Built-in Gain Solution
Sec. 382 Limitation
Table of Contents
EXECUTIVE SUMMARY
SECTION 382
SEC 382 LIMITATIONS
SEC 382 DEFINITIONS
SEC 382 ACRONYMS
SAFE HARBOR METHODS
RED MOON SOLUTIONS
GENERAL APPROACH – NUBIG / NUBIL
GENERAL APPROACH – RBIG / RBIL
PROCESS – NUBIG / NUBIL
PROCESS – RBIG / RBIL
BIG / BIL REPORTS
RMS BIG REPORTS
NUBIG / NUBIL REPORT EXAMPLE
RBIG / RBIL DEPRECIATION REPORT EXAMPLE
RBIG / RBIL GAIN / (LOSS) REPORT EXAMPLE
FAM – BIG SOLUTION BENEFITS
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Table of Contents
BIG OPPORTUNITIES
“Net Operating Loss” tax attributes created during the “great recession” may now be
usable. As the economy improves, many previously struggling businesses are now generating
taxable income. However, IRC Sec. 382 limitations are imposed on the amount of net
operating losses that can be used annually after a change in ownership of a corporation
occurs.
The theory is that, after an ownership change, the amount of a loss corporation’s taxable
income for any post-change year that may be offset by pre-change losses shall not exceed the
Sec. 382 limitation for that year.
THE FAM BIG SOLUTION
Red Moon Solutions (RMS) will enable a loss corporation to maximum the use of its NOLs by
utilizing FAM BIG software to calculate the following Sec. 382 requirements:
•NUBIG or NUBIL
•RBIG or RBIL (Depreciation)
•RBIG or RBIL (Gain or Loss from Sale)
Section 382 Limitation
Annual Sec. 382 Limitation – Generally, this limitation is equal to the FMV
of the loss corporation, immediately before the ownership change, multiplied
by the long term tax exempt rate. This rate is the highest rate in effect during
the 3-calendar-months ending in the month the change date occurred.
Adjustments To Sec. 382 Limitation – This limitation will be adjusted by recognized
built-in gain (RBIG). The built-in gain rules, prescribed under IRC
Sec. 382, sets forth the circumstances under which items of income and gain
that a “loss corporation” recognizes after an “ownership change” should be
treated as RBIG and increase the Sec. 382 limitation.
Unused Sec. 382 Limitation – Any current year unused Sec. 382 limitations will carryover
to the next year.
Section 382 Definitions
Loss Corporation – A corporation that has a net operating loss carryover, a net operating
loss for the current year, or a net unrealized built-in loss for the taxable year in which an
ownership change occurs.
Ownership Change – Greater than 50 percentage point increase in ownership by 5
percentage shareholders during the test period, which is generally three years.
Pre-Change Loss – A net operating loss arising before an ownership change.
Post-Change Year – Any tax year ending after the ownership change date.
Recognition Period – This refers to the five year period, beginning on the ownership
change date.
Section 382 Acronyms
NUBIG – Net unrealized built-in gain
NUBIL – Net unrealized built-in loss
RBIG – Recognized built-in gain
RBIL – Recognized built-in loss
Safe Harbor Methods
• IRS Notice 2003-65 provides useful guidelines in determining how to calculate NUBIG and
NUBIL, and more importantly provides two safe harbor methods for determining RBIG and
RBIL.
• The 1374 Approach safe harbor method will generally be most beneficial for NUBIL loss
corporations.
• The 338 Approach safe harbor method will generally be most beneficial for NUBIG loss
corporations.
General Approach – RBIG / RBIL
• Calculation of RBIG & RBIL (Items of Income & Deduction) – In cases other than
sales of assets, the approach generally relies on the accrual method of accounting to identify
income or deduction items as RBIG or RBIL, respectively. There are specific rules with regard
to the following:
• Income generated by built-in gain assets
• Discharge of indebtedness income and bad debt reductions
• Depreciation, amortization and depletion reductions with respect to built-in loss assets
• Calculation of RBIG & RBIL (Gain or Loss from Sale) – Based on the accrual
method of accounting, the amount of gain or loss recognized during the recognition period on
the sale or exchange of an asset is RBIG or RBIL, subject to the limitations. The sum of the
RBIG or RBIL, attributable to an asset, cannot exceed the unrealized built-in gain or loss of that
asset on the ownership change date.
• Purpose of RBIG – This amount can be used to increase the Sec. 382 limitation.
• Purpose of RBIL – This may increase the amount of pre-change loss.
Process – NUBIG / NUBIL
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Initial BIG Setup
 RMS will provide a solution to meet the client’s needs.
 This involves creating a separate MS SQL database for each client and
initializing the BIG system parameters in accordance with client specifications.
 The database will reside on a server in our secure data center.
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NUBIG or NUBIL Calculation
Fixed asset information is extracted from the client’s system.
RMS will import the client data into the FAM Federal Tax Book (FT Book).
RMS will also import the data to a separate FAM Net Unrealized Book (NU Book).
This “NU Book” will reflect the new “change of ownership date” and the FMV
data for each asset.
 Information from these two FAM books will enable the calculation of NUBIG or
NUBIL.
 The results of these calculations will provide the requested NUBIG or NUBIL
reports.
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Process – RBIG / RBIL
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Annual Depreciation Calculation
 Client provides a file for upload of asset dispositions into both FAM FT Book and
FAM NU Book.
 Depreciation is calculated using the appropriate lives and methods in both the FAM
FT Book and FAM NU Book.
 The results of the depreciation calculations are compared in order to determine
the RBIG or RBIL, subject to available NUBIG or NUBIL, respectively.
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Annual Asset Disposition Calculation
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FAM FT Books is utilized to determine the gain or loss on asset dispositions.
RBIG or RBIL is determined from these results and compared to the available
NUBIG or NUBIL.
Optional Projection Reports
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These reports can be produced subject to client assumptions with respect to the
timing of future asset dispositions.
BIG / BIL REPORTS
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NUBIG / NUBIL Reports - These reports compare the fair market
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RBIG / RBIL Depreciation Reports - These reports determine what specific
value of the
assets of the loss corporation to the aggregate adjusted Federal tax basis of such assets
immediately before the ownership change.
amounts of depreciation are attributable to built-in gain or not attributable to built-in loss in
an asset immediately before the change in ownership date during the five year recognition
period.
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RBIG / RBIL Gain / (Loss) Reports - These reports determine the impact, from
disposition, of the RBIG or RBIL on the loss corporations’ Sec. 382 annual limitation or
pre-change loss, respectively, during the five year recognition period. The built-in gain
may increase the Sec. 382 limitation and the built-in loss will define the loss that will be
treated as pre-change loss.
NUBIG / NUBIL REPORTS
Content: These reports compare the fair market value of the assets of the loss
corporation to the aggregate adjusted Federal tax basis of such assets
immediately before the ownership change.
Purpose: NUBIG is the ceiling that the Sec. 382 limitation can be increased
during the recognition period. NUBIL is the governor or limit for the entire amount
of RBIL that can be treated as pre-change loss during the recognition period.
NUBIG / NUBIL REPORT EXAMPLE
RBIG / RBIL - DEPRECIATION REPORT
Content: Compares the actual federal tax depreciation taken into account in
the recognition period tax year to the amount that would have been taken into
account had the asset been sold on the change in ownership date for its FMV.
Purpose: These reports determine what specific amounts of depreciation are
attributable to built-in gain or not attributable to built-in loss in an asset
immediately before the change in ownership date during the five year recognition
period.
RBIG / RBIL DEPRECIATION REPORT EXAMPLE
RBIG / RBIL – GAIN / (LOSS) REPORT
Content: This identifies the amount of NUBIG that becomes RBIG and thus
increases the Sec. 382 limitation. This report also identifies the amount of NUBIL
which becomes RBIL and increases the pre-change loss, subject to the NUBIL
limitations.
Purpose: These reports determine the impact of the recognized built-in gain or
built-in loss, from dispositions, on the loss corporations’ Sec. 382 annual
limitation or pre-change loss, respectively, during the five year recognition period.
RBIG / RBIL GAIN / (LOSS) REPORT EXAMPLE
FAM – BIG SOLUTION BENEFITS
Our FAM – BIG Solution is comprehensive, reliable and valuable.
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Increase Cash Flow – Maximize the utilization of tax loss attributes.
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Increase the Sec. 382 Limitation – Determines the amount of RBIG, resulting in an
increased limitation.
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Limit the Amount of RBIL – Use information obtained from the process to establish
that specific amounts of loss not attributable to built-in loss in an asset immediately
before the change in ownership date. This will limit the amount of pre-change loss.
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Projections – Use to project RBIG or RBIL in recognition period.
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Tax Provision – Use reports to support tax provision.
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Comprehensive Documentation – RMS FAM BIG software generates the reports
required to satisfy the IRS.
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Avoid Excel – Avoid calculating and tracking amounts by hand or in Excel.