The section 1374 approach relies on the accrual method of accounting to identify income or deduction items as RBIG or RBIL. An accrual-basis taxpayer might not have any income or deduction items treated as RBIG or RBIL under this method, while a cash-basis taxpayer will.
In accordance with IRC section 382(h)(2)(B), depreciation and amortization deductions are treated as RBIL except to the extent that the loss company can establish that the deduction is not attributable to the excess of the tax basis of the assets over the fair market value (FMV) as of the change date.
1374 safe harbor is elected (which applies the built-in-gain rules of S corporations), RBIL tends to be narrowly defined.
174(b) or 59(e) election are not treated as RBIL under the above definition.
Similarly, the post-conversion payment of their accounts payable and accrued expenses as of the beginning of the recognition period generally will be treated as RBIL. As a result, where a cash-basis corporation merely operates the business in the normal course, the items of income recognized early in the recognition period could give rise to the built-in gains tax.
There is no provision in the Code for carrying forward an unused RBIL or deduction for offset against an RBIG or built-in income item recognized in a subsequent tax year.
The taxpayer asserted that it could include the full amount of its RBIL when computing its NOL for the recognition year because Sec.
382(h)(4) provides that, if a deduction for any portion of an RBIL is "disallowed" for any post-change year, such portion is carried forward to subsequent tax years but is subject to limitation under Sec.
Except to the extent the loss corporation establishes that the amount is not attributable to the excess of an asset's adjusted basis over its FMV on the change date, those amounts are treated as RBIL, regardless of whether they accrued for tax purposes before the change date.
However, it identifies RBIG and RBIL items by comparing a loss corporation's actual items of income, gain, deduction and loss with those that would have resulted had a Sec.
The application of the RBIG or RBIL
rules can lead to incongruous results.
The excess is the S corporation's "partnership RBIG" (or "partnership RBIL
" if a negative number).