Net Operating Losses and Other Tax Attributes — Sections 381, 382, 383, 384, and 269 (Portfolio 780)

Tax Management Portfolio, Net Operating Losses and Other Tax Attributes — Sections 381, 382, 383, 384, and 269, No. 780-4th, analyzes Net Operating Loss and Credit Carryovers during and after a change of corporate ownership.

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Tax Management Portfolio, Net Operating Losses and Other Tax Attributes — Sections 381, 382, 383, 384, and 269, No. 780-4th, analyzes Net Operating Loss and Credit Carryovers during and after a change of corporate ownership.
Analysis begins with the basic concept of a Net Operating Loss carryover under §172 of the Internal Revenue Code.
The next step is an examination of the rules of §381 that permit corporate taxpayers to preserve Net Operating Loss and other tax attribute carryovers following an ownership change.

Following an ownership change, the Internal Revenue Code contains limitations on the use of those carryovers to prevent “trafficking in loss carryovers. The first of those limitations is §382. Section 382 limits the income against which the Net Operating Loss Carryovers (and Net Operating Losses in the year of the change) can be deducted. Section 383 applies similar limitations to a corporation's income (or tax liability) against which tax attributes (other than Net Operating Losses) can be applied. Section 384 limits the use of pre-existing Net Operating Losses against acquired built-in gains.

Section 382 was completely rewritten in 1986. Section 383 was created at the same time. Section 384 was added to the Internal Revenue Code one year later.

Net Operating Loss and other tax attribute carryovers have come to be considered a form of corporate asset. To protect that asset and to seek to reduce exposure to limitations on that asset, a number of widely-held corporations attempt to discourage future stock acquisitions that might trigger the limitations of §382 or §383. Those protections have developed in the form of Tax Attribute Protection (TAP) Plans or Charter Amendments. Both types of protections are products of the traditional anti-takeover plans that have come to be known as “Poison Pill Plans.” This portfolio looks at TAP Plans and Charter Amendments in detail.

The other important limitation is IRS's long-standing power to disallow deductions and credits that are acquired or used for the primary purpose of avoiding or evading tax. This IRS power is found in §269. Application of §269 to Net Operating Loss and other tax attribute carryovers is also reviewed in this portfolio.

Finally, various historical issues involving Net Operating Loss transfers are the subject of the last part of this portfolio. While some of those rules are now extinct, they are discussed in summary in order to provide a historical context for the adoptions by Congress of §§382, 383 and 384.


Lewis T. Barr, B.S. in Economics, Wharton School of Finance, University of Pennsylvania (1964); J.D., University of Michigan Law School (1967); member of Ohio Bar, American College of Tax Counsel, American Law Institute, American College of Trust and Estate Counsel; contributor to various tax publications; lecturer at various tax institutes and presenter at tax programs and webinars.


Detailed Analysis

I. Net Operating Losses - In General

A. Section 172

1. Development

a. Net Operating Loss

b. Carrybacks and Carryovers

c. Taxable Year

d. History

e. Bypassing the Carryback Years

f. Special Relief

2. Application

a. Sequence

b. Election

c. Benefits

3. Corporate Equity Reduction Transactions

a. Limited Carrybacks

b. The Transaction

c. Loss Portion Affected

d. Rules of Application

e. Regulations

B. The Development of Limitations

1. Early Judicially Developed Limits

2. Section 269

3. The Statutory Pattern

C. Format

II. Section 381 - Net Operating Losses and Corporate Acquisitions

Introductory Material

A. Tax Attribute Transfers

B. Application to Net Operating Losses

C. Acquisitions in Which the Net Operating Loss May Carry Over

1. Subsidiary Liquidations

a. Section 332

b. No Transfer to Parent in “Purchase-Type” Transaction

(1) Section 338

(2) Effect of a Liquidation

c. Effect of Subsidiary's “Excessive Debt”

2. Qualifying Reorganizations

a. “A” Reorganizations

b. “C” Reorganizations

c. Nondivisive “D” Reorganizations

d. “F” Reorganizations

(1) Limitation to One Active Corporation

(2) Proposed Regulations Identifying Requirements for an “F” Reorganization

e. “G” Reorganizations

3. Complete Acquisitions Not Required

4. Effect of Other Sections

D. Timing of the Carryover Deduction

1. Acquired Corporation's Taxable Year

2. Succession to Carryovers

3. Taxable Years

E. Acquisition-Year Limitation

1. Distribution or Transfer on Last Day of Acquiring Corporation's Taxable Year

2. Distribution or Transfer Other Than on Last Day of Acquiring Corporation's Taxable Year

3. Subsequent Years

4. Aggregate Net Operating Loss Carryovers

5. Multiple Acquisitions on One Date

6. Multiple Acquisitions on Different Dates

a. Post-acquisition Income Defined

b. If Post-acquisition Income Does Not Exceed Aggregate Carryovers

c. If Post-acquisition Income Exceeds Aggregate Carryovers

F. Deducting Net Operating Losses

1. Sequence for Deduction of Net Operating Losses

2. Mid-Year Acquisitions

a. Pre-acquisition Part-Year

b. Post-acquisition Part-Year

c. Division of Income

d. Limitation on Deductions

G. Other Operating Rules

1. Date of Distribution or Transfer

2. Only One Acquiring Corporation

3. Qualifying Reorganizations and Liquidations Within a Consolidated Group

H. Carrybacks

1. In General

2. “F” Reorganizations

3. The “Other” Reorganizations

4. CERTs

5. Carrybacks of Consolidated Net Operating Losses

III. Ownership Change Limitations - Section 382

Introductory Material

A. In General

B. Ownership Change

1. Testing Date

a. Owner Shifts and Equity Structure Shifts

b. Option Transactions

c. Information Statement

d. Records

e. 2008 Testing Date Relief

2. The Transaction

a. Owner Shift

(1) “Shift” Transactions

(2) Overlap With Equity Structure Shifts

(3) Exclusions

b. Equity Structure Shift

(1) Receipt or Retention

(2) Tax-Free Reorganizations

(3) Taxable Reorganization-Type Transactions

c. Publicly Held Companies

(1) Public Offerings

(2) Going Private

d. Multiple Transactions

e. Corporate Separations

f. Recapitalizations

g. Consolidated Groups

3. The Ownership Increase

a. Lowest Percentage of Ownership

b. Predecessor Corporation

c. Ownership Increase Relief

4. The Testing Period

a. Effective Date Exception

b. Successive Ownership Changes

c. First Day of Losses

5. Five Percent Shareholders

a. Aggregation of Shareholders Owning Less Than Five Percent

b. Segregation

c. Acquisitions from Multiple Groups

d. Rules of Convenience and Presumptions

e. Publicly Held Corporations

(1) Reliance on SEC Filings

(2) Ownership by Mutual Funds and Pension Plans

(3) Stock Transfer Restrictions

f. Actual Knowledge

g. Identifying the Shareholders

h. Avoidance Purpose

C. Stock

1. Inclusions and Exclusions

a. Non-Stock as Stock

b. Stock as Non-Stock

c. Three Factors

(1) Growth Potential

(2) Resulting in an Ownership Change

(3) Excess Pre-Change Losses

2. Attribution

a. Families

b. Entities

(1) Partnerships

(2) Estates

(3) Trusts in General

(4) Employer Trusts

(5) Corporations

c. Limited Attribution to Entities

d. Options, Warrants and Similar Interests

(1) Identifying Options and “Other Interests”

(2) 1987 Temporary Regulations

(3) 1992 Proposed Regulations

(4) 1994 Final Regulations

(a) The Ownership Test

(b) The Control Test

(c) The Income Test

(d) The “A Principal Purpose” Standard

(e) Safe Harbors

(f) Indirect Transfers

(g) Non-Corporate Entities

(h) Interests Similar to Options

(i) Options Treated as Exercised

(5) Excepted Transfers

(6) Non-Stock Rule Inapplicable

(7) Effective Date

(a) November 5, 1992

(b) The Control Test

(c) Transition Rule for Deemed Exercise

(d) Election of Temporary Regulations

(8) Deemed Exercise Relief

3. Death, Gifts and Marital Transfers

4. Fluctuations in Value

5. The Aggregation Rules

a. Definitions

(1) Entity

(a) Group with a Common Understanding or Objective

(b) Excluded Actions

(2) Public Shareholder

(3) Direct and Indirect Ownership

b. Public Group

c. Group Ownership

d. Adjustments

e. Applying the Aggregation Rules

6. The Segregation Rules

a. The Statutory Directive

b. Regulations

c. Segregation Transactions

(1) Equity Structure Shifts

(2) Stock Issuances

(3) “B” Reorganizations

(4) Redemptions

(5) Options

d. Transfers Involving First-Tier and Higher-Tier Entities

e. Distinct Groups

f. Presumptions of No Cross Ownership

g. Exceptions

(1) Small Issuance Exception

(2) Cash Issuance Exception

(3) Applications

(4) Effective Dates

h. Multiple Transactions

i. Proportionate Acquisitions

j. Combinations

k. Later Acquisitions

l. Aggregation and Attribution

m. Mutual Funds

7. Determinations Based on Value

8. Other Securities

9. Worthless Stock

10. Economic Ownership

11. Repealed Exception for ESOPs

D. The Loss Corporation

1. Identifying the Loss Corporation

2. Distributor or Transferor Loss Corporation

a. Continuation of Existence

b. End of Continued Existence

3. Separate Accounting

4. Successor and Predecessor Corporations

5. Old Loss Corporation

6. New Loss Corporation

7. Taxable Income

8. No Limitation of Pre-Change Income

9. No Limitation of Post-Change Losses

10. Combinations of Multiple Loss Corporations

11. Carryovers of Pre-Change Losses

E. Pre-Change Losses

1. Definition

2. Change Date

a. The Last Component of an Ownership Change

b. Year-End Change

c. Mid-Year Change

(1) Daily Proration

(2) Notice 87-79

(3) Private Letter Rulings

(4) Final Regulations

(a) Special Operating Rules

(b) Consistency with Section 383

(c) Alternative Minimum Tax

(d) Consolidated Return Allocations

(e) Netting Income and Loss of the Change Year

(f) Filing Extensions

F. The Section 382 Limitation

1. Value of the Old Loss Corporation

a. Value

b. Stock

c. When Value Determined

d. Redemptions and Other Corporate Contractions

e. Anti-Stuffing Rule

(1) Disqualified Capital Contributions

(2) Avoid or Increase a Limitation

(3) Non-Avoidance Transactions

(4) Anti-Stuffing Rule Relief

f. Substantial Non-Business Assets

(1) Fair Market Value Test

(2) Controlled Subsidiaries

(3) Integral Assets

(4) Non-Business Indebtedness

(5) Anti-Stuffing and Non-Business Assets

g. Bankruptcy and Insolvency

h. Adjustments

i. Controlled Groups

(1) General Value Reduction Rule

(2) The Value Restoration Election

(a) Limitation

(b) Election Procedure

(c) Election Extension

(3) Other Rules of Reduction/Restoration Application

2. Long-Term Tax-Exempt Rate

3. Carryover of Unused § 382 Limitation

4. Applying the § 382 Limitation to the Year of Change

a. Mid-Year Ownership Change

b. Pre- and Post-Change Periods

c. Daily Proration

5. Multiple Ownership Changes

6. Short Taxable Years

7. Recognized Built-in Gains and § 338 Gains

G. Continuity of Business

1. Continuity Requirements

a. The Historic Business

b. A Significant Portion of the Assets

c. Discontinuing the Active Business

2. Two-Year Period

3. Complete Disallowance

4. Exception for Certain Gains

5. Consolidated Groups

H. Built-In Gains and Losses

1. Net Unrealized Built-In Gain or Loss

a. Definitions

b. Special Rule for Stock Acquisitions

c. Redemptions

d. The De Minimis Rule

(1) The Assets

(2) The Threshold

e. Appraisals

2. The Recognition Period

a. Five-Year Period

b. Recognition Period Taxable Year

3. Recognized Built-In Gains

a. Establishing the Gain

b. Increasing the § 382 Limitation

c. Accrued Income Items

4. Recognized Built-In Losses

a. Establishing the Loss

b. Treated as Pre-Change Loss

c. Accrued Deductions

d. Regulations for Nonrecognition Transactions

5. Notice 2003-65

a. The 1374 Approach

b. The 338 Approach

c. Effect of the Notice

I. Special Rules for Bankruptcy Proceedings

1. Regulations

2. No § 382 Limitation

3. Title 11 Case

4. Retention of Control

a. Qualified Creditors

b. Qualified Indebtedness

(1) No Attribution

(2) Meaning of “Ordinary Course”

(3) Continuous Ownership

(4) Disqualification of Certain Debt After Creditor Ownership Change

(5) Tacking Ownership of Indebtedness

(6) Tacking by Substitution

(7) Claimants

c. Application of the Regulations

5. Option Attribution in Bankruptcy

a. General Rule on Option Attribution

b. Separate Option Attribution Rule for Bankruptcy Exception Ownership Requirements

c. Special Rules for Certain Bankruptcy Options

d. Effect of Regular Option Attribution Rules

6. Reduction of Carryovers

a. The 1995 Change

b. Repeal of the Debt-for-Stock Exception

c. Interest on Converted Debt

7. No Continuity of Business Requirement

8. Subsequent Ownership Change

9. Election-Out Privilege

a. Election-Out Irrevocable

b. Election-Out Due Date

c. Form of Election-Out

d. Election-Out Decision

(1) Benefits

(2) Disadvantages

10. Value After Ownership Change

a. Value of the Stock

(1) Coordination Provisions

(2) Anti-Abuse Provision

(3) Limitation on Value

b. Value of the Assets

(1) Coordination Provisions

(2) Intangible Assets

c. Successive Ownership Changes

d. Effective Date

11. Application of § 269

a. Business Activity Requirement

b. The Bankruptcy Code

c. Timing of Creditor Ownership

12. Thrift Institutions

J. Anti-Avoidance Measures

1. Anti-Avoidance Provisions in § 382

a. Anti-Stuffing Rule

b. Nonbusiness (Passive) Assets Rule

2. Section 382 Regulations

a. Stock Ownership

b. Section 382(m)

(1) Successive Ownership Changes

(2) Short Taxable Years

(3) Avoidance Prevention

(4) Aggregation and Segregation in One Corporation

(5) Groups

c. Other Areas

3. The Traditional Limitations

K. Consolidated Groups

1. SRLY Changes

2. Application of § 382 Principles

a. Loss Groups and Subgroups

b. The Consolidated § 382 Limitation

c. Change of Ownership

d. Section 382 Limitation

e. Continuity of Business

f. New Loss Members

g. Departing Loss Members

h. Re-attributed Losses

i. Adjustment of Apportionment

j. Section 383

k. Applications

L. 2008-2009 § 382 Limitation Guidance

M. Section 382(n)

N. Effective Dates

1. Ownership Changes

2. Repeal of 1976 Rules

IV. Other Tax Attributes - Section 383

A. In General

B. Pre-Change Credits

1. General Business and Minimum Tax Credits

2. Excess Foreign Tax Credits

C. Pre-Change Capital Losses

D. Change Year

E. The § 383 Credit Limitation

F. Limitation on Pre-Change Credits

G. Ordering Rules

H. Unused Limitations

I. Special Rules

J. Consolidated Returns

K. Effective Date

V. Limitation on Use of Pre-acquisition Losses - Section 384

A. In General

B. The Acquisition

1. Stock Acquisition Rule

2. Asset Acquisition Rule

3. Gain Corporation

C. Recognized Built-in Gains

1. Disposition of Assets

2. Net Unrealized Built-in Gain

3. The De Minimis Rule

4. Income Items

5. Limitation

D. Pre-acquisition Losses

1. Defined

2. Excess Credits and Net Capital Losses

3. Pre-acquisition Losses of the Gain Corporation

4. Post-acquisition NOLs

E. The Limitation Period

1. Acquisition Date

2. Recognition Period

F. Common Control

G. Predecessors and Successors

H. Ordering Rules

I. Regulations

VI. Tax Avoidance Limitation - Section 269

A. In General

B. Acquisitions

1. Acquisitions of Corporate Control

a. Person

b. Control

c. Ownership

2. Acquisition of Corporate Property with Carryover Basis

C. Tax Avoidance Motive

1. Evasion or Avoidance of Federal Income Tax

2. Principal Purpose

a. Determining the Principal Purpose

b. When the Determination Is Made

c. Business Purpose

d. Burden of Proof

e. Tax Purpose

D. Subsidiary Liquidations

E. Post-acquisition Losses

1. Identifying the Losses

2. Case Law

3. Effect of the 1986 Act

F. Partial Disallowance

G. Repeal of the Statutory Presumption of Tax Avoidance Purpose

H. Relationship Between § 269 and 1954 § 382

VII. Historical Limitations

A. 1954 Section 382(a)

1. In General

2. Change of Ownership Test

a. Increase of At Least 50 Percentage Points

b. Ownership by the 10 Largest Stockholders

c. The Lookback Period

d. Multiple Transactions - Sales and Purchases

e. Applying the Change of Ownership Test

3. The Purchase Test

a. Indirect Purchases

b. Reductions

4. Change of Business Test

B. 1954 Section 382(b)

1. In General

2. Effect of 1954 Section 382(b) Limitation

3. Conditions for Application of 1954 Section 382(b)

a. Certain Reorganizations

b. Former Stockholders of the Loss Corporation

c. Receive or Retain Less Than 20 Percent Ownership

d. As a Result of the Reorganization

4. Proportionate Reduction

5. Common Ownership Exception

a. No Constructive Ownership

b. Attribution in 1954 Section 382(b)

6. Transactions Designed to Create the Requisite Continuity of Interest

a. Acquisition of the Stock of the Loss Corporation

b. Multiple Reorganizations

7. Application to Either Corporate Party

8. Application to More Than One Corporation

9. Use of Stock of Controlling Corporation

a. The Deemed Ownership of the Survivor

b. When Target Is the Acquired Corporation

c. When Target Is the Acquiring Corporation

10. Definition of Stock

11. Application to Subsequent Years

C. The Tax Reform Act of 1976

1. Historical Summary

2. Substantive Provisions

a. Taxable Acquisitions

b. Reorganizations

c. Reduction of Carryovers

d. Stock

3. Effective Dates

4. Repeal

5. 1978 Right to Elect the 1976 Rules

6. Other Limitations

D. The Libson Shops Doctrine

1. The Libson Shops Decision

2. Expanding the Doctrine

3. Limiting the Libson Shops Doctrine

4. Libson Shops Under the 1954 Code

5. Libson Shops Under the 1986 Code


Working Papers

Table of Worksheets

Other Sources

Worksheet 1 1954 Version of § 382

Worksheet 2 1976 Version of § 382

Worksheet 3 H.R. Rep. No. 495 (Conf. Rep. on Omnibus Budget Reconciliation Act of 1987) 100th Cong., 1st Sess. 971-974 (1987) (Excerpt)

Worksheet 4 1986 Tax Reform Act Committee Reports (Excerpts): H.R. Rep. No. 841 (Conf.) S. Rep. No. 313; H.R. Rep. No. 426

Worksheet 5 1976 Tax Reform Act Committee Reports (Excerpts): H.R. Rep. No. 1515 (Conf.); S. Rep. No. 891

Worksheet 6 1954 Internal Revenue Code Committee Reports (Excerpts): H.R. Rep. No. 2543 (Conf.), S. Rep. No. 1622; H.R. Rep. No. 1337

Worksheet 7 1943 Revenue Act Committee Reports (Excerpts): H.R. Rep. No. 871; S. Rep. No. 627

Worksheet 8 T.I.R. 773, Maxwell Hardware Co. v. Comr.

Worksheet 9 Notice 88-57, 1988-1 C.B. 545

Worksheet 10 Notice 88-67, 1988-1 C.B. 555

Worksheet 11 Preamble to 1991 Proposed Regulations under § 382 on the Application of § 382 to Short Taxable Years and Controlled Groups

Worksheet 12 Summary of the 1976 Version of § 382

Worksheet 13 Determining Applicability of the Section 382 Limitation

Worksheet 14 Steps for Applying the § 382 Limitation in the Year of Change

Worksheet 15 Steps for Applying the § 382 Limitation After the Year of Change

Worksheet 16 Information Statement Required by Loss Corporation Pursuant to Regs. § 1.382-11T(a) for Each Year in Which an Owner Shift or Equity Structure Shift Occurs




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