§ 382. Limitation on net operating loss carryforwards and certain built-in losses following ownership change
(a)
General rule
The amount of the taxable income of any new loss corporation for any post-change year which may be offset by pre-change losses shall not exceed the section
382 limitation for such year.
(b)
Section
382 limitation
For purposes of this section—
(1)
In general
Except as otherwise provided in this section, the section
382 limitation for any post-change year is an amount equal to—
(3)
Special rule for post-change year which includes change date
In the case of any post-change year which includes the change date—
(A)
Limitation does not apply to taxable income before change
Subsection (a) shall not apply to the portion of the taxable income for such year which is allocable to the period in such year on or before the change date. Except as provided in subsection (h)(5) and in regulations, taxable income shall be allocated ratably to each day in the year.
(B)
Limitation for period after change
For purposes of applying the limitation of subsection (a) to the remainder of the taxable income for such year, the section
382 limitation shall be an amount which bears the same ratio to such limitation (determined without regard to this paragraph) as—
(c)
Carryforwards disallowed if continuity of business requirements not met
(1)
In general
Except as provided in paragraph (2), if the new loss corporation does not continue the business enterprise of the old loss corporation at all times during the 2-year period beginning on the change date, the section
382 limitation for any post-change year shall be zero.
(2)
Exception for certain gains
The section
382 limitation for any post-change year shall not be less than the sum of—
(d)
Pre-change loss and post-change year
For purposes of this section—
(1)
Pre-change loss
The term “pre-change loss” means—
(A)
any net operating loss carryforward of the old loss corporation to the taxable year ending with the ownership change or in which the change date occurs, and
(B)
the net operating loss of the old loss corporation for the taxable year in which the ownership change occurs to the extent such loss is allocable to the period in such year on or before the change date.
Except as provided in subsection (h)(5) and in regulations, the net operating loss shall, for purposes of subparagraph (B), be allocated ratably to each day in the year.
(e)
Value of old loss corporation
For purposes of this section—
(f)
Long-term tax-exempt rate
For purposes of this section—
(1)
In general
The long-term tax-exempt rate shall be the highest of the adjusted Federal long-term rates in effect for any month in the 3-calendar-month period ending with the calendar month in which the change date occurs.
(g)
Ownership change
For purposes of this section—
(1)
In general
There is an ownership change if, immediately after any owner shift involving a 5-percent shareholder or any equity structure shift—
(2)
Owner shift involving 5-percent shareholder
There is an owner shift involving a 5-percent shareholder if—
(3)
Equity structure shift defined
(4)
Special rules for application of subsection
(A)
Treatment of less than 5-percent shareholders
Except as provided in subparagraphs (B)(i) and (C), in determining whether an ownership change has occurred, all stock owned by shareholders of a corporation who are not 5-percent shareholders of such corporation shall be treated as stock owned by 1 5-percent shareholder of such corporation.
(B)
Coordination with equity structure shifts
For purposes of determining whether an equity structure shift (or subsequent transaction) is an ownership change—
(C)
Coordination with other owner shifts
Except as provided in regulations, rules similar to the rules of subparagraph (B) shall apply in determining whether there has been an owner shift involving a 5-percent shareholder and whether such shift (or subsequent transaction) results in an ownership change.
(D)
Treatment of worthless stock
If any stock held by a 50-percent shareholder is treated by such shareholder as becoming worthless during any taxable year of such shareholder and such stock is held by such shareholder as of the close of such taxable year, for purposes of determining whether an ownership change occurs after the close of such taxable year, such shareholder—
(i)
shall be treated as having acquired such stock on the 1st day of his 1st succeeding taxable year, and
For purposes of the preceding sentence, the term “50-percent shareholder” means any person owning 50 percent or more of the stock of the corporation at any time during the 3-year period ending on the last day of the taxable year with respect to which the stock was so treated.
(h)
Special rules for built-in gains and losses and section
338 gains
For purposes of this section—
(1)
In general
(A)
Net unrealized built-in gain
(i)
In general
If the old loss corporation has a net unrealized built-in gain, the section
382 limitation for any recognition period taxable year shall be increased by the recognized built-in gains for such taxable year.
(B)
Net unrealized built-in loss
(C)
Special rules for certain section
338 gains
If an election under section
338 is made in connection with an ownership change and the net unrealized built-in gain is zero by reason of paragraph (3)(B), then, with respect to such change, the section
382 limitation for the post-change year in which gain is recognized by reason of such election shall be increased by the lesser of—
(2)
Recognized built-in gain and loss
(A)
Recognized built-in gain
The term “recognized built-in gain” means any gain recognized during the recognition period on the disposition of any asset to the extent the new loss corporation establishes that—
(B)
Recognized built-in loss
The term “recognized built-in loss” means any loss recognized during the recognition period on the disposition of any asset except to the extent the new loss corporation establishes that—
(ii)
such loss exceeds the excess of—
Such term includes any amount allowable as depreciation, amortization, or depletion for any period within the recognition period except to the extent the new loss corporation establishes that the amount so allowable is not attributable to the excess described in clause (ii).
(3)
Net unrealized built-in gain and loss defined
(A)
Net unrealized built-in gain and loss
(i)
In general
The terms “net unrealized built-in gain” and “net unrealized built-in loss” mean, with respect to any old loss corporation, the amount by which—
(ii)
Special rule for redemptions or other corporate contractions
If a redemption or other corporate contraction occurs in connection with an ownership change, to the extent provided in regulations, determinations under clause (i) shall be made after taking such redemption or other corporate contraction into account.
(B)
Threshold requirement
(i)
In general
If the amount of the net unrealized built-in gain or net unrealized built-in loss (determined without regard to this subparagraph) of any old loss corporation is not greater than the lesser of—
the net unrealized built-in gain or net unrealized built-in loss shall be zero.
(4)
Disallowed loss allowed as a carryforward
If a deduction for any portion of a recognized built-in loss is disallowed for any post-change year, such portion—
(A)
shall be carried forward to subsequent taxable years under rules similar to the rules for the carrying forward of net operating losses (or to the extent the amount so disallowed is attributable to capital losses, under rules similar to the rules for the carrying forward of net capital losses), but
(5)
Special rules for post-change year which includes change date
For purposes of subsection (b)(3)—
(A)
in applying subparagraph (A) thereof, taxable income shall be computed without regard to recognized built-in gains to the extent such gains increased the section
382 limitation for the year (or recognized built-in losses to the extent such losses are treated as pre-change losses), and gain described in paragraph (1)(C), for the year, and
(B)
in applying subparagraph (B) thereof, the section
382 limitation shall be computed without regard to recognized built-in gains, and gain described in paragraph (1)(C), for the year.
(6)
Treatment of certain built-in items
(A)
Income items
Any item of income which is properly taken into account during the recognition period but which is attributable to periods before the change date shall be treated as a recognized built-in gain for the taxable year in which it is properly taken into account.
(B)
Deduction items
Any amount which is allowable as a deduction during the recognition period (determined without regard to any carryover) but which is attributable to periods before the change date shall be treated as a recognized built-in loss for the taxable year for which it is allowable as a deduction.
(C)
Adjustments
The amount of the net unrealized built-in gain or loss shall be properly adjusted for amounts which would be treated as recognized built-in gains or losses under this paragraph if such amounts were properly taken into account (or allowable as a deduction) during the recognition period.
(7)
Recognition period, etc.
(8)
Determination of fair market value in certain cases
If 80 percent or more in value of the stock of a corporation is acquired in 1 transaction (or in a series of related transactions during any 12-month period), for purposes of determining the net unrealized built-in loss, the fair market value of the assets of such corporation shall not exceed the grossed up amount paid for such stock properly adjusted for indebtedness of the corporation and other relevant items.
(9)
Tax-free exchanges or transfers
The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection where property held on the change date was acquired (or is subsequently transferred) in a transaction where gain or loss is not recognized (in whole or in part).
(i)
Testing period
For purposes of this section—
(1)
3-year period
Except as otherwise provided in this section, the testing period is the 3-year period ending on the day of any owner shift involving a 5-percent shareholder or equity structure shift.
(2)
Shorter period where there has been recent ownership change
If there has been an ownership change under this section, the testing period for determining whether a 2nd ownership change has occurred shall not begin before the 1st day following the change date for such earlier ownership change.
(3)
Shorter period where all losses arise after 3-year period begins
The testing period shall not begin before the earlier of the 1st day of the 1st taxable year from which there is a carryforward of a loss or of an excess credit to the 1st post-change year or the taxable year in which the transaction being tested occurs. Except as provided in regulations, this paragraph shall not apply to any loss corporation which has a net unrealized built-in loss (determined after application of subsection (h)(3)(B)).
(j)
Change date
For purposes of this section, the change date is—
(k)
Definitions and special rules
For purposes of this section—
(1)
Loss corporation
The term “loss corporation” means a corporation entitled to use a net operating loss carryover or having a net operating loss for the taxable year in which the ownership change occurs. Except to the extent provided in regulations, such term includes any corporation with a net unrealized built-in loss.
(3)
New loss corporation
The term “new loss corporation” means a corporation which (after an ownership change) is a loss corporation. Nothing in this section shall be treated as implying that the same corporation may not be both the old loss corporation and the new loss corporation.
(l)
Certain additional operating rules
For purposes of this section—
(1)
Certain capital contributions not taken into account
(2)
Ordering rules for application of section
(A)
Coordination with section
172
(b) carryover rules
In the case of any pre-change loss for any taxable year (hereinafter in this subparagraph referred to as the “loss year”) subject to limitation under this section, for purposes of determining under the 2nd sentence of section
172
(b)(2) the amount of such loss which may be carried to any taxable year, taxable income for any taxable year shall be treated as not greater than—
Similar rules shall apply in the case of any credit or loss subject to limitation under section
383.
(B)
Ordering rule for losses carried from same taxable year
In any case in which—
(i)
a pre-change loss of a loss corporation for any taxable year is subject to a section
382 limitation, and
(ii)
a net operating loss of such corporation from such taxable year is not subject to such limitation,
taxable income shall be treated as having been offset first by the loss subject to such limitation.
(3)
Operating rules relating to ownership of stock
(A)
Constructive ownership
Section
318 (relating to constructive ownership of stock) shall apply in determining ownership of stock, except that—
(i)
paragraphs (1) and (5)(B) of section
318
(a) shall not apply and an individual and all members of his family described in paragraph (1) of section
318
(a) shall be treated as 1 individual for purposes of applying this section,
(iv)
except to the extent provided in regulations, an option to acquire stock shall be treated as exercised if such exercise results in an ownership change, and
(v)
in attributing stock from an entity under paragraph (2) of section
318
(a), there shall not be taken into account—
(I)
in the case of attribution from a corporation, stock which is not treated as stock for purposes of this section, or
(II)
in the case of attribution from another entity, an interest in such entity similar to stock described in subclause (I).
A rule similar to the rule of clause (iv) shall apply in the case of any contingent purchase, warrant, convertible debt, put, stock subject to a risk of forfeiture, contract to acquire stock, or similar interests.
(B)
Stock acquired by reason of death, gift, divorce, separation, etc.
If—
(iii)
stock is acquired by a person pursuant to any divorce or separation instrument (within the meaning of section
71
(b)(2)),
such person shall be treated as owning such stock during the period such stock was owned by the person from whom it was acquired.
(C)
Certain changes in percentage ownership which are attributable to fluctuations in value not taken into account
Except as provided in regulations, any change in proportionate ownership which is attributable solely to fluctuations in the relative fair market values of different classes of stock shall not be taken into account.
(4)
Reduction in value where substantial nonbusiness assets
(A)
In general
If, immediately after an ownership change, the new loss corporation has substantial nonbusiness assets, the value of the old loss corporation shall be reduced by the excess (if any) of—
(B)
Corporation having substantial nonbusiness assets
For purposes of subparagraph (A)—
(i)
In general
The old loss corporation shall be treated as having substantial nonbusiness assets if at least 1/3 of the value of the total assets of such corporation consists of nonbusiness assets.
(ii)
Exception for certain investment entities
A regulated investment company to which part I of subchapter M applies, a real estate investment trust to which part II of subchapter M applies, or a REMIC to which part IV of subchapter M applies, shall not be treated as a new loss corporation having substantial nonbusiness assets.
(C)
Nonbusiness assets
For purposes of this paragraph, the term “nonbusiness assets” means assets held for investment.
(D)
Nonbusiness asset share
For purposes of this paragraph, the nonbusiness asset share of the indebtedness of the corporation is an amount which bears the same ratio to such indebtedness as—
(E)
Treatment of subsidiaries
For purposes of this paragraph, stock and securities in any subsidiary corporation shall be disregarded and the parent corporation shall be deemed to own its ratable share of the subsidiary’s assets. For purposes of the preceding sentence, a corporation shall be treated as a subsidiary if the parent owns 50 percent or more of the combined voting power of all classes of stock entitled to vote, and 50 percent or more of the total value of shares of all classes of stock.
(5)
Title 11 or similar case
(A)
In general
Subsection (a) shall not apply to any ownership change if—
(i)
the old loss corporation is (immediately before such ownership change) under the jurisdiction of the court in a title 11 or similar case, and
(ii)
the shareholders and creditors of the old loss corporation (determined immediately before such ownership change) own (after such ownership change and as a result of being shareholders or creditors immediately before such change) stock of the new loss corporation (or stock of a controlling corporation if also in bankruptcy) which meets the requirements of section
1504
(a)(2) (determined by substituting “50 percent” for “80 percent” each place it appears).
(B)
Reduction for interest payments to creditors becoming shareholders
In any case to which subparagraph (A) applies, the pre-change losses and excess credits (within the meaning of section
383
(a)(2)) which may be carried to a post-change year shall be computed as if no deduction was allowable under this chapter for the interest paid or accrued by the old loss corporation on indebtedness which was converted into stock pursuant to title 11 or similar case during—
(D)
Section
382 limitation zero if another change within 2 years
If, during the 2-year period immediately following an ownership change to which this paragraph applies, an ownership change of the new loss corporation occurs, this paragraph shall not apply and the section
382 limitation with respect to the 2nd ownership change for any post-change year ending after the change date of the 2nd ownership change shall be zero.
(E)
Only certain stock taken into account
For purposes of subparagraph (A)(ii), stock transferred to a creditor shall be taken into account only to the extent such stock is transferred in satisfaction of indebtedness and only if such indebtedness—
(F)
Special rule for certain financial institutions
(i)
In general
In the case of any ownership change to which this subparagraph applies, this paragraph shall be applied—
(ii)
Special rule for depositors
For purposes of applying this paragraph to an ownership change to which this subparagraph applies—
(I)
a depositor in the old loss corporation shall be treated as a stockholder in such loss corporation immediately before the change,
(iii)
Changes to which subparagraph applies
This subparagraph shall apply to—
(I)
an equity structure shift which is a reorganization described in section
368
(a)(3)(D)(ii) [1] (as modified by section
368
(a)(3)(D)(iv)),[1] or
(II)
any other equity structure shift (or transaction to which section
351 applies) which occurs as an integral part of a transaction involving a change to which subclause (I) applies.
This subparagraph shall not apply to any equity structure shift or transaction occurring on or after May 10, 1989.
(6)
Special rule for insolvency transactions
If paragraph (5) does not apply to any reorganization described in subparagraph (G) of section
368
(a)(1) or any exchange of debt for stock in a title 11 or similar case (as defined in section
368
(a)(3)(A)), the value under subsection (e) shall reflect the increase (if any) in value of the old loss corporation resulting from any surrender or cancellation of creditors’ claims in the transaction.
(m)
Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section and section
383, including (but not limited to) regulations—