Anti-Stuffing and Net Operating Loss
Anti-Stuffing is actually something that I have been whiteness to on a few occasions with an old business partner that I had a acquired. Unfortunately the partnership did not succeed, so I am going to share my love for business and what I had found out about Anti-Stuffing, but not limited to Net Operating Loss companies and how this affects them.
Before 1986, the history of capital gain tax came back to one court ruling. This case was General Utilities and Operating Company v. Helvering, 296 U.S. 200 (1935), which resulted in the General Utilities doctrine. Under this doctrine companies could distribute their corporate ...view middle of the document...
B then decides to sell the stock for a fair market value of $150 and realizes they lost $50 on their transaction. While company A made $50 for selling the stock to B plus the $100 for E&P.
The duplication of loss occurs when company A’s stock has FMV of $100 and a basis of $90. Company B buys the stock for $100, and the stock immediately crashes to $40. B has incurred a loss of $60 while A has lost $50. A has brought upon itself a “built in” cost of $50 which they should not be penalized for because they sold the stock.
Due to all of this the Treasury does not allow companies to claim losses on the sale of stock to subsidiaries. The anti-stuffing rules came about because of all of the confusion and loop holing going on within companies to their subsidiaries. The rule states “that if any transfer of an asset to a subsidiary is followed within two years by a disposition or deconsolidation of stock, basis of the stock will be reduced by an amount sufficient to cause recognition of gain, equal to loss disallowance avoided by reason of the transfer.” (CPA Journal) For example Company A has a basis of $0 of its stock but the FMV is $80. A sells the stock to one of its subsidiaries company B for $80. B then sells off some assets worth $80 bringing their basis up to $160. If B then sold the stock for $80 they would be incurring a loss of $80 but then they decide to give some assets to the main company A worth $80, which looks like they are breaking even with no loss or gain. Under the anti-stuffing law the subsidiary (company B) would have to claim its basis for the stock at $80 giving them an $80 gain on the sale, which would then be taxable. This law keeps companies and their subsidiaries from moving funds and stocks around to stay away from being taxed.
I found a few different codes and numbers defining the anti-stuffing law, used for different sets of laws, for example the Code of Federal Regulations number is 1.1374-9, as for Congress they passed Tax Reform Act of 1986 which was used by the IRS and it was Section 337(d), but for the most part their definitions were the same with different wording or added amendments to further define what can be done and what can’t.
The most up to date definition I could find was the Code of Federal Regulations;
|§ 1.1374-9 Anti-stuffing rule. |
|If a corporation acquires an asset before or during the recognition period with a principal purpose of |
|avoiding the tax imposed under section 1374, the asset and any loss, deduction, loss carry forward, |
|credit, or credit carry forward attributable to the asset is disregarded in determining the S |
|corporation's pre-limitation amount, taxable income limitation, net unrealized built-in gain limitation, |
|deductions against net recognized built-in gain, and credits against the section 1374 tax. |
|[T.D. 8579, 59 FR 66470, Dec....