Reducing the Impact of Section 382 Built in Loss rules for Intangible Assets

posted Mar 14, 2014, 12:26 PM by John Ye
An opportunity may exist for a corporation, that otherwise would be subject to a Section 382 limitation, to realize beneficial tax treatment on the sale of intangible assets. If a company wishes to sell high-basis, low-value intangibles, the Section 382 limitation generally prohibits the company from recognizing the built-in loss on the disposition. For business reasons, the company has no desire to continue to use or own the property, but would prefer to retain the benefits of the built-in loss upon disposition of the intangible.

Generally, when intangible assets are sold within 5 years (the §382 recognition period) after a change of ownership, the taxpayer is unable to fully recognize the built-in loss because it is subject to the Section 382 limitation. However, the taxpayer will not be subject to Section 382 if the transaction is structured so that a loss is not recognized. For example, if only a portion of its high-basis, low-value intangible assets are sold, the taxpayer is not permitted to recognize a loss under Section 197(f), therefore rendering the Section 382 loss limitation inapplicable. The taxpayer, or a member of the taxpayer's controlled group, intentionally would retain ownership of the remaining portion of these high-basis, low-value Section 197 intangible assets and lease these remaining intangibles to the buyer.

Under Section 197(f), a loss from the sale of a Section 197 intangible asset may not be recognized if the taxpayer, or a member of the taxpayer's controlled group, continues to own at least one Section 197 intangible asset acquired in the same transaction. Thus, by retaining ownership of a portion of the intangible assets, the loss generated by the sale of the other intangible assets would be disallowed under Section 197 and not subject to the Section 382 limitation. The taxpayer then would be entitled to recognize the built-in loss by selling the retained Section 197 intangible assets to the lessee/buyer at least five years after the date of the ownership change that created the taxpayer's Section 382 limitation.

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