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Net Operating Loss Carryovers
Following Changes in
Ownership
This portion of the introduction to the basic
principles of United States federal income taxation of corporate
acquisitions is part of the
Pillsbury
Winthrop Shaw Pittman LLP Tax Page,
a
World
Wide Web demonstration project.
Comments are welcome
on
the design or content of this material.
The information presented is only of a general
nature,
intended simply as background material, is current only as of
the latest revision date, October 15, 2007,
,
omits many details and special rules and cannot be regarded as
legal or tax advice.
Internal Revenue Code § 382
In general, the rules of section 382 apply to limit a corporation's
ability
to utilize existing net operating loss ("NOL") carryovers once the
corporation experiences an "ownership change."
Generally, an ownership change occurs when, within a span of 36
months (or, if shorter, the period beginning the day after the most
recent
ownership change), there is an increase in the stock ownership by one
or
more shareholders of more than 50 percentage points.
For example, if Shareholder A owned 25 percent of Corporation X,
and
within a space of three years, acquired another 51 percent, there
would be
an ownership change, triggering section 382.
In general, the rules of section 382 allow post-change corporations to
use
pre-change NOLs, but limit the amount that may be used annually to a
percentage of the entity value of the corporation at the date of
change of
ownership. That percentage is the highest
"federal long-term tax-exempt rate,"
for
the month during which the change in ownership occurs and the
preceding
two months; the
federal long-term tax-exempt rate
is determined monthly by the IRS along with other
"applicable federal rates."
Numerous special rules and limitations apply, including provisions
dealing
with "built-in gains and losses."
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