
• Sec. 322. Extension of subpart F exception for active financing income.
• Sec. 323. Extension of look-thru treatment of payments between related controlled foreign corporations under foreign personal holding company rules.
• Sec. 324. Extension of temporary exclusion of 100 percent of gain on certain small business stock.
• Sec. 325. Extension of basis adjustment to stock of S corporations making charitable contributions of property.
• Sec. 326. Extension of reduction in S-corporation recognition period for built-in gains tax.
• Sec. 327. Extension of empowerment zone tax incentives.
• Sec. 328. Extension of tax-exempt financing for New York Liberty Zone.
• Sec. 329. Extension of temporary increase in limit on cover over of rum excise taxes to Puerto Rico and the Virgin Islands.
• Sec. 330. Modification and extension of American Samoa economic development credit.
• Sec. 331. Extension and modification of bonus depreciation.
• TITLE IV—ENERGY TAX EXTENDERS
• Sec. 401. Extension of credit for energy-efficient existing homes.
• Sec. 402. Extension of credit for alternative fuel vehicle refueling property.
• Sec. 403. Extension of credit for 2- or 3-wheeled plug-in electric vehicles.
• Sec. 404. Extension and modification of cellulosic biofuel producer credit.
• Sec. 405. Extension of incentives for biodiesel and renewable diesel.
• Sec. 406. Extension of production credit for Indian coal facilities placed in service before 2009.
• Sec. 407. Extension and modification of credits with respect to facilities producing energy from certain renewable resources.
• Sec. 408. Extension of credit for energy-efficient new homes.
• Sec. 409. Extension of credit for energy-efficient appliances.
• Sec. 410. Extension and modification of special allowance for cellulosic biofuel plant property.
• Sec. 411. Extension of special rule for sales or dispositions to implement FERC or State electric restructuring policy for qualified electric utilities.
• Sec. 412. Extension of alternative fuels excise tax credits.
• TITLE V—UNEMPLOYMENT
• Sec. 501. Extension of emergency unemployment compensation program.
• Sec. 502. Temporary extension of extended benefit provisions.
• Sec. 503. Extension of funding for reemployment services and reemployment and eligibility assessment activities.
• Sec. 504. Additional extended unemployment benefits under the Railroad  Unemployment Insurance Act.
• TITLE VI—MEDICARE AND OTHER HEALTH EXTENSIONS
• Subtitle A—Medicare Extensions
• Sec. 601. Medicare physician payment update.
• Sec. 602. Work geographic adjustment.
• Sec. 603. Payment for outpatient therapy services.
• Sec. 604. Ambulance add-on payments.
• Sec. 605. Extension of Medicare inpatient hospital payment adjustment for lowvolume hospitals.
• Sec. 606. Extension of the Medicare-dependent hospital (MDH) program.
• Sec. 607. Extension for specialized Medicare Advantage plans for special needs individuals.
• Sec. 608. Extension of Medicare reasonable cost contracts.
• Sec. 609. Performance improvement.
• Sec. 610. Extension of funding outreach and assistance for low-income programs.
• Subtitle B—Other Health Extensions
• Sec. 621. Extension of the qualifying individual (QI) program.
• Sec. 622. Extension of Transitional Medical Assistance (TMA).
• Sec. 623. Extension of Medicaid and CHIP Express Lane option.
• Sec. 624. Extension of family-to-family health information centers.
• Sec. 625. Extension of Special Diabetes Program for Type I diabetes and for Indians.
• Subtitle C—Other Health Provisions
• Sec. 631. IPPS documentation and coding adjustment for implementation of MSDRGs.
• Sec. 632. Revisions to the Medicare ESRD bundled payment system to reflect findings in the GAO report.
• Sec. 633. Treatment of multiple service payment policies for therapy services.
• Sec. 634. Payment for certain radiology services furnished under the Medicare hospital outpatient department prospective payment system.
• Sec. 635. Adjustment of equipment utilization rate for advanced imaging services.
• Sec. 636. Medicare payment of competitive prices for diabetic supplies and elimination of overpayment for diabetic supplies.
• Sec. 637. Medicare payment adjustment for non-emergency ambulance transports for ESRD beneficiaries.
• Sec. 638. Removing obstacles to collection of overpayments.
• Sec. 639. Medicare advantage coding intensity adjustment.
• Sec. 640. Elimination of all funding for the Medicare Improvement Fund.
• Sec. 641. Rebasing of State DSH allotments.
• Sec. 642. Repeal of CLASS program.
• Sec. 643. Commission on Long-Term Care.
• Sec. 644. Consumer Operated and Oriented Plan program contingency fund.
• TITLE VII—EXTENSION OF AGRICULTURAL PROGRAMS
• Sec. 701. 1-year extension of agricultural programs.
• Sec. 702. Supplemental agricultural disaster assistance.
• TITLE VIII—MISCELLANEOUS PROVISIONS
• Sec. 801. Strategic delivery systems.
• Sec. 802. No cost of living adjustment in pay of members of congress.
• TITLE IX—BUDGET PROVISIONS
• Subtitle A—Modifications of Sequestration
• Sec. 901. Treatment of sequester.
• Sec. 902. Amounts in applicable retirement plans may be transferred to designated Roth accounts without distribution.
• Subtitle B—Budgetary Effects
• Sec. 911. Budgetary effects.

Unrealized Built-in Gains and Losses Under Section 382 and the Tax Accounting Rules

Originally published in The Tax Adviser, November 2010  [http://www.aicpa.org/Publications/TaxAdviser/2010/November/Pages/clinic_nov10-story-10.aspx]

Many practitioners already know that section 382 generally limits the use of a corporation’s net operating losses (NOLs) in cases where there is an increase in ownership of more than 50 percentage points by one or more 5% shareholders during a three-year testing period.

Many practitioners also know that section 382 addresses cases in which corporations have either net unrealized built-in gains (NUBIGs) or net unrealized built-in losses (NUBILs) as of the ownership change date. In such cases, under section 382(h) generally,

1. For corporations with NUBIGs, a year’s section 382 limitation is increased by recognized built-in gains for that year during the five-year recognition period following the change or
2. For corporations with NUBILs, recognized built-in losses for a year during the five-year recognition period following the change are treated as if they were pre-change NOLs.

Section 382(h)(3)(A) defines the terms NUBIG and NUBIL as the amounts by which the fair market value (FMV) of the corporation’s assets immediately before an ownership change is more or less, respectively, than the aggregate adjusted basis of such assets at such time.

Interestingly, what practitioners and taxpayers sometimes do not consider is section 382(h)(6)(C)’s requirement that NUBIGs and NUBILs must generally be further adjusted for items of accrued income and accrued deductions attributable to the pre-change period (to the extent not already recognized as of the change date).

This provision can yield unexpected results (sometimes good, sometimes bad). As shown in Example 1, it can mean that a corporation that at first appears to have a NUBIL might actually have a NUBIG. Alternatively (as shown in Example 2 below), given a seemingly minor factual difference, it can mean a corporation that at first appears not to have a NUBIL might not be able to avoid having one.

Example 1: All amounts are determined as of the change date (December 31, year 1). Legal settlement accrual is reasonably ascertainable in amount but is not agreed to or paid until January 5, year 2 (i.e., neither the all-events test of section 461(h)(4) nor economic performance per section 461(h)(1) is met as of the change date).

The corporation has a net unrealized built-in gain of $1.7 million, computed as follows (see exhibit below):

• Intangible: The FMV exceeds the basis by $2 million.
• Land: The basis exceeds the FMV by $300,000.
• Accrued legal settlement (related to a tort): This $3 million amount is excluded from the calculation because it did not represent a proper accrual (aside from required economic performance) as of the change date. Therefore, it is not treated as being attributable to the pre-change period and is not a component of any NUBIG or NUBIL.

Example 2: All amounts are determined as of the change date (December 31, year 1). Legal settlement accrual is reasonably ascertainable in amount and is agreed to but is not paid until January 5, year 2 (i.e., the all-events test is met as of the change date, with economic performance occurring after the change date). Pre-change NOLs are $500,000. The section 382 limitation is $1 million.

The corporation has a net unrealized built-in loss of $1.3 million, computed as follows (see exhibit below):

• Intangible: The FMV exceeds the basis by $2 million.
• Land: The basis exceeds the FMV by $300,000.
• Accrued legal settlement (related to a tort): This $3 million amount is included in the calculation because the deduction was a proper accrual at the change date under the all-events test but was deferred until paid under section 461(h)(2)(C). Therefore, it is treated as being attributable to the pre-change period and is a component of any NUBIG or NUBIL.

This means that the deduction (to the extent of the NUBIL of $1.3 million) is lumped together with the corporation’s pre-change NOLs and (in this case) is subject to the section 382 limitation as a realized built-in loss.

Exhibit

	Tax Basis	Fair Market Value	Difference
Assets
Intangible	0	2,000,000	2,000,000
Land	2,000,000	1,700,000	(300,000)
Liabilities
Accrued legal settlement (tort)			(3,000,000)

Using the numbers above, there would be a post-change deemed NOL of $1.8 million (pre-change losses of $500,000 plus $1.3 million of realized built-in losses), which could only offset income in the subsequent year (December 31, year 2) of up to the $1 million section 382 limitation, with the remainder ($800,000) of the disallowed realized built-in losses being carried forward under the rules applicable to NOLs.

While these two examples are admittedly simple (and focus only on accrued deductions), they do make one thing clear—corporate tax practitioners must pay close attention not only to the unrealized gains and losses inherent in a corporation’s assets when facing a section 382 limitation, but also to those less-obvious items of accrued income and expense. In fact, the author was approached about a year ago by another practitioner on a matter fairly similar to Example 1 above, where the numbers were many times higher than those given here. As a result, what initially looked like a large NUBIL instead turned out to be a substantial NUBIG, much to the relief of all involved.

Bottom line: Don't forget to consider the tax accounting method rules (for accrued income or expense items) when dealing with section 382.