Key Tax Insights for Loss Corporations: Navigating Sections 382, 383, and 384

Many corporations, even if profitable from a book perspective, may generate tax losses or other tax attributes that are required to be carried forward to use in a subsequent tax year. However, these corporations may not realize that they may be limited in their ability to utilize these losses in the future.

Sections 382 and 383[1] provide that if a loss corporation experiences an Ownership Change, then the amount of taxable income for any post-change year that can be offset by pre-change losses or excess credits cannot exceed the Section 382 limitation for that year.[2][3] These sections of the Code were implemented to prevent corporations from “trafficking” their net operating losses (“NOLs”) and other tax attributes.

In general, a “loss corporation” is any corporation that is entitled to utilize any of the following tax attributes:

• NOLs;
• Section 163(j) disallowed interest carryover;
• Capital loss carryover;
• General business credit carryover;
• Alternative minimum tax credit carryover;
• Foreign tax credit carryover; or
• A corporation with a net unrealized built-in loss.[4]

A loss corporation experiences an Ownership Change on a particular testing date[5] when the percentage of the stock ownership of one or more 5-percent shareholders[6] has increased by more than 50 percentage points over the lowest percentage of stock ownership owned by such shareholders at any time during a prescribed testing period.[7] The determination of the percentage ownership interest of any shareholder is made on the basis of value.[8]  That is, in determining whether there is a more-than-50-percentage points increase, all transactions, whether related or unrelated, occurring during the testing period that affect the stock ownership (by value) of any 5-percent shareholders whose percentage stock ownership (by value) has increased as of the close of the testing date are taken into account.

Many complex steps are required in performing a full Section 382/383 Analysis, which include:

1. Determine when the corporation became a loss corporation.
2. Determine which corporate instruments are considered “stock” from a Section 382 perspective (“Section 382 Stock”).
3. Determine the value of each class of Section 382 Stock.
4. Determine the 5-percent shareholder threshold based on the total value of all Section 382 Stock.
5. Determine the appropriate 5-percent shareholders to include in the Section 382/383 Analysis.
   1. Just because a shareholder owns five percent of the value of a corporation does not necessarily mean the shareholder is a 5-percent shareholder. This step often involves shareholder inquiry.[9]
6. Analyze applicable transactions that occur on the testing dates over the testing period and apply the appropriate rules (i.e., segregation and aggregation rules).
   1. This step often involves shareholder inquiry. [10]
7. Determine the ownership percentage for each 5-percent shareholder on each testing date during the testing period.
8. Calculate if an Ownership Change has occurred.
9. If an Ownership Change or multiple Ownership Changes have occurred:
   1. Determine the appropriate base Section 382 Limitation(s)[11]; and
   1. Determine if the corporation was in a net unrealized built-in gain/(loss) position at the time of each Ownership Change and the adjustment to the base Section 382 Limitation for the subsequent 5-year period following each Ownership Change due to the impact of recognized built-in gains/(losses).[12][13]

In addition to Sections 382 and 383, Section 384 may also limit a corporation’s ability to utilize NOLs (either its own NOLs or the NOLs of a target) in connection with an acquisition. If either corporation that is a party to an acquisition is a gain corporation,[14] Section 384 limits the ability of the gain corporation to utilize the NOLs of another corporate party to offset recognized built-in gains in the 5-year period following the acquisition of a target that were “built-in” at the date of the acquisition of a target (i.e., the gain corporation could only utilize its own NOLs to offset these amounts).[15]  Centri will be diving deeper into each of the steps of a Section 382/383 Analysis as well as Section 384 in a subsequent series of articles.

How Centri Can Help

Navigating the complexities of Sections 382, 383, and 384 can be challenging for any corporation. Centri’s Tax Advisory experts offer specialized expertise to help manage and optimize your tax attributes. We conduct thorough analyses to identify relevant tax factors and determine if any significant changes have occurred. Our strategic advice ensures compliance with tax laws and maximizes potential benefits. With Centri’s support, you can confidently navigate tax limitations and focus on achieving your business goals. Contact us to learn how we can help your company succeed.

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[1] Unless otherwise indicated, references to the “Code” or “Section” are to the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder.

[2] Section 382(a).

[3] Section 383 applies the Section 382 rules to general business credits, minimum tax credits, foreign tax credits, and net capital loss carryforwards. As such, Section 382 will be used throughout this article to be inclusive of Section 383 as well.

[4] Sections 382(k)(1), 383. See also Treas. Reg. Section 1.382-2(a)(1).

[5] Treas. Reg. Section 1.382-2(a)(4); Section 382(l)(3)(C).

[6] Sections 382(k)(6)(C) and (7).

[7] Section 382(g)(1).

[8] Section 382(k)(6)(C).

[9] Treas. Reg. Section 1.382-2T(k)(3).

[10] Id.

[11] Section 382(b)(1).

[12] Section 382(h).

[13] Notice 2003-65 is currently the primary source of guidance in effect governing Section 382(h).

[14] Section 384(c)(4).

[15] Section 384(a)