1. The § 382 Limitation.
    1. Section 382 Limitation.
      1. For any taxable year ending after the change date (i.e., the date on which an owner shift resulting in an ownership change occurs or the date of the reorganization in the case of an equity structure shift resulting in an ownership change),
        1. The amount of a new loss corporation's (or a successor corporation's) taxable income for any post-change year that can be offset by a pre-change loss,
        1. Cannot exceed the § 382 limitation for such year (new § 382(a)).
      1. Pre-Change/Post-Change Losses.
        1. Any NOL carryforward of the old loss corporation to the taxable year ending with the ownership change or in which the ownership change date occurs; and
        1. The NOL of the 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 (§ 382(d)(1)).
        1. The term "post-change year" means any taxable year ending after the change date.
      1. The § 382 limitation for any taxable year is generally the amount equal to the value of the old loss corporation immediately before the ownership change multiplied by the long-term tax-exempt rate (new § 82(b)(1)).
        1. In the case of a short taxable year, regulations will generally provide that the § 382 limitation applicable in a short taxable year will be determined by multiplying the full § 382 limitation by the ratio of the number of days in the year to 365.
        1. Taxable income realized by a new loss corporation during a short taxable year may be offset by pre-change losses not exceeding a ratable portion of the full § 382 limitation.
      1. If there is a net unrealized built-in gain, the § 382 limitation for any taxable year is increased by the amount of any recognized built-in gains.
        1. The § 382 limitation is increased by built-in gain recognized by virtue of a § 338 election (to the extent such gain is not otherwise taken into account as a built-in gain).
        1. If the § 382 limitation for a taxable year exceeds the taxable income for the year, the § 382 limitation for the next taxable year is increased by such excess.
        1. A corporation has built-in gains if the value of the assets exceed basis immediately before the ownership change and the net unrealized built-in gain exceeds 25% of the value of the loss corporation's assets. The § 382 limitation is increased by built-in gain recognized within the five-year period ending on the fifth anniversary of the end of the year in which the ownership change occurred (see § 382(h)(1)(A)).
      1. If two or more loss corporations are merged or otherwise reorganized into a single entity, separate § 382 limitations are determined and applied to each loss corporation that experiences an ownership change.
      1. Example 18: X corporation is wholly owned by individual A and its stock has a value of $3,000; X has NOL carryforwards of $10,000, Y corporation is wholly owned by individual B and its stock has a value of $9,000; Y has NOL carryforwards of $100. Z corporation is owned by individual C and its stock has a value of $18,000; Z has no NOL carryforwards. On July 22, 1999, X, Y, and Z consolidate into W corporation in a transaction that qualifies as a tax-free reorganization under § 368(a)(1)(A). The applicable long-term tax-exempt rate on such date is 10%. As a result of the consolidation, A receives 10% of W stock, B receives 30% and C receives 60%. The consolidation of X, Y and Z results in an ownership change for old loss corporations X and Y. The Act applies a separate § 382 limitation to the utilization of the NOL carryforwards of each loss corporation that experiences an ownership change. Therefore, the annual limitation on X's NOL carryforwards is $300 and the annual limitation on Y's NOL carryforwards is $900. For W's taxable year ending on December 31, 2000, W's taxable income before any reduction or its NOLs is $1,400. The amount of taxable income of W that may be offset by X and Y's percentage losses (without regard to any unused § 382 limitation) is $400 (the $300 § 382 limitation for X's NOL carryforwards and all $100 of Y's NOL carryforwards because that amount is less than Y's $900 § 382 limitation). The unused portion of Y's § 382 limitation may not be used to augment X's § 382 limitation for 2000 or in any subsequent year.
    1. Special Rule for Post-Change Year that Includes the Change Date.
      1. In general, the § 382 limitation with respect to an ownership change that occurs during a taxable year does not apply to the utilization of losses against the portion of the loss corporation's taxable income, if any, allocable to the period before the change.
      1. For this purpose, except as provided in regulations, taxable income (not including built-in gains or losses, if there is a net unrealized built-in gain or loss) realized during the change year is allocated ratably to each day in the year.
        1. The regulations may provide that income realized before the change date from discrete sales of assets would be excluded from the ratable allocation and could be offset without limit by pre-change losses.
        1. Moreover, these regulations may provide a loss corporation with an option to determine the taxable income allocable to the period before the change by closing its books on the change date and thus foregoing the ratable allocation.
    1. Value of Loss Corporation.
      1. The value of a loss corporation is generally the fair market value of the corporation's stock (including preferred stock described in § 1504(a)(4)) immediately before the ownership change) (new § 382(e)(1)).
        1. If a redemption occurs in connection with an ownership change, either before or after taking the redemption into account (new § 382(e)(2)).
        1. The Treasury Department is given regulatory authority to treat other corporate contractions in the same manner as redemptions for purposes of determining the loss corporation's value.
        1. The Treasury Department also is required to prescribe such regulations as are necessary to treat warrants, options, contracts to acquire stock, convertible debt, and similar interests as stock for purposes of determining the value of the loss corporation (new § 382(k)(B)(i)).
      1. In determining value, the price at which loss corporation stock changes hands in an arm's-length transaction would be evidence, but not conclusive evidence, of the value of the stock.
        1. Assume for example, that an acquiring corporation purchased 40% of loss corporation stock over a 12-month period. Six months following this 40% acquisition, the acquiring corporation purchased an additional 200% of loss corporation stock at a price that reflected a premium over the stock's proportionate amount of the value of all the loss corporation stock. The premium is paid because the 20% block carries with it effective control of the loss corporation. Based on these facts, it would be inappropriate to simply gross-up the amount paid for the 20% interest to determine the value of the corporation's stock.
        1. Under regulations, it is anticipated that the Treasury Department will permit the loss corporation to be valued based upon a formula that grosses up the purchase price of all of the acquired loss corporation stock if a control block of such stock is acquired within a 12-month period.
      1. Example 19: All of the outstanding stock of L corporation is owned by individual A and has a value of $1,000. On June 15, 1998, A sells 51% of his stock in L to unrelated individual B. On January 1, 1999, L and A enter into a 15-year management contract and L redeems A's remaining stock interest in such corporation. The latter transactions were contemplated in connection with B's earlier acquisition of stock in 1998. The acquisition of 51% of the stock of L on June 15, 1998, constituted an ownership change. The value of L for computing the § 382 limitation is the value of the stock of such corporation immediately before the ownership change. Although the value of such stock was $1,000 at that time, the value must be reduced by the value of A's stock that was subsequently redeemed in connection with the ownership change.
    1. Long-Term Tax-Exempt Rate.
      1. The long-term tax-exempt rate is defined as the highest of the federal long-term rates determined under § 1274(d), as adjusted to reflect differences between rates on long-term taxable and tax-exempt obligations, in effect for the month in which the change date occurs or the two prior months (new § 382(f)).
      1. The Treasury Department will publish the long-term tax-exempt rate by revenue ruling within 30 days after the date of enactment and monthly thereafter.
      1. The long-term tax-exempt rate will be computed as the yield on a diversified pool of prime, general obligation tax-exempt bonds with remaining periods to maturity of more than nine years.
    1. Continuity of Business Enterprise Requirements.
      1. Following an ownership change, a loss corporation's NOL carryforwards including any recognized built-in losses are subject to complete disallowance (except to the extent of any recognized built-in gains or § 338 gain), unless the loss corporation's business enterprise is continued at all times during the two-year period following the ownership change.
      1. If a loss corporation fails to satisfy the continuity of business enterprise requirements, no NOL carryforwards would be allowed to the new loss corporation for any post-change year.
      1. This continuity of business enterprise requirement is the same requirement that must be satisfied to qualify a transaction as a tax-free reorganization under § 368 (see Reg. 1.368-1(d)).
        1. Under these continuity of business enterprise requirements, a loss corporation (or a successor corporation) must either continue the old loss corporation's historic business or use a significant portion of the old loss corporation's assets in a business.
        1. Thus, the requirements may be satisfied even though the old loss corporation discontinues more than a minor portion of its historic business.
        1. Changes in the location of a loss corporation's business or the loss corporation's key employees, in contrast to the results under the business-continuation rule in the 1954 Code version of § 382(a), will not constitute a failure to satisfy the continuity of business enterprise requirements under the Conference Agreement.
    1. Reduction in Loss Corporation's Value for Certain Capital Contributions.
      1. Any capital contribution (including a § 351 transfer) that is made to a loss corporation as part of a plan, a principal purpose of which is to avoid any of the special limitations under § 382, shall not be taken into account for any purpose under § 382.
      1. For purposes of this rule, except as provided in regulations, a capital contribution made during the two-year period ending on the change date is irrebuttably presumed to be part of a plan to avoid the limitations.
        1. The application of this rule will result in a reduction of a loss corporation's value for purposes of determining the § 382 limitation.
        1. The term "capital contribution" is to be interpreted broadly to encompass any direct or indirect infusion of capital into a loss corporation (e.g., the merger of one corporation into a commonly owned loss corporation).
      1. Regulations generally will accept:
        1. Capital contributions received on the formation of a loss corporation (not accompanied by the incorporation of assets with a net unrealized built-in loss) where an ownership change occurs within two years of incorporation,
        1. Capital contributions received before the first year from which there is an NOL or excess credit carryforward (or in which a net unrealized built-in loss arose), and
        1. Capital contributions made to continue basic operations of the corporation's business (e.g., to meet the monthly payroll or fund other operating expenses of the loss corporation).
        1. The regulations also may take into account, under appropriate circumstances, the existence of substantial nonbusiness assets on the change date and distributions made to shareholders subsequent to capital contributions, as offsets to such contributions.
    1. Reduction in Value for Corporations Having Substantial Nonbusiness Assets.
      1. If at least one-third of the fair market value of a corporation's assets consists of nonbusiness assets,
        1. The value of the loss corporation, for purposes of determining the § 382 limitation,
        1. Is reduced by the excess of the value of the nonbusiness assets over the portion of the corporation's indebtedness attributable to such assets.
      1. The term "nonbusiness assets" includes any asset held for investment, including cash and marketable stock or securities.
        1. Assets held as an integral part of the conduct of a trade or business (e.g., assets funding reserves of an insurance company or similar assets of a bank) would not be considered nonbusiness assets.
        1. In addition, stock or securities in a corporation that are at least 50% owned (voting power and value) by a loss corporation are not treated as nonbusiness assets.
        1. Instead, the parent loss corporation is deemed to own its ratable share of the subsidiary's assets.
      1. The portion of a corporation's indebtedness attributable to nonbusiness assets is determined on the basis of the ratio of the value of nonbusiness assets to the value of all the loss corporation's assets.