Federal Tax

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

  • This Portfolio analyzes the post-acquisition rules, §§381 through 384, as applied to corporations with a net operating loss or other favorable tax attributes.


Bloomberg Tax Portfolio, Net Operating Losses and Other Tax Attributes — Sections 381, 382, 383, 384, and 269, No. 780, 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.

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Table of Contents

I. Net Operating Losses – In General
II. Section 381 – Net Operating Losses and Corporate Acquisitions
III. Ownership Change Limitations – Section 382
IV. Other Tax Attributes – Section 383
V. Limitation on Use of Pre-acquisition Losses – Section 384
VI. Tax Avoidance Limitation – Section 269
VII. Historical Limitations

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Lewis Barr
Ulmer & Berne LLP