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.

Bloomberg Tax & Accounting subscribers can access the full Portfolio Net Operating Losses and Other Tax Attributes — Sections 381, 382, 383, 384, and 269 (Portfolio 780). If you’re not a subscriber, learn more or to see our premier tax research platform for yourself, request a demo.

Table of Contents


I. Net Operating Losses — In General

    A. Section 172

        1. Net Operating Loss

        2. Carrybacks and Carryovers

        3. Taxable Year

        4. History

        5. Special Relief

            a. Disaster Relief

            b. Economic Relief

            c. The 2009 Extensions of the Carryback Period

                (1) ARRA

                (2) WHBAA

                (3) TARP Recipients Not Included

                (4) Claiming the Longer Carryback

        6. Bypassing the Carryback Years

        7. Application

            a. Sequence

            b. Election to Skip Carrybacks

            c. Benefits

            d. Duplicative Benefits

        8. Corporate Equity Reduction Transactions

            a. Limited Carrybacks

            b. The Transaction

            c. Loss Portion Affected

            d. Loss Limitation Years

            e. Rules of Application

            f. Regulations

                (1) General CERT Rules

                    (a) Determination of Existence of a CERT

                    (b) Loss Limitation Years

                    (c) Computation of CERIL

                    (d) Limitation on Interest Deductions

                    (e) Predecessor and Successor

                    (f) Operating Rules

                (2) Special CERT Rules Applicable to Consolidated Groups

    B. The Development of Limitations

        1. Early Judicially Developed Limits

        2. Section 269

        3. The Statutory Pattern

    C. Examining the Limitations

        1. Importance of §172

        2. Effects of §381

        3. Applying §382§383 and §384

        4. The Trend Toward Transfer Restrictions

        5. Emergence of § 269

        6. Historical Perspective

II. Section 381 — Net Operating Losses and Corporate Acquisitions

    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 Attribute Transfer to Parent in “Purchase-Type” Transaction

                (1) Section 338

                (2) Effect of § 269(b) on Subsidiary Liquidations

            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) Regulations Identifying Requirements for an F Reorganization

            e. G Reorganizations

        3. Complete Acquisitions Not Required

        4. Effect of Debt Cancellation

    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

            a. On Last Day of Acquiring Corporation’s Taxable Year

            b. Other than on Last Day of Acquiring Corporation’s Taxable Year

        2. Subsequent Years

        3. Aggregate Net Operating Loss Carryovers

        4. Multiple Acquisitions on One Date

        5. Multiple Acquisitions on Different Dates

            a. Postacquisition Income Defined

            b. If Postacquisition Income Does Not Exceed Aggregate Carryovers

            c. If Postacquisition Income Exceeds Aggregate Carryovers

    F. Deducting Net Operating Losses

        1. Sequence for Deduction of Net Operating Losses

        2. Mid-Year Acquisitions

            a. Preacquisition Part-Year

            b. Postacquisition Part-Year

            c. Division of Income

            d. Limitation on Deductions

    G. Other Operating Rules

        1. Date of Distribution or Transfer

            a. Transfers of Substantially All

            b. Consent Statement

            c. Permitted Retentions

        2. Only One Acquiring Corporation

        3. Qualifying Reorganizations and Liquidations Within a Consolidated Group

    H. Carrybacks

        1. In General

        2. F Reorganizations

        3. Other Transactions

        4. CERTs

        5. Carrybacks of Consolidated Net Operating Losses

III. Ownership Change Limitations — Section 382

    A. In General

    B. Ownership Change

        1. 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 S.E.C. Filings

                (2) Beneficial vs. Economic Ownership

                (3) No Presumption of an “Entity”

                (4) Beyond S.E.C. Filings

                (5) No S.E.C. Filings

                (6) Ownership by Mutual Funds, Retirement Plans and Qualified Settlement Funds

                (7) Stock Transfer Restrictions

            f. Actual Knowledge

            g. Identifying the Shareholders

            h. Avoidance Purpose

        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

            h. Option Transfers/Issuances

        3. Testing Date

            a. Information Statement

            b. Records

        4. The Testing Period

            a. Effective Date Exception

            b. Successive Ownership Changes

            c. First Day of Losses

        5. The Ownership Increase

            a. Lowest Percentage of Ownership

            b. Predecessor Corporation

            c. Transactional Subtleties

        6. Loss Corporation Stock Acquired by the United States Treasury

    C. Stock

        1. Pure Preferred Stock Excluded

        2. Regulations 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

            d. Other Instruments

        3. Constructive Ownership

            a. Families

                (1) Spouse, Parents, Children and Grandchildren

                (2) Siblings

                (3) Changes in Family Composition

                (4) Multiple Family Units

            b. Entities

                (1) Partnerships

                (2) Estates

                (3) Trusts in General

                (4) Employer Trusts

                (5) Corporations

                (6) The Exceptions

            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

                    (j) Permitted Transferees

                (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

        4. Death, Gifts and Marital Transfers

        5. Determinations Based on Value

        6. Fluctuations in Value

            a. Historical PLRs

            b. Notice 2010-50

                (1) The Full Value Methodology

                (2) The Hold Constant Principle

                    (a) The Two Methodologies of the Hold Constant Principle

                    (b) Dispositions Under the Hold Constant Principle

                    (c) Redemptions Under the Hold Constant Principle

                    (d) Issuance of New Stock Under the Hold Constant Principle

                    (e) Effect on the So-Called Segregation Rule

                    (f) Value-for-Value

                (3) Consistency

            c. Recapitalizations

        7. Aggregation

            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 Rule

        8. The Segregation Rule

            a. The Statutory Directive

            b. Segregation Transactions

                (1) Equity Structure Shifts

                (2) Stock Issuances

                (3) B Reorganizations

                (4) Redemptions

                (5) Options

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

            d. Distinct Groups

            e. Presumptions of No Cross Ownership

            f. Final Regulations — Exceptions

                (1) Small Issuance Exception

                (2) Cash Issuance Exception

                (3) Applications

                (4) Effective Dates

            g. Multiple Transactions

            h. Proportionate Acquisitions

            i. Combinations

            j. Later Acquisitions

            k. Aggregation and Attribution

            l. Mutual Funds

            m. Notice 2010-49

            n. Regulations §1.382-3(j)

                (1) The Secondary Transactions Exception

                (2) The Small Redemption Exception

                (3) The Tiers Exceptions

        9. Other Securities

        10. Worthless Stock

        11. Economic Ownership

        12. Repealed Exception for ESOPs

    D. The Loss Corporation

        1. Identifying the Loss Corporation

            a. Regulations

            b. Profitable Corporations

        2. Distributor or Transferor Loss Corporation

        3. Separate Accounting

        4. Successor and Predecessor Corporations

        5. Old Loss Corporation

        6. New Loss Corporation

        7. Taxable Income

            a. Modification

            b. Post-Change Year Loss

        8. No Limitation on Pre-Change Income

        9. No Limitation on Post-Change Losses

        10. Combinations of Multiple Loss Corporations

        11. Carryovers of Pre-Change Losses

    E. Pre-Change Losses

        1. Definition

        2. Change Date

        3. The Last Component of an Ownership Change

        4. Year-End Change

        5. Mid-Year Change

            a. Daily Proration

            b. Closing-the-Books Method

                (1) Notice 87-79

                (2) Private Letter Rulings

                (3) Final Regulations

                (4) Extraordinary Items

                (5) Filing Extensions

        6. Special Operating Rules

        7. Consistency with § 383

        8. Alternative Minimum Tax

        9. Consolidated Return Allocations

        10. Netting Income and Loss of the Change Year

    F. The § 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) Non-Avoidance Contributions

                (3) Notice 2008-78

                (4) The Safe Harbors

                    (a) Minor Capital Contributions by Minor Shareholders

                    (b) Minor Capital Contributions More than a Year Ahead of the Ownership Change

                    (c) Minor Stock Issued for Services or Stock Issued to a Retirement Plan

                    (d) Pre-Loss Contributions

                (5) TARP Funds Invested in Loss Corporations

            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) Identifying a Controlled Group Loss

                (2) General Value Reduction Rule

                (3) Value Restoration

                (4) Foreign Component Members

                (5) The Value Restoration Election

                    (a) Limitation

                    (b) Election Procedure — Change in 2006

                    (c) Election Extension

                (6) Election out of Deemed Value Restoration

                (7) 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. COBE Requirements

            a. The Historic Business

            b. A Significant Portion of the Assets

            c. Discontinuing the Active Business

        2. Two-Year Period

        3. Disallowance

        4. Exception for Certain Gains

        5. “NOL Shells”

        6. 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

                (1) Prepaid Income

                (2) Increasing Net Unrealized Built-In Gain

        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. Claims Trading Orders

        6. 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

        7. Reduction of Carryovers

            a. The 1995 Change

            b. Repeal of the Debt-for-Stock Exception

            c. Interest on Converted Debt

        8. No Continuity of Business Requirement

        9. Second Ownership Change Within Two Years

            a. Two-Year Period

            b. Effect on Second Ownership Change

            c. Effect on First Ownership Change

            d. Effect of § 382(l)(6)

            e. Bankruptcy Court Imposition of Transfer Restrictions

        10. 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

        11. 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

        12. Application of § 269

            a. Business Activity Requirement

            b. The Bankruptcy Code

            c. Timing of Creditor Ownership

        13. Thrift Institutions

    J. Anti-Avoidance Measures

        1. Anti-Avoidance Provisions in § 382

            a. Anti-Stuffing Rule

            b. Non-business (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. Separate Return Limitation Year

            a. Aggregate Consolidated Taxable Income

            b. The “Overlap” Rule

        2. Application of §382 Principles

            a. Loss Group

            b. Loss Subgroup

            c. The § 382 Limitation

            d. Change of Ownership

            e. Continuity of Business

            f. New Loss Members

            g. Departing Loss Members

            h. Section 383

    L. Fannie & Freddie, T.A.R.P. and §382(n)

        1. Section 382(n)

        2. Characterization

        3. Warrants

        4. Issuer’s Exchange

        5. Disposition by Treasury

        6. Treasury Sales to the Public

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

        1. Calculating the §383 Credit Limitation

        2. Absence of Tax Liability

    F. Limitation on Pre-Change Credits

    G. Ordering Rules

    H. Unused Limitations

    I. Special Rules

    J. Consolidated Returns

V. Limitation on Use of Preacquisition Losses — Section 384

    A. In General

    B. Gain Corporation

    C. The Acquisition

        1. Stock Acquisition Rule

        2. Asset Acquisition Rule

    D. Recognized Built-In Gains

        1. Disposition of Assets

        2. Net Unrealized Built-in Gain

        3. The De Minimis Rule

        4. Income Items

        5. Limitation

    E. Preacquisition Losses

        1. Defined

        2. Excess Credits and Net Capital Losses

        3. Preacquisition Losses of the Gain Corporation

        4. Postacquisition NOLs

    F. The Limitation Period

        1. Acquisition Date

        2. Recognition Period

    G. Common Control Exception

    H. Predecessors and Successors

    I. Rules of Application

    J. Regulations

VI. Protecting Net Operating Losses — Poison Pills and Charter Amendments

    A. TAP Plans

        1. Origin

            a. Traditional Anti-Takeover Plans

            b. Adapting to TAP Plans

        2. Preliminary Board Actions

        3. Format of a TAP Plan

            a. “Acquiring Person”

            b. Rights Certificates

                (1) Excluding the Acquiring Person and Others

                (2) Importance of the 10-Day Period

                (3) Limited Privileges

            c. Exercise of Rights

            d. Discount

            e. Terminology: “Flip-Ins” and “Flip-Overs”

            f. Redemption

            g. Exchange

            h. Adjustments

            i. Renewals

            j. Amendments

            k. Expiration

    B. NOL Charter Amendment

        1. Origin

        2. Vocabulary of an NOL Charter Amendment

        3. No Transfer

            a. Waivers and Exceptions

            b. Effect on Purported Acquirer

        4. Disposition of Excess Securities

        5. IRS Reaction

        6. Enforcement

        7. Expiration

    C. TAP Plans and NOL Charter Amendments Complementary

    D. TAP Plan Validation

VII. Tax Avoidance Limitation — Section 269

    A. In General

        1. Historical Development

        2. Application

    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. Postacquisition 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 §382

VIII. Historical Limitations

    A. 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

    B. The 1954 § 382

        1. In General

        2. The 1954 § 382(a)

        3. The 1954 § 382(b)

    C. Tax Reform Act of 1976

        1. Substantive Provisions

        2. Postponement

        3. Repeal

        4. The 1978 Right to Elect the 1976 Rules


Lewis Barr
Retired Tax Partner
Ulmer & Berne LLP
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