Originally published in July 2003

TABLE OF CONTENTS

I. INTRODUCTION

II. SUMMARY OF PROVISIONS AFFECTING NOL CARRYOVERS AND OTHER FAVORABLE TAX ATTRIBUTES

  1. Section 172 - Net Operating Loss Deduction
  2. Section 381 - Carryovers in Certain Corporate Acquisitions
  3. Old Section 382 - Special Limitations on Net Operating Loss Carryovers
  4. Old Section 383 -- Special Limitations on Unused Business Credits, Research Credits, Foreign Taxes, and Capital Losses
  5. Libson Shops Doctrine
  6. Consolidated Return Regulations
    1. Separate Return Limitation Year Rules
    2. Built-in Deduction Limitation
    3. Consolidated Return Change in Ownership
      1. Repeal of the CRCO Rules
      2. Summary of Old CRCO Rules
  7. Section 269 - Acquisitions Made to Avoid or Evade Income Tax
  8. Section 482 -- Allocation of Income and Deductions Among Taxpayers
  9. Section 338 -- Certain Stock Purchases Treated as Asset Acquisitions
  10. Section 1371(b) -- Rules Regarding Carryovers Carrybacks of Subchapter S Corporations
  11. Section 384 -- Acquisitions Involving Gain Corporations

III. NEW SECTION 382 -- INTRODUCTION

  1. Reasons for Change
  2. General Background
    1. Policy Considerations Behind Limitations
      1. Prevention of loss trafficking
      2. Prevention of windfalls
      3. Preventing losses of one business from offsetting gains of an unrelated business
      4. Losses of certain corporations should not be subsidized by the Government
      5. Preventing distortion of business transactions
    2. Possible Modes of Regulation
      1. Refundability
      2. Free transferability
      3. Limitation based on stock ownership
      4. Limitations based on continuity of business enterprise
  3. Legislative Background and Other Developments
  4. The Neutrality Principle
    1. Neutrality as to Corporate Owners
    2. Neutrality as to Business Decisions
    3. New Section 382

IV. OVERVIEW OF NEW SECTION 382

  1. Required Change in Ownership
  2. Consequences of an Ownership Change
  3. NOLs Subject to Limitation
  4. Example
    1. Fact Pattern
    2. Tax Consequences Under Section 382
  5. Effective Date

V. OWNERSHIP CHANGE -- A DETAILED ANALYSIS

  1. General Analysis
    1. Ownership Change
      1. Definition
      2. Legislative history
    2. Determination Events -- Testing Date
    3. Measuring Changes in Stock Ownership
  2. Defined Terms
    1. Owner Shift Involving a 5-Percent Shareholder
    2. Equity Structure Shift
    3. Stock
      1. The general rules
      2. Treating "stock" as not stock
      3. Treating nonstock interests as
      4. Indirect ownership interest
      5. Valuation rules -- Discounts and Premiums
    4. Loss Corporation
      1. In general
      2. Impact of section 381(a) transactions
      3. Separate accounting for losses
      4. End of separate accounting
      5. Effect of Treas. Reg. § 1.382-1(a)(iv)
    5. Old Loss Corporation
    6. New Loss Corporation
    7. Testing Period
      1. General rule
      2. Effect of recent ownership change
      3. Shorter period where all losses arise during the testing period
    8. Change Date
  3. Application of the Ownership Change Rules -- Owner Shifts Involving a 5-Percent Shareholder
    1. Taxable Purchase of Stock
    2. Redemptions
    3. Multiple Owner Shifts
    4. Split-off Transaction
  4. Application of the Ownership Change Rules -- Equity Structure Shifts
    1. Straight "A" Reorganization
    2. Successive Equity Structure Shifts
  5. Application of the Ownership Change Rules – Combinations
    1. Owner Shift Followed by a Merger
    2. Merger Followed by an Owner Shift
  6. The Constructive Ownership Rules
    1. Family Attribution
      1. General rule
      2. Special limitations
      3. Overlapping families
    2. Entity Attribution
      1. In general
      2. No attribution through nonstock interests
      3. Limitation on attribution from certain entities
      4. Example – triangular A reorganization
      5. Example -- commonly controlled corporations
      6. Example -- commonly controlled corporations
    3. Back Attribution
    4. Option Attribution -- Final Regulations
      1. Definitions
      2. Rules
      3. Ownership test
      4. Control test
      5. Income test
      6. Factors used in applying the ownership, control, and income tests
      7. Safe harbors
      8. Additional rules
      9. Testing date
      10. Subsequent treatment of options
      11. Application to ownership change
      12. Effective date
    5. Option Attribution – Former Temporary Regulations (No Longer Applicable)
      1. In general
      2. Examples
      3. Interests similar to options
      4. Evergreen rule
      5. Contingencies
      6. Effect of deemed exercise of options on outstanding stock
      7. Effect on value of loss corporation
      8. Options that lapse or are forfeited
      9. Actual exercise of options
      10. De minimis pre-change losses
      11. Disregarding transfers of options
      12. Exempt options
  7. 5-Percent Shareholder Rules
    1. The Statute
    2. The Regulations -- Definitions
      1. First tier entity
      2. Higher tier entity
      3. Highest tier entity
      4. Public group
      5. Public shareholder
      6. Public owner
      7. 5-percent owner
      8. 5-percent shareholder
    3. Determining 5-Percent Shareholders and Their Percentage Interest
      1. In general
      2. Analysis of highest tier entities
      3. Analysis of higher tier and first tier entities
      4. Analysis at the loss corporation level
      5. Determining percentage stock interest
      6. Stock ownership presumptions
    4. Illustrations of the Aggregation Rules
      1. Identifying 5-percent shareholders -- example one
      2. Identifying 5-percent shareholders -- example two
      3. Takeover by publicly-held corporation
      4. Spin-off transaction
  8. Segregation Rules -- Loss Corporation Level
    1. In General
    2. Segregation Transactions
      1. Certain equity structure shifts and section 1032 transactions
      2. Redemption-type transactions
      3. Stock acquired through rights issued by the loss corporation
      4. Other transactions
      5. Issuance of rights to acquire loss corporation stock
    3. Multiple Transactions
    4. Acquisitions Following Segregation
    5. De Minimis Public Groups
  9. Special Segregation Rules -- First Tier or Higher Tier Entity Level
    1. Disposition of Loss Corporation Stock
    2. Disposition of Interests in First or Higher Tier Entities
      1. In general
      2. Merger of a first tier entity
      3. Forward triangular merger
      4. B reorganization
      5. Holding company formation
    3. Redemption-Type Transaction
  10. New Regulations Modifying Segregation Rules
    1. Small Issuance Exception
    2. Cash Issuance Exception
    3. Limitation on Exempted Stock
    4. Proportionate Acquisition of Exempted Stock
    5. Exception for Equity Structure Shifts
    6. Transitory Ownership by Underwriter
    7. Certain Related Issuances
    8. Application to Options
    9. Application to First Tier and Higher Tier Entities
    10. Certain Non-Stock Ownership Interests
    11. De Minimis Rule
    12. Effective Date
    13. Examples
  11. Certain Changes Not Taken Into Account
    1. Stock Acquired by Death, Gift or Divorce
    2. Acquisitions by ESOPs
    3. Changes Attributable to Fluctuations in Value
  12. Operating Rules -- Presumptions and Duties Regarding Stock Ownership
    1. Identifying 5-Percent Shareholders
      1. Publicly traded stock
      2. Determining changes in interest
    2. Actual Knowledge Regarding Stock Ownership
    3. Ownership Structured to Avoid Section 382
    4. Duty to Inquire as to Stock Ownership
    5. Annual Statement by Loss Corporations
    6. Records Maintenance
  13. Effective Dates
    1. New Section 382
      1. General rule
      2. Plan of reorganization
      3. Indirect ownership changes
      4. Bankruptcy proceedings
      5. Earliest commencement of the testing period
      6. Transition rules
      7. Option rules
    2. Sunset Provisions for Old Section 382
    3. The 1976 Version of Section 382

VI. CONSEQUENCES OF AN OWNERSHIP CHANGE

  1. Annual Limitation on Earnings
    1. The Statute
    2. Taxable Income
    3. Post-Change Year
    4. Pre-Change Loss
    5. Section 382 Limitation
      1. General rules
      2. Determining the value of the old loss corporation
      3. The long-term tax-exempt rate
      4. Carryover of unused limitation
      5. Special rule for short taxable years
    6. Ordering Rules
      1. Coordination with section 172(b)
      2. Losses from the same year
  2. Special Rules for Mid-Year Ownership Changes
    1. Taxable Income
    2. Net Operating Loss
    3. Section 382 Limitation
  3. Special Rules for Built-in Gains and Losses
    1. Net Unrealized Built-in Gain or Loss
      1. Definition
      2. Example
      3. Special rule for redemptions
      4. Special rule for computing net unrealized built-in loss
      5. Threshold test
      6. Importance of the threshold
    2. Recognized Built-In Gains
      1. In general
      2. Definition
      3. Limitation
      4. Gains recognized beyond the recognition period
    3. Recognized Built-In Losses
      1. In general
      2. Definition
      3. Limitation
      4. Accrued deductions
      5. Losses recognized beyond the recognition period
      6. Carryover of disallowed built-in losses
    4. Post-Change Years that Include the Change Date
      1. Prorating taxable income
      2. Section 382 limitation
      3. Comparisons
      4. Tax-Free Transactions
    5. Closing-of-the-Books Election
      1. General rule
      2. Election
      3. Unified elections for consolidated and controlled groups
      4. Operating rules
      5. Coordination with other rules
      6. Examples
  4. Special Anti-Abuse Provisions
    1. Capital Contributions
      1. Contributions received as part of a plan
      2. Irrebuttable presumption
      3. Scope of provision
      4. Administrative Guidance
      5. Conversions of debt
      6. Adjustment to value
    2. Nonbusiness Assets
      1. Definitions
      2. Look-through rule
      3. Reduction in value
      4. Purpose of the rule
    3. Interrelationship of Provisions
  5. Continuity of Business Enterprise Requirement
    1. In General
    2. Consequences of Failing the Test
      1. In general
      2. Exception
    3. Purpose of the Rule
    4. Objections to the Rule
  6. Consequences of an Ownership Change -- Application
    1. General Operation of Section 382
    2. Built-in Gains

VII. BANKRUPT CORPORATIONS AND TROUBLED THRIFT INSTITUTIONS

  1. Section 382(l)(5)
  2. The Section 382(l)(5) Final Regulations
    1. Definition of Qualified Creditors
      1. Conceptual framework
      2. General rules of the final regulation
      3. Duty of inquiry
  3. Section 382(l)(6)
  4. The Section 382(l)(6) Final Regulations
    1. Conceptual Framework
    2. Value Increases
      1. The stock value test
      2. The Asset value test
    3. Coordination Rules
      1. Certain capital contributions
      2. Redemptions or other corporate contractions
      3. Substantial nonbusiness assets
    4. Miscellaneous
    5. Effective Date
  5. Reorganizations of Financially Troubled Thrift Institutions

VIII.AUTHORITY TO ISSUE REGULATIONS

  1. In General
  2. Successive Ownership Changes
  3. Short Taxable Years
  4. Pass-Thru Entities
  5. Controlled Group Rules
    1. Background
    2. Section 382 Limitation with Respect to Controlled Group Loss
    3. Restoration of Value
    4. Disposal and Reacquisition of Controlled Group Stock
    5. Rules Preventing Double Reduction
    6. Coordination with Consolidated Section 382 Regulations

IX. INTERRELATIONSHIP OF SECTION 382 WITH SELECTED OTHER PROVISIONS

  1. Section 269
  2. Consolidated Return Provisions
  3. Section 338
    1. One-Step Acquisitions
    2. Two-Step Acquisitions
  4. Section 381 -- Impact of Subsequent Events
  5. Section 383

X. PLANNING TRANSACTIONS

  1. Avoiding Ownership Changes
    1. Issuing Debt Instruments
    2. Sale or Lease of L's Assets
    3. Subsidiary Tracking Stock
  2. Increasing the Section 382 Limitation
    1. Corporate Combinations Prior to the Ownership Change
    2. Leveraged Buyout Transactions
  3. General Planning
    1. L Purchases Assets of P
    2. L Acquires P Stock
  4. Monitoring Stock Ownership

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