Source: https://www.currentfederaltaxdevelopments.com/blog/2018/5/8/irs-modifies-safe-harbor-rbig-and-rbil-calculations-for-section-382-due-to-tcja-changes-to-bonus-depreciation
Timestamp: 2019-04-20 04:45:05+00:00

Document:
In Notice 2018-30 the IRS has modified certain safe harbor calculations for recognized built in gain (RBIG) and recognized built in loss (RBIL) as it relates to limitations under IRC §382. The IRS has revised guidance found in Notice 2003-65 to modify the safe harbor rules found in the IRC §§338 and 1374 approaches described in that ruling.
IRC §382 serves to limit the ability to “buy losses” in an existing corporation, limiting the corporation’s ability to claim pre-ownership change losses against post-change taxable income. That ability is limited by the §382(b) limitation for each taxable year.
Section 382(h) provides rules for the treatment of built-in gain or loss with respect to assets owned by the loss corporation at the time of its ownership change. Under that provision, if, at the time of an ownership change, a loss corporation has a net unrealized built-in gain (NUBIG), any RBIG for a taxable year within the 5-year recognition period following the ownership change increases the section 382 limitation for that year, but not above the amount of the NUBIG. Similarly, if a loss corporation has a net unrealized built-in loss (NUBIL), any RBIL for a taxable year within the 5-year recognition period is a pre-change loss subject to the section 382 limitation, but not above the amount of the NUBIL.
The IRS provided in Notice 2003-65 two safe harbor methods that could be used by a taxpayer to recognize that built in gain and/or built in loss over the years in question. Generally, the rule looks to provide a deemed recognized gain in a year equal to the additional depreciation that could have been claimed if that built-in gain was actually part of the basis of the asset. It also provides a similar calculation to take into the excess depreciation that is being claimed on assets with a fair value that is less than their basis at the time of the ownership change.
Notice 2003-65, 2003-2 C.B. at 749. As described in Section IV of Notice 2003-65, under the 338 approach, certain assets generate RBIG or RBIL even if not disposed of during the recognition period. Specifically, the 338 approach treats as RBIG or RBIL (as the case may be) the difference between the loss corporation’s actual allowable cost recovery deduction with respect to an asset and the hypothetical cost recovery deduction that would have been allowable with respect to the asset had an election under section 338 been made for a purchase of the loss corporation’s stock.
The 338 approach assumes that, for any taxable year, an asset that had a built-in gain on the change date generates income equal to the cost recovery deduction that would have been allowed for such asset under the applicable Code section if an election under section 338 had been made with respect to the hypothetical purchase. Therefore, with respect to an asset that had a built-in gain on the change date, the 338 approach treats as RBIG an amount equal to the excess of the cost recovery deduction that would have been allowable with respect to such asset had an election under section 338 been made for the hypothetical purchase over the loss corporation’s actual allowable cost recovery deduction.
A similar approach is used to compute the recognized built-in loss, determining the “excess” depreciation being claimed by the entity.
All was well until the Tax Cuts and Jobs Act, which expanded IRC §168(k)’s bonus depreciation, now set at 100%, to apply to used property—which would include property that would be part of a §338 election. Thus, the calculations specified under the above methods would end up generating very different numbers than occurred prior to TCJA.
…[T]he Treasury Department and the IRS have determined that the hypothetical cost recovery deduction using the additional first year depreciation allowed under section 168(k) does not provide a reasonable estimate of the income or expense produced by a built-in gain or loss asset during the recognition period. Thus, the use of this additional first year depreciation would invalidate the assumption that underlies the section 338 approach, as set forth above.
The IRS notes that the problem also spills over to a portion of the alternative safe harbor §1374 approach described in the 2003 notice.
One acceptable method is to compare the amount of the amortization deduction actually allowed to the amount of such deduction that would have been allowed had the loss corporation purchased the asset for its fair market value on the change date. The amount by which the amount of the actual amortization deduction does not exceed the amount of the hypothetical amortization deduction is not RBIL.
Notice 2003-65, 2003-2 C.B. at 749. This method is essentially the same as the 338 approach for determining RBIL.
Thus, the IRS again rules that the bonus depreciation provisions of IRC §168(k) are not to be used for this approach either.
The notice is effective for ownership changes occurring after May 8, 2018.

References: §382
 §382
 §382
 §168
 §338
 §1374
 §168