Corporate Tax | Just Tax

Attribute Carryover in § 332 and Reorg Transactions (§ 381)

This checklist guides practitioners through the complete analysis of whether and to what extent tax attributes carry over in corporate liquidations under § 332 and reorganizations under § 368(a)(1)(A), (C), (D), (F), and (G). Use this checklist when advising on any corporate acquisition or liquidation where the target corporation has net operating losses, tax credits, earnings and profits, capital loss carryovers, or other tax attributes that may survive the transaction. The checklist covers the carryover rules of § 381, the ownership change limitations of § 382, the credit limitations of § 383, the built-in gain limitations of § 384, and the anti-abuse doctrines that may deny carryover treatment entirely.

"A corporation which acquires the assets of another corporation in a distribution or transfer described in subsection (a) shall succeed to and take into account, as of the close of the day of the distribution or transfer, the items described in subsection (c) of the distributor or transferor corporation." (IRC § 381(a))

Step 1. Qualified Transaction Types Under § 381(a)

"In the case of the receipt by a corporation of property distributed by another corporation in a distribution or transfer described in subsection (a) or (b) of section 332... or the acquisition by a corporation of the assets of another corporation in a reorganization described in subparagraph (A), (C), (D) (but only if the requirements of subparagraphs (A) and (B) of section 354(b)(1) are met), (F), or (G) of section 368(a)(1)..." (IRC § 381(a)(1)-(2))

• Complete liquidations of controlled subsidiaries under § 332.
  • § 381(a)(1) applies when a parent corporation that owns at least 80% of the total combined voting power and 80% of each class of nonvoting stock of a subsidiary receives property in the subsidiary's complete liquidation. (IRC § 332(a)) (IRC § 381(a)(1))
  • The parent corporation is the "acquiring corporation" and succeeds to all attributes of the liquidating subsidiary.
  • The subsidiary recognizes no gain or loss on the distribution under § 337, and the parent recognizes no gain or loss on receipt under § 332(a).
  • TRAP. § 381 applies only to complete liquidations. A partial liquidation or a distribution that is not part of a complete liquidation does not trigger § 381. (Treas. Reg. § 1.381(a)-1(b)(1))
  • CAUTION. If the subsidiary is insolvent or the parent does not meet the 80% ownership requirement, § 332 does not apply and § 381 does not apply to the liquidation.
• A reorganizations (statutory mergers and consolidations).
  • § 381(a)(2) applies to statutory mergers or consolidations qualifying under § 368(a)(1)(A) to which § 361 applies. (IRC § 381(a)(2)(ii)) (Treas. Reg. § 1.381(a)-1(b)(1)(ii))
  • The target corporation must go out of existence as a separate legal entity. The acquiring (surviving) corporation succeeds to the target's attributes.
  • Forward triangular mergers under § 368(a)(2)(D) qualify as A reorganizations for § 381 purposes. (IRC § 368(a)(2)(D))
• C reorganizations (stock-for-assets acquisitions).
  • § 381(a)(2) applies to reorganizations qualifying under § 368(a)(1)(C) where the acquiring corporation acquires substantially all of the target's properties solely in exchange for voting stock. (IRC § 381(a)(2)(iii)) (Treas. Reg. § 1.381(a)-1(b)(1)(iii))
  • The target corporation must liquidate as part of the plan of reorganization. (IRC § 368(a)(1)(C))
  • "Substantially all" has been interpreted to mean approximately 70% of gross assets and 90% of net assets by fair market value, though these are guidelines rather than rigid rules. (Rev. Rul. 2002-86, 2002-2 C.B. 986) (Rev. Rul. 72-405, 1972-2 C.B. 217)
• Nondivisive D reorganizations.
  • § 381(a)(2) applies to D reorganizations only if the requirements of § 354(b)(1)(A) (substantially all assets) AND § 354(b)(1)(B) (liquidation/distribution) are both satisfied. (IRC § 381(a)(2)(iv))
  • A divisive D reorganization (spin-off, split-off, or split-up under § 355) does NOT qualify for § 381 attribute carryover. (Treas. Reg. § 1.381(a)-1(b)(3))
• F reorganizations (mere changes in identity, form, or place of organization).
  • § 381(a)(2) applies to F reorganizations under § 368(a)(1)(F). (IRC § 381(a)(2)(v))
  • F reorganizations involve a single continuing economic entity, so attribute carryover is automatic and follows the continuing corporation. (Treas. Reg. § 1.368-2(m))
  • § 381(b)(3)'s prohibition on carrybacks does NOT apply to F reorganizations. (IRC § 381(b)(3))
• G reorganizations (bankruptcy reorganizations).
  • § 381(a)(2) applies to G reorganizations under § 368(a)(1)(G). This was added by the Gulf Opportunity Zone Act of 2005 (P.L. 109-135, § 412(a)), effective for transfers after December 21, 2005. (IRC § 381(a)(2))
  • Before this 2005 amendment, G reorganizations were NOT listed in § 381(a)(2), creating a 25-year statutory gap. Transactions in that window may have uncertain carryover treatment.

Step 2. Transactions That Do NOT Qualify for § 381

• Stock acquisitions and B reorganizations.
  • In a B reorganization (stock-for-stock acquisition under § 368(a)(1)(B)), the target corporation retains its assets and its tax attributes. No asset transfer occurs, so § 381 does not apply. (Treas. Reg. § 1.381(a)-1(b)(3))
  • The target's attributes remain in the target. The acquirer may be subject to § 382 if the target is a loss corporation, but no carryover occurs under § 381.
  • This distinction between asset acquisitions (§ 381 applies) and stock acquisitions (§ 381 does not apply) is fundamental to M&A tax structuring.
• Partial liquidations.
  • § 381 applies only to complete liquidations meeting the requirements of § 332. A partial liquidation or a distribution of less than all assets does not trigger attribute carryover. (Treas. Reg. § 1.381(a)-1(b)(3))
• Divisive reorganizations (spin-offs, split-offs, split-ups).
  • A divisive D reorganization under § 355 or a transaction described in § 368(a)(1)(D) that does not satisfy § 354(b)(1)(A) and (B) does not qualify for § 381. (Treas. Reg. § 1.381(a)-1(b)(3))
  • In a divisive transaction, the transferor corporation continues in existence and retains its attributes.
• E reorganizations (recapitalizations).
  • Recapitalizations under § 368(a)(1)(E) are not listed in § 381(a)(2) and do not trigger attribute carryover. The same corporation continues before and after the recapitalization.
• Transactions not described in § 368(a)(1).
  • If a transaction fails to qualify as a reorganization under § 368(a)(1), § 381 does not apply even if the transaction achieves similar economic results. The acquirer takes a cost basis in the acquired assets and obtains none of the target's tax attributes. (Yoc Heating Corp. v. Commissioner, 61 T.C. 168 (1973))
• No inference from § 381 exclusion.
  • Treas. Reg. § 1.381(a)-1(b)(3) provides that where § 381 does not apply to a transaction, no inference is to be drawn from the provisions of § 381 as to whether any item or tax attribute shall be taken into account by the successor corporation. This means other Code provisions (such as § 173 for capitalized costs) may still permit attribute continuation.

Step 3. The Enumerated Carryover Items in § 381(c)

"The items referred to in subsection (a) are..." followed by 23 enumerated paragraphs. (IRC § 381(c))

• Net operating loss carryovers.
  • § 381(c)(1) carries over NOLs determined under § 172, subject to the conditions and limitations of § 381(c)(1)(A)-(C) and the § 382 ownership change limitations.
  • The taxable year of the acquiring corporation to which NOL carryovers are first carried is the first taxable year ending after the date of distribution or transfer. (IRC § 381(c)(1)(A))
  • The first-year deduction is prorated based on the number of days after the transfer date. (IRC § 381(c)(1)(B))
  • See Step 8 for detailed NOL timing mechanics.
• Earnings and profits.
  • § 381(c)(2) carries over the transferor's E&P or deficit in E&P, subject to the hovering deficit rule of § 381(c)(2)(B). See Step 7 for detailed E&P analysis.
• Capital loss carryovers.
  • § 381(c)(3) carries over capital loss carryovers determined under § 1212, subject to conditions similar to the NOL rules including proration in the first year.
  • The carryover is treated as a short-term capital loss in the acquiring corporation's hands. (IRC § 381(c)(3)(B))
• Method of accounting.
  • § 381(c)(4) requires the acquiring corporation to use the transferor's method of accounting under § 446.
  • If the acquiring corporation and transferor use different accounting methods, the acquiring corporation must continue using the transferor's method for the transferred business.
• Inventory method.
  • § 381(c)(5) carries over the transferor's inventory valuation method under § 471.
• Depreciation method.
  • § 381(c)(6) carries over the transferor's depreciation method under §§ 167 and 168.
• Installment method.
  • § 381(c)(8) carries over the transferor's installment obligations under § 453. The acquiring corporation is treated as the transferor for purposes of recognizing gain on installment obligations.
• Pension plan contribution carryovers.
  • § 381(c)(11) carries over excess pension plan contributions that are deductible by the transferor under § 404.
• Charitable contribution carryovers.
  • § 381(c)(19) carries over charitable contributions in excess of the § 170(b)(2) limitation. These contributions are deductible by the acquiring corporation for taxable years beginning after the date of transfer.
  • TRAP. Charitable contribution carryovers apply to years BEGINNING after the transfer, while other carryovers apply to years ENDING after the transfer. This timing difference can create a one-year delay in utilizing excess charitable contributions.
• Disallowed business interest carryovers (post-TCJA).
  • § 381(c)(20), added by the TCJA, carries over disallowed business interest described in § 163(j)(2). This was a significant expansion of § 381's scope.
  • Business interest expense disallowed under § 163(j) is treated as a pre-change loss for § 382 purposes.
• Items that are NOT enumerated in § 381(c).
  • Foreign tax credit carryovers are NOT listed in § 381(c). However, § 383(c) provides a mechanism for foreign tax credit limitation carryovers. (IRC § 383(c))
  • General business credits under § 38 and minimum tax credits under § 53 are carried over through § 383, not § 381(c).
  • The legislative history of § 381 states that "no inference is to be drawn" from the omission of an item. Some unlisted attributes may still carry over by analogy. (S. Rep. No. 1622, 83d Cong., 2d Sess. 277 (1954))
  • CAUTION. CCA 201605018 (January 2016) held that TARP recipient status was an attribute analogous to § 381(c) items that carried over in a merger. This represents a broad interpretation of § 381's scope. Practitioners should assume both favorable and unfavorable non-enumerated attributes may carry over.

Step 4. Identifying the Acquiring Corporation

"Only a single corporation may be an acquiring corporation for purposes of section 381." (Treas. Reg. § 1.381(a)-1(b)(2)(i))

• The post-2014 bright-line rule.
  • Under current Treas. Reg. § 1.381(a)-1(b)(2)(i), as amended by T.D. 9700 (November 10, 2014), the acquiring corporation is the corporation that DIRECTLY ACQUIRES the assets transferred by the transferor corporation, even if that corporation ultimately retains none of the assets so transferred.
  • This eliminated the pre-2014 "ultimately acquires" test that had created uncertainty and potential electivity in triangular transactions.
• For § 332 liquidations.
  • The parent corporation receiving the distribution is the acquiring corporation. (Treas. Reg. § 1.381(a)-1(b)(2)(i))
• For asset reorganizations (A, C, D, F, G).
  • The acquiring corporation is the corporation that directly acquires the assets transferred by the transferor corporation. (Treas. Reg. § 1.381(a)-1(b)(2)(i))
  • TRAP. In a triangular C reorganization where a subsidiary directly acquires the target's assets using parent stock, the SUBSIDIARY is the acquiring corporation for § 381 purposes and succeeds to all of the target's attributes. The parent receives nothing.
  • EXAMPLE. P Corporation owns S Corporation. Target transfers all of its assets to S in exchange solely for P voting stock. Target then liquidates. Under § 368(a)(2)(D), this qualifies as a C reorganization. Under Treas. Reg. § 1.381(a)-1(b)(2)(i), S (the direct acquirer) is the § 381 acquiring corporation and succeeds to all of Target's E&P, NOLs, and other attributes. P receives none of Target's attributes.
• Where assets are transferred to multiple corporations.
  • If no single corporation ultimately acquires all of the target's assets, the regulations designate the corporation that directly acquires the assets as the acquiring corporation, even if it ultimately retains none. (Treas. Reg. § 1.381(a)-1(b)(2)(i))
  • TRAP. If Target transfers 50% of assets to Subsidiary A and 50% to Subsidiary B, and neither subsidiary acquires all assets, the designation of the acquiring corporation follows the regulatory rule, and that corporation gets ALL of the E&P and other attributes even though it keeps none of the assets.
• E&P follows the acquiring corporation exclusively.
  • Treas. Reg. § 1.312-11(a) provides that "only that corporation" (the § 381 acquiring corporation) succeeds to the transferor's E&P.
  • E&P cannot be divided or allocated among multiple corporations. The acquiring corporation gets all positive E&P and all hovering deficits.
  • If the acquiring corporation transfers acquired assets to controlled subsidiaries, the E&P does NOT follow the assets. The subsidiaries receive no E&P from the transferor.
• When to apply the old rule.
  • The 2014 amendment applies to transactions occurring on or after November 10, 2014.
  • For transactions before that date, the old rule applied as follows. The acquiring corporation was (a) the corporation that ultimately acquired all assets (directly or indirectly), or (b) if no single corporation ultimately acquired all assets, the corporation that directly acquired the assets. (Treas. Reg. § 1.381(a)-1(b)(2), prior to amendment)

Step 5. The § 332 Liquidation Requirements

"No gain or loss shall be recognized on the receipt by a corporation of property distributed in complete liquidation of another corporation." (IRC § 332(a))

• The 80% control requirement.
  • § 332 applies only if the parent corporation owns stock in the subsidiary meeting the requirements of § 1504(a)(2). The parent must own at least 80% of the total combined voting power of all classes of stock entitled to vote AND at least 80% of the total number of shares of all other classes of stock.
  • "Stock" for this purpose does not include nonvoting preferred stock described in § 1504(a)(4) (nonvoting, nonparticipating, limited and preferred as to dividends, limited as to liquidation rights, and with no redemption or conversion rights). (IRC § 1504(a)(4))
• Complete liquidation requirement.
  • The distribution must be in complete liquidation. A distribution is treated as in complete liquidation if it is one of a series of distributions in redemption of all the stock of the corporation pursuant to a plan of liquidation. (Treas. Reg. § 1.332-2(c))
  • The plan of liquidation need not be formal but must establish the corporation's intent to liquidate. (Rev. Rul. 89-102, 1989-2 C.B. 102)
• Subsidiary-level tax consequences.
  • Under § 337(a), no gain or loss is recognized to the liquidating subsidiary on the distribution of property to the parent.
  • If the subsidiary distributes property to minority shareholders, gain (but not loss) is recognized on the distribution to the minority. (IRC § 337(b))
• Parent-level tax consequences.
  • The parent recognizes no gain or loss on receipt of property under § 332(a).
  • The parent takes a carryover basis in the subsidiary's assets under § 334(b)(1).
  • The parent's basis in its subsidiary stock disappears. (§ 332 is a nonrecognition transaction)
• Attribute carryover in § 332 liquidations.
  • All § 381(c) items carry over to the parent. The parent succeeds to the subsidiary's attributes as of the close of the day of the liquidation.
  • The parent's tax year does NOT close. Only the subsidiary's tax year closes. (IRC § 381(b)(1))

Step 6. Reorganization Qualification Prerequisites

• Continuity of interest (COI).
  • COI requires that a "substantial part" of the value of the proprietary interests in the target corporation be preserved. (Treas. Reg. § 1.368-1(e)(1))
  • The regulations provide a 40% safe harbor based on the value of proprietary interests preserved. (Treas. Reg. § 1.368-1(e)(2)(v), Example 1)
  • For advance ruling purposes, the IRS requires at least 50% continuity. (Rev. Proc. 77-37, 1977-2 C.B. 568)
  • Pre-reorganization dispositions by target shareholders to unrelated parties and post-reorganization dispositions by acquiring shareholders to unrelated parties are generally disregarded for COI purposes. (T.D. 8898, August 30, 2000)
  • CAUTION. COI failure means the transaction is fully taxable. If the transaction is not a reorganization, § 381 does not apply and NO tax attributes carry over. The acquirer takes a cost basis in the acquired assets and gets none of the target's NOLs, E&P, or other attributes. (Yoc Heating Corp. v. Commissioner, 61 T.C. 168 (1973))
• Continuity of business enterprise (COBE).
  • COBE requires the acquiring corporation to either (a) continue the target's historic business (the historic business test), or (b) use a significant portion of the target's historic business assets in any business (the historic asset test). (Treas. Reg. § 1.368-1(d)(2))
  • The acquiring corporation need not engage in the same type of business as the target. (Bentsen v. Phinney, 199 F. Supp. 257 (S.D. Tex. 1961))
  • For purposes of COBE, the issuing corporation is treated as holding all of the businesses and assets of all members of a "qualified group" (corporations connected through § 368(c) stock ownership with the issuing corporation). (Treas. Reg. § 1.368-1(d)(4))
  • E and F reorganizations are EXEMPT from both COI and COBE requirements. (T.D. 9182, February 25, 2005)
  • COBE failure, like COI failure, results in taxable treatment with no § 381 attribute carryover.
• Business purpose requirement.
  • A transaction must have a business purpose independent of tax avoidance to qualify as a reorganization. (Gregory v. Helvering, 293 U.S. 465 (1935))
  • In Gregory, the Supreme Court held that a transaction that literally satisfied the statutory definition of a reorganization could be denied tax-free treatment because it was "an elaborate and devious form of conveyance masquerading as a corporate reorganization, and nothing else."
  • The business purpose requirement applies to all reorganization types except where specifically exempted.
  • CAUTION. Document the business purpose contemporaneously. A reorganization undertaken solely to acquire tax attributes is at risk of failing the business purpose test.
• The step-transaction doctrine as a reorganization risk.
  • If a series of formally separate steps are part of a single integrated plan, the IRS or courts may collapse them and recharacterize the transaction.
  • See Step 15 for detailed step-transaction analysis.

Step 7. E&P Carryover and the Hovering Deficit Rule

"In the case of a distribution or transfer described in subsection (a), the earnings and profits or deficit in earnings and profits, as the case may be, of the distributor or transferor corporation shall, subject to subparagraph (B), be deemed to have been received or incurred by the acquiring corporation as of the close of the date of the distribution or transfer." (IRC § 381(c)(2)(A))

• Positive E&P carryover.
  • The transferor's positive accumulated E&P carries over to the acquiring corporation and merges immediately with the acquiring corporation's existing accumulated E&P. (IRC § 381(c)(2)(A))
  • The acquiring corporation can use the transferor's positive E&P immediately to support dividend distributions after the acquisition.
  • EXAMPLE. Acquiring Corp has $50 of accumulated E&P. Transferor Corp has $30 of accumulated E&P. After the § 381 transaction, Acquiring Corp has $80 of accumulated E&P. Acquiring Corp can distribute up to $80 as a dividend from accumulated E&P (plus any current E&P).
• The hovering deficit rule.
  • § 381(c)(2)(B) provides that a deficit in E&P of the distributor, transferor, or acquiring corporation shall be used only to offset earnings and profits accumulated AFTER the date of transfer.
  • A deficit carries over to the acquiring corporation but is segregated in a separate "hovering deficit" account. It CANNOT offset pre-existing positive E&P of the acquiring corporation. (IRC § 381(c)(2)(B))
  • The hovering deficit principle was codified from Commissioner v. Phipps, 336 U.S. 410 (1949), where the Supreme Court held that a subsidiary's E&P deficit could not offset the parent's positive E&P.
  • Deficits only offset post-transaction earnings. Current year E&P is allocated pro rata based on days before and after the transaction. Only the post-acquisition portion of current year E&P can absorb hovering deficits. (IRC § 381(c)(2)(B))
• Multiple hovering deficits.
  • If the acquiring corporation has multiple acquisitions with deficits, each hovering deficit is tracked separately from its respective transaction date.
  • Each hovering deficit can only offset E&P accumulated after its own transfer date.
• Year-end allocation for current E&P.
  • For the taxable year of the acquiring corporation in which the transfer occurs, current E&P is deemed to have been accumulated after the transfer in an amount bearing the same ratio to undistributed current E&P as the number of days after the transfer bears to the total number of days in the taxable year. (IRC § 381(c)(2)(B))
  • EXAMPLE. Acquiring Corp has a calendar tax year. The transfer occurs on July 1 (day 182 of 365). Acquiring Corp's current year E&P (excluding transferor E&P) is $100. The post-acquisition portion is $100 x (184/365) = $50.40. This $50.40 can be offset by hovering deficits from the transfer. The pre-acquisition portion ($49.60) cannot.
• Distribution ordering after E&P carryover.
  • After a § 381 acquisition, distributions follow the LIFO ordering of § 316(a).
  • Distributions are first sourced to current E&P (the "nimble dividend" rule), then to accumulated E&P on a LIFO basis (most recent earnings first), then return of capital (reducing shareholder basis), then capital gain.
  • CAUTION. Because positive transferor E&P merges immediately with acquirer E&P, it becomes available for distribution immediately. Clients should be advised that the acquisition may increase dividend capacity.

Step 8. NOL Carryover Timing and Year-of-Acquisition Limitations

"In determining the net operating loss deduction, the portion of such deduction attributable to the net operating loss carryovers of the distributor or transferor corporation to the first taxable year of the acquiring corporation ending after the date of distribution or transfer shall be limited to an amount which bears the same ratio to the taxable income (determined without regard to a net operating loss deduction) of the acquiring corporation in such taxable year as the number of days in the taxable year after the date of distribution or transfer bears to the total number of days in such taxable year." (IRC § 381(c)(1)(B))

• The transferor's taxable year closes.
  • Under § 381(b)(1), the taxable year of the distributor or transferor corporation ends on the date of distribution or transfer. The transferor must file a short-period return for this final taxable year.
  • The acquiring corporation's taxable year does not close unless the transfer occurs on the last day of the acquiring corporation's taxable year.
• First-year proration limitation.
  • In the acquiring corporation's first taxable year ending after the transfer, the NOL deduction attributable to the transferor's carryovers is limited to a prorated amount. (IRC § 381(c)(1)(B))
  • The limitation ratio equals the number of days in the taxable year AFTER the transfer date divided by the total number of days in the taxable year.
  • EXAMPLE. The transfer occurs on September 1. The acquiring corporation has a calendar tax year with $365,000 of taxable income (without NOL deduction). There are 121 days after September 1 in the year. The maximum transferor NOL deduction is $365,000 x (121/365) = $121,000.
  • TRAP. If the transfer occurs on the LAST DAY of the acquiring corporation's taxable year, the ratio is 1/365 (or 1/366), producing a tiny first-year limitation. However, the regulations confirm that the limitation applies to the first taxable year ENDING after the transfer, so if the transfer IS on the last day, the next year is the "first taxable year ending after" and no proration applies to that year. The statute limits the deduction "to the first taxable year of the acquiring corporation ending after the date of distribution or transfer." If the transfer is on December 31 of a calendar year, the first taxable year ending after that date is the NEXT calendar year, and no proration applies because the transfer did not occur during that year. (Treas. Reg. § 1.381(c)(1)-1(d))
• Part-year treatment for NOL absorption.
  • § 381(c)(1)(C) provides special rules for determining how much of the acquiring corporation's taxable income is available to absorb transferor NOLs.
  • The taxable year of the acquisition is computationally split into a "pre-acquisition part year" and a "post-acquisition part year." (IRC § 381(c)(1)(C)(i))
  • Transferor NOLs can only offset the post-acquisition part year's income.
  • The acquirer's own NOLs offset the pre-acquisition part year's income first.
  • Taxable income is divided between the two part years in proportion to the number of days in each, unless a closing-of-the-books election is made.
• Closing-of-the-books election.
  • The acquiring corporation may elect under Treas. Reg. § 1.381(c)(1)-1(e) and § 1.382-6(b) to allocate income and loss between the pre-acquisition and post-acquisition periods based on actual results rather than the default daily proration.
  • The election is made by attaching a statement to the return for the taxable year of the distribution or transfer. (Treas. Reg. § 1.382-6(b))
  • The election is IRREVOCABLE.
  • A closing-of-the-books election is beneficial when the acquiring corporation's operations produced significantly different results before and after the transfer date (e.g., seasonal businesses, one-time gains or losses).
• Carryback prohibition (with F reorganization exception).
  • § 381(b)(3) generally prohibits the acquiring corporation from carrying back post-acquisition losses to the transferor's taxable years.
  • This prohibition does NOT apply to F reorganizations. (IRC § 381(b)(3))
• NOL carryover period.
  • Pre-2018 NOLs have a 20-year carryforward period and 100% of taxable income may be offset. (IRC § 172(b)(1), pre-TCJA)
  • 2018-2020 NOLs (CARES Act) have a 5-year carryback available, indefinite carryforward, and are temporarily 100% offset. (CARES Act § 2303)
  • Post-2020 NOLs have no carryback (generally), indefinite carryforward, and 80% of taxable income limitation. (IRC § 172(a), (b)(1), as amended by TCJA)
  • TRAP. The acquiring corporation must track the origin and age of each NOL separately because different limitation rules apply based on when the NOL was generated.

Step 9. § 382 Ownership Change Testing

"There is an ownership change with respect to any loss corporation if, on any testing date, the percentage of stock of such corporation owned by 1 or more 5-percent shareholders (as defined in subsection (k)(7)) has increased by more than 50 percentage points over the lowest percentage of stock of such corporation owned by such 5-percent shareholders at any time during the testing period." (IRC § 382(g)(1))

• Loss corporation definition.
  • A "loss corporation" includes any corporation entitled to use an NOL carryover, having an NOL for the taxable year, entitled to use a disallowed business interest carryforward under § 163(j), or having a net unrealized built-in loss. (IRC § 382(k)(1))
  • The TCJA expanded the definition to include corporations with § 163(j) disallowed interest carryforwards. Profitable corporations with high leverage may now be loss corporations for § 382 purposes.
• The 50-percentage-point test.
  • An ownership change occurs when one or more 5-percent shareholders increase their ownership by MORE THAN 50 percentage points over their lowest ownership percentage during the testing period. (IRC § 382(g)(1))
  • The test is applied by VALUE, not by vote.
  • The "lowest percentage" is measured over the 3-year testing period (generally). (IRC § 382(i))
• 5-percent shareholders.
  • A "5-percent shareholder" is any person (individual, entity, or public group) owning 5% or more of the stock of the loss corporation at any time during the testing period. (IRC § 382(k)(7))
  • All stock owned by shareholders who are NOT 5-percent shareholders is aggregated and treated as stock owned by a single "public group." (IRC § 382(g)(4)(A))
  • For publicly traded corporations, the public group concept prevents the need to track every small shareholder individually.
  • Attribution rules of § 318(a) apply with modifications. (IRC § 382(l)(3)(A))
• Testing period.
  • The testing period is generally the 3-year period ending on the day of any owner shift involving a 5-percent shareholder or equity structure shift. (IRC § 382(i))
  • The testing period is shortened if there was a prior ownership change or if the corporation has been a loss corporation for less than 3 years.
  • Multiple small transactions over three years can cumulatively trigger an ownership change.
• Equity structure shifts.
  • An equity structure shift includes any reorganization under § 368(a)(1) with respect to which the loss corporation is a party. (IRC § 382(g)(2))
  • Owner shifts and equity structure shifts are tested together. An ownership change can result from the cumulative effect of both types of transactions.
• Small issuance and small redemption exceptions.
  • Treas. Reg. § 1.382-3(j) provides exceptions for small issuances (less than 10% of stock value), cash issuances to creditors, certain secondary transfers, and small redemptions.
  • These exceptions prevent routine capital-raising activities from inadvertently triggering ownership changes.
• Fluctuations in value.
  • Changes in proportionate ownership attributable solely to fluctuations in the relative fair market values of different classes of stock are disregarded. (IRC § 382(l)(3)(C)) (Notice 2010-50)
  • This provision protects corporations with multiple classes of stock from value-driven ownership changes.
• The change date.
  • The "change date" is the date on which the owner shift or equity structure shift that completes the ownership change occurs. (IRC § 382(j))
  • The § 382 limitation applies to all post-change years beginning on or after the change date.

Step 10. The § 382 Limitation Calculation

"The section 382 limitation for any post-change year which is the first year ending after the change date shall be an amount equal to the value of the loss corporation immediately before the ownership change, multiplied by the long-term tax-exempt rate." (IRC § 382(b)(1))

• Base limitation formula.
  • Annual § 382 limitation = Value of the old loss corporation's stock immediately before the ownership change x Long-term tax-exempt rate. (IRC § 382(b)(1))
  • The long-term tax-exempt rate is the highest adjusted Federal long-term rate in effect for any month in the 3-calendar-month period ending with the month of the ownership change. (IRC § 382(f))
  • The IRS publishes the long-term tax-exempt rate monthly in Revenue Rulings.
• Valuation of the old loss corporation.
  • Value is the fair market value of all stock of the old loss corporation immediately before the ownership change. (IRC § 382(e)(1))
  • Value includes all classes of stock (common and preferred), including pure preferred stock. (Treas. Reg. § 1.382-2(a)(3))
  • For publicly traded companies, trading value is a starting point but may not equal fair market value for control blocks.
  • For privately held companies, different classes of stock may have different rights and values.
• Anti-stuffing adjustment.
  • § 382(l)(1) disregards capital contributions made as part of a plan to increase the § 382 limitation if a principal purpose of the contribution was to avoid or increase the limitation.
  • Notice 2008-78 provides safe harbors for contributions made in the ordinary course of business.
• Nonbusiness asset adjustment.
  • § 382(l)(4) reduces the value of the old loss corporation if nonbusiness assets (passive assets not used in the active conduct of a trade or business) exceed one-third of total assets.
  • The value is reduced by the excess of the value of nonbusiness assets over the liabilities allocable to those assets.
• Continuity of business enterprise (COBE).
  • Under § 382(c), the acquiring corporation must continue the loss corporation's business enterprise (or use a significant portion of its assets in a business) for the 2-year period beginning on the change date.
  • If the COBE requirement is not met, the § 382 limitation for all post-change years is ZERO. (IRC § 382(c))
  • If losses have already been deducted before COBE failure, the disallowance is retroactive. (Treas. Reg. § 1.382-1(d))
• Bankruptcy exceptions.
  • § 382(l)(5) provides a complete exemption from the § 382 limitation if (a) the loss corporation was under the jurisdiction of a court in a Title 11 or similar case immediately before the ownership change, AND (b) the corporation's former creditors and its shareholders (as a result of being creditors or shareholders before the case) own at least 50% of the stock of the new loss corporation after the ownership change.
  • The price of the § 382(l)(5) exemption is that the corporation's NOL carryovers must be reduced by the interest deductions claimed (or that could have been claimed) for the 3 years preceding the change year and the period before the change date in the change year. (IRC § 382(l)(5)(B))
  • § 382(l)(5) does not apply to a second ownership change within 2 years. If a second change occurs, the § 382 limitation becomes zero. (IRC § 382(l)(5)(D))
  • As an alternative, the corporation may elect under § 382(l)(6) to apply the normal § 382 rules with a special valuation rule (value = the lesser of the value of the stock after the ownership change or the value of the pre-change assets). (IRC § 382(l)(6))
• Unused limitation carryforward.
  • Any portion of the § 382 limitation not used in a post-change year carries forward and is added to the next year's limitation. (IRC § 382(b)(2))
  • This carryforward of unused limitation does NOT extend the NOL carryforward period. If NOLs expire before the limitation is fully used, they are lost.
• Short taxable year proration.
  • If a post-change year is a short taxable year (less than 12 months), the § 382 limitation is prorated on a daily basis. (IRC § 382(b)(3)(A))

Step 11. NUBIG and NUBIL Analysis

"The term 'net unrealized built-in gain' means the amount by which the fair market value of the assets of the loss corporation immediately before the ownership change exceeds the aggregate adjusted basis of such assets at such time." (IRC § 382(h)(1)(A))

• Threshold test.
  • A corporation has a net unrealized built-in gain (NUBIG) or net unrealized built-in loss (NUBIL) only if the amount of the excess of aggregate FMV over aggregate adjusted basis (or vice versa) exceeds the lesser of (a) $10,000,000 or (b) 15% of the aggregate FMV of the assets. (IRC § 382(h)(3)(B))
  • If the threshold is not met, NUBIG/NUBIL is treated as zero. Neither RBIG nor RBIL rules apply.
  • EXAMPLE. Loss Corp has assets with aggregate FMV of $100M and aggregate adjusted basis of $82M. The unrealized gain is $18M. The threshold is the lesser of $10M or 15% of $100M = $15M. Since $18M exceeds $15M, Loss Corp has a NUBIG of $18M.
• 5-year recognition period.
  • RBIG and RBIL are tracked during the 5-year period beginning on the change date. (IRC § 382(h)(7)(A))
  • Only gains and losses recognized within this 5-year window can affect the § 382 limitation.
• Two approaches under Notice 2003-65.
  • Taxpayers may choose between the "338 approach" and the "1374 approach" to determine RBIG and RBIL. (Notice 2003-65, 2003-2 C.B. 747) (as modified by Notice 2018-30)
  • The 338 approach. This approach treats the corporation as if it had made a § 338 election on the change date. Built-in gains and losses are determined by reference to a hypothetical deemed asset sale. This approach can produce RBIG from wasting assets (depreciation, amortization) even without actual disposition. Generally more favorable to taxpayers with NUBIG.
  • The 1374 approach. This approach tracks only actually recognized gains and losses on dispositions of assets. No RBIG is generated until an asset is actually sold. Generally more favorable to taxpayers with NUBIL.
  • The election of approach is made by filing the first post-change tax return consistently with the chosen method.
  • TRAP. The election is effectively binding. Once chosen on the first post-change return, changing methods is difficult and may require IRS consent.
• Effect of NUBIG on the § 382 limitation.
  • If the corporation has a NUBIG, recognized built-in gains (RBIG) during the 5-year period INCREASE the § 382 limitation for the year of recognition. (IRC § 382(h)(1)(A))
  • The cumulative RBIG increases cannot exceed the total NUBIG amount.
  • This allows a corporation with built-in gain assets to recover the full benefit of its appreciation over the 5-year period.
• Effect of NUBIL on pre-change losses.
  • If the corporation has a NUBIL, recognized built-in losses (RBIL) during the 5-year period are treated as pre-change losses subject to the § 382 limitation. (IRC § 382(h)(1)(B))
  • RBIL includes ordinary losses on asset sales, capital losses, and certain depreciation deductions that are treated as RBIL.
  • The cumulative RBIL subject to limitation cannot exceed the total NUBIL amount.
• Current regulatory status (July 2025).
  • On July 2, 2025, Treasury and IRS WITHDREW the proposed regulations (REG-125710-18) that would have eliminated the 338 approach. (Federal Register Notice, July 2, 2025)
  • Notice 2003-65 remains fully in effect. Taxpayers may continue using either the 338 approach or the 1374 approach.
  • Treasury has stated it will "continue to study the issues" and may issue revised proposed regulations at an unspecified future date.

Step 12. § 383 Credit Limitations

"The amount of any credit... which may be used in any post-change year shall be limited to an amount which does not exceed the amount determined under subsection (b)." (IRC § 383(a))

• Credits subject to § 383.
  • § 383 applies the § 382 ownership change limitation framework to three categories of tax attributes. These are (1) general business credits under § 39, (2) minimum tax credits under § 53, and (3) foreign tax credits under § 27. (IRC § 383(a)) (IRC § 383(c))
  • Net capital loss carryforwards under § 1212 are also subject to § 383. (IRC § 383(b))
• Credit limitation computation.
  • The § 383 limitation is computed as the excess of the new loss corporation's regular tax liability over its regular tax liability computed as if an additional deduction equal to the remaining § 382 limitation were allowed. (IRC § 383(b))
  • In practical terms, the corporation must first exhaust its § 382 limitation on NOL deductions before it can use credit carryovers.
  • When credits are used, a "credit reduction amount" (the tax liability offset grossed up at the effective marginal rate) reduces the § 382 limitation available for carryforward to future years. (Treas. Reg. § 1.383-1(c))
• Ordering of attribute utilization.
  • The ordering rules establish a precise waterfall for attribute utilization after an ownership change.
  • 1. Recognized built-in capital losses (subject to NUBIL cap)
  • 2. Pre-change capital loss carryovers (subject to § 383)
  • 3. Recognized built-in losses (subject to NUBIL cap and § 382 limitation)
  • 4. Disallowed business interest carryforwards (subject to § 382 limitation)
  • 5. Pre-change NOL carryovers (subject to § 382 limitation)
  • 6. Foreign tax credits (subject to § 383)
  • 7. General business credits (subject to § 383)
  • 8. Minimum tax credits (subject to § 383)
• Interaction with § 382.
  • § 383 does not create a separate limitation. It applies the § 382 limitation framework to credits.
  • The § 382 limitation is first used for NOLs and built-in losses, and any remaining capacity is then available for credits.
  • Credits used reduce the § 382 limitation carryforward to subsequent years.

Step 13. § 384 Limitation on Pre-Acquisition Losses Against Built-in Gains

"If a corporation acquires directly (or through the acquisition of stock of a loss corporation) control of another corporation... and immediately after such acquisition, the acquiring corporation or the loss corporation is a gain corporation, then for the recognition period, the pre-acquisition loss of either such corporation shall not be allowed to offset the recognized built-in gain of either such corporation." (IRC § 384(a))

• When § 384 applies.
  • § 384 applies when (1) a corporation acquires control (defined as 80% of vote and value under § 1504(a)(2)) of another corporation (whether by stock acquisition or asset reorganization), AND (2) either the acquiring corporation OR the target (loss) corporation is a "gain corporation" immediately after the acquisition. (IRC § 384(a))
  • A "gain corporation" is a corporation with a net unrealized built-in gain. The threshold is the same as § 382(h)(3)(B), the lesser of $10M or 15% of FMV. (IRC § 384(c)(2))
• The § 384 limitation.
  • During the 5-year "recognition period" beginning on the acquisition date, the pre-acquisition losses of EITHER corporation cannot offset the recognized built-in gains of EITHER corporation. (IRC § 384(a))
  • Each corporation may use only its OWN pre-acquisition losses against its OWN recognized built-in gains.
  • EXAMPLE. Acquiring Corp (loss corp with $50M NOL) acquires Target Corp (gain corp with $30M NUBIG). In Year 2, Target sells a built-in gain asset and recognizes $10M of gain. Acquiring Corp's $50M NOL CANNOT offset Target's $10M RBIG. Only Target's own pre-acquisition losses (if any) can offset that gain.
• RBIG presumption.
  • Any gain recognized by the gain corporation during the 5-year recognition period is PRESUMED to be RBIG unless the taxpayer proves otherwise. (IRC § 384(c)(1))
  • This is the REVERSE of the § 382(h) presumption. The burden of proof is on the taxpayer to show that a gain is NOT RBIG.
  • This presumption makes § 384 one of the most taxpayer-unfavorable provisions in the Code.
• Exceptions to § 384.
  • § 384 does not apply if the acquiring corporation and the target corporation were under 50% common control (vote and value) for the 5-year period ending on the acquisition date. (IRC § 384(b)(1))
  • § 384 does not apply to the acquisition of control of a corporation if substantially all of the assets of the gain corporation and the loss corporation are used in the active conduct of one qualified trade or business. (IRC § 384(b)(2))
  • § 384(c)(6) provides affiliated group aggregation rules that treat members of an affiliated group as one corporation.
• No regulations.
  • Despite being enacted in 1987, § 384 has NEVER had regulations issued. There is no guidance on how to allocate income between RBIG and non-RBIG, how to apply the common control exception, or how the active business exception operates.
  • Practitioners must rely solely on the statutory text and limited case law.
  • CAUTION. The lack of regulations creates significant uncertainty. Conservative practitioners should assume all gains recognized by a gain corporation within 5 years are RBIG unless clearly attributable to post-acquisition activities.
• § 384 operates independently from § 382.
  • § 384 is NOT dependent on an ownership change under § 382. It applies whenever a gain corporation acquires or is acquired by a loss corporation, regardless of whether a § 382 ownership change occurs.
  • Both § 382 and § 384 can apply to the same transaction, further limiting attribute utilization.

Step 14. § 269 Anti-Avoidance and Anti-Abuse Doctrines

"If... any person or persons acquire, directly or indirectly, control of a corporation... and the principal purpose for which such acquisition was made is evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy, then the Secretary may disallow such deduction, credit, or other allowance." (IRC § 269(a))

• § 269(a) acquisitions.
  • § 269(a) covers two types of acquisitions. First, any person or persons acquiring control (at least 50% of vote or value) of a corporation. Second, any corporation acquiring property of another corporation with carryover basis. (IRC § 269(a)(1)-(2))
  • The principal purpose must be tax evasion or avoidance. "Principal purpose" means the tax avoidance purpose "exceeds in importance any other purpose." It need not be the sole purpose. (Treas. Reg. § 1.269-3(a))
• § 269(b). Liquidation After Qualified Stock Purchase.
  • § 269(b), added by the Deficit Reduction Act of 1984, applies when a corporation makes a qualified stock purchase (§ 338 definition), does NOT make a § 338 election, and liquidates the target within 2 years. (IRC § 269(b))
  • If the principal purpose of the liquidation is tax avoidance, the Secretary may disallow deductions, credits, or other allowances.
  • This provision prevents taxpayers from obtaining carryover basis in a target's assets and access to the target's tax attributes through a § 332 liquidation after a stock purchase.
• Transactions indicative of tax avoidance purpose.
  • Treas. Reg. § 1.269-3(b) lists transactions "ordinarily indicative" of tax avoidance purpose. These include (1) a profitable corporation acquiring a loss corporation followed by income-shifting transfers, (2) organizing multiple corporations to secure multiple benefits, and (3) transferring high-earning assets to a loss corporation.
  • Treas. Reg. § 1.269-3(c) lists property acquisitions indicative of tax avoidance. These include (1) acquiring property with carryover basis materially exceeding FMV to generate losses, and (2) a loss corporation acquiring high-earning assets from a related corporation.
• Bankruptcy presumption.
  • Treas. Reg. § 1.269-3(d) creates a presumption that acquisitions in connection with § 382(l)(5) bankruptcy reorganizations have tax avoidance as their principal purpose UNLESS the corporation carries on "more than an insignificant amount of an active trade or business" during and after the Title 11 case.
• Scope of "allowance."
  • Treas. Reg. § 1.269-1(a) defines "allowance" broadly as "anything in the internal revenue laws which has the effect of diminishing tax liability." This includes deductions, credits, adjustments, exemptions, exclusions, and accounting method elections.
  • CCA 202501008 (January 2025) applied § 269 to a check-the-box election, significantly expanding the scope of the provision to elective transactions.
• Key cases.
  • Gregory v. Helvering, 293 U.S. 465 (1935). The foundational case. A transaction literally satisfying the statutory definition of a reorganization was denied tax-free treatment because it was solely a device to extract appreciated property. The Court held that a transaction must have business purpose beyond tax avoidance.
  • Zanesville Investment Co. v. Commissioner, 335 F.2d 507 (6th Cir. 1964). § 269 does not reach post-acquisition operating losses. It applies only to pre-existing attributes.
  • Rocco, Inc. v. Commissioner, 72 T.C. 140 (1979). § 269 does not apply where the tax benefit was affirmatively granted by Congress.
  • Vulcan Materials Co. v. United States, 446 F.2d 690 (5th Cir. 1971). § 269 applies when a loss corporation acquires a profitable corporation to offset its losses.
• Economic substance doctrine (codified).
  • § 7701(o) codifies the economic substance doctrine. A transaction has economic substance only if (1) the transaction changes in a meaningful way (apart from Federal income tax effects) the taxpayer's economic position, AND (2) the taxpayer has a substantial purpose (apart from Federal income tax effects) for entering into the transaction. (IRC § 7701(o))
  • Both prongs must be satisfied. The conjunctive test makes this a strict standard.
  • If a transaction lacks economic substance, no tax benefit is allowed. (IRC § 7701(o)(2)(A))
• Practical indicators of IRS scrutiny.
  • A profitable corporation acquiring a loss corporation followed by income-shifting
  • No meaningful non-tax business purpose for the transaction structure
  • Acquiring built-in loss property with basis materially exceeding FMV
  • Multi-step structures where steps lack independent economic significance
  • QSP followed by target liquidation within 2 years without a § 338 election
  • Post-bankruptcy acquisitions without active business continuation
  • Organizing multiple corporations solely to secure multiple tax benefits

Step 15. Step-Transaction and Substance-Over-Form Doctrines

• The step-transaction doctrine.
  • The step-transaction doctrine allows the IRS and courts to treat a series of formally separate transactions as a single integrated transaction when designed and executed as parts of a unitary plan. (FNMA v. Commissioner, 896 F.2d 580 (D.C. Cir. 1990))
  • The doctrine can either deny reorganization treatment (denying § 381 carryover) or create reorganization treatment (imposing § 381 carryover where the taxpayer sought taxable treatment). (McDonald's Restaurants of Illinois, Inc. v. Commissioner, 688 F.2d 520 (7th Cir. 1982))
• The three tests.
  • 1. Binding commitment test. If there was a binding commitment to undertake the later steps at the time of the first step, all steps are treated as a single transaction. (Commissioner v. Gordon, 391 U.S. 83 (1968)) This is the most restrictive test.
  • 2. Mutual interdependence test. If the steps are so interdependent that the legal relations created by one transaction would have been fruitless without the completion of the series, all steps are treated as one. (Redding v. Commissioner, 630 F.2d 1169 (7th Cir. 1980))
  • 3. End result test. If a series of transactions are prearranged parts of a single scheme to reach an ultimate result, they are treated as a single transaction regardless of whether there was a binding commitment. (King Enterprises, Inc. v. United States, 418 F.2d 511 (Ct. Cl. 1969)) This is the broadest test.
• Impact on attribute carryovers.
  • When the step-transaction doctrine recharacterizes a purported reorganization as a taxable acquisition, § 381 attribute carryover is lost entirely because § 381(a)(2) applies only to reorganizations described in § 368. (Yoc Heating Corp. v. Commissioner, 61 T.C. 168 (1973))
  • When the doctrine combines separate steps to create reorganization treatment, carryover may be imposed on a transaction that the taxpayer structured as taxable.
  • TRAP. The step-transaction doctrine is asymmetrical. The IRS can use it to deny reorganization treatment (denying carryover), but taxpayers have successfully used the "separating" version to break apart an integrated transaction into taxable and nontaxable components. (McDonald's Restaurants, 688 F.2d 520 (7th Cir. 1982))
• Rev. Rul. 67-274 - binding commitment in practice.
  • Rev. Rul. 67-274 held that where a corporation transferred assets to a newly formed corporation and the transferor's shareholders simultaneously sold their stock to a third party pursuant to a prearranged plan, the transfer and sale were treated as an integrated taxable sale of assets under the step-transaction doctrine.
  • The ruling illustrates how a prearranged sale can destroy reorganization treatment and eliminate § 381 carryover.
• Substance-over-form doctrine.
  • Under the substance-over-form doctrine, the IRS may recharacterize a transaction based on its economic reality rather than its legal form. (Minnesota Tea Co. v. Helvering, 302 U.S. 609 (1938))
  • The doctrine is closely related to the business purpose requirement of Gregory v. Helvering.
  • In the attribute carryover context, substance-over-form recharacterization can convert a purported tax-free reorganization (with carryover) into a taxable purchase (without carryover) or vice versa.
• Mitigating step-transaction risk.
  • Each step should have independent economic significance and business purpose.
  • Avoid binding commitments for later steps at the time of the first step.
  • Use separate agreements with unrelated consideration for each step.
  • Allow adequate time between steps (though no fixed safe harbor exists).
  • Document the independent business purpose for each step contemporaneously.
  • CAUTION. There is no "step-transaction safe harbor." The IRS can apply the doctrine to any integrated plan regardless of the time between steps.

Step 16. TCJA and Post-2017 Amendments

• NOL carryover changes.
  • Pre-2018 NOLs have a 20-year carryforward and 100% of taxable income may be offset. A 2-year carryback was reinstated by the CARES Act for 2018-2020 NOLs. (IRC § 172, pre-TCJA) (CARES Act § 2303)
  • Post-2017 NOLs (arising in tax years beginning after December 31, 2017) have no carryback (generally), indefinite carryforward, and 80% of taxable income limitation. (IRC § 172(a), (b)(1), as amended by TCJA § 13302)
  • TRAP. The acquiring corporation must maintain separate tracking of pre-2018 NOLs (100% offsettable, 20-year carryforward) and post-2017 NOLs (80% limitation, indefinite carryforward). These two buckets may not be commingled for limitation purposes.
• § 163(j) business interest limitation.
  • The TCJA added § 163(j), limiting business interest expense deductions to 30% of adjusted taxable income (ATI). (IRC § 163(j), as amended by TCJA § 13301)
  • Disallowed business interest under § 163(j) is treated as a § 381(c)(20) carryover item and is carried over in a § 381 transaction. (IRC § 381(c)(20))
  • Disallowed business interest is also treated as a pre-change loss for § 382 purposes. (IRC § 382(k)(1))
  • The OBBBA (2025) restored EBITDA-based ATI computation for tax years beginning after 2024.
• § 174 R&E expenditure capitalization.
  • The TCJA required R&E expenditures to be capitalized and amortized over 5 years (15 years for foreign research). (IRC § 174(a)(2), as amended by TCJA § 13204)
  • The OBBBA (2025) restored immediate expensing for domestic R&E via new § 174A for tax years beginning after 2024.
  • Capitalized R&E creates additional deductions that may increase NOLs available for carryover.
• CAMT (Corporate Alternative Minimum Tax).
  • The Inflation Reduction Act of 2022 enacted a 15% CAMT on adjusted financial statement income (AFSI) for applicable corporations. (IRC § 55, as amended by P.L. 117-169)
  • CAMT operates as a parallel tax system with its own set of rules for financial statement net operating losses (FSNOLs).
  • FSNOLs have an 80% limitation and SRLY-type carryover rules similar to § 382.
  • Notice 2025-49 provides guidance on pre-2020 embedded depreciation.
  • TRAP. CAMT requires separate attribute tracking. A corporation may have different NOL positions for regular tax and CAMT purposes.
• FDII and GILTI.
  • § 250 provides deductions for foreign-derived intangible income (FDII) and global intangible low-taxed income (GILTI).
  • These deductions are limited by taxable income and do not have carryforwards. Excess deductions are lost.
  • § 250 deduction rates are 37.5% for FDII and 50% for GILTI for tax years beginning before 2026. For tax years beginning after 2025, rates change to 21.875% (FDII) and 37.5% (GILTI) per the OBBBA.

Step 17. State Tax Conformity

• Rolling vs. fixed-date conformity.
  • States adopt federal tax law changes through either "rolling conformity" (automatically conforming to current federal law) or "fixed-date conformity" (conforming to federal law as of a specific date).
  • Rolling conformity states automatically adopt TCJA changes, CARES Act changes, and subsequent amendments.
  • Fixed-date conformity states may decouple from specific federal provisions.
• Key state deviations.
  • California decouples from the federal 80% NOL limitation, maintaining its own 100% offset for pre-2018 NOLs with a 20-year carryforward. California suspended NOL deductions for 2024-2026 for taxpayers with income over $1M. (Cal. Rev. & Tax. Code § 24416.20)
  • California decouples from § 163(j), applying its own interest limitation rules.
  • California does not conform to CAMT.
  • Illinois decouples from the § 382 limitation, meaning Illinois NOLs are not subject to federal-style ownership change limitations.
  • New York and Pennsylvania conform to federal § 382 but apply their own computation methodologies.
  • Texas (margin tax) has its own set of attribute rules that differ materially from federal rules.
• State attribute tracking.
  • Practitioners must maintain separate attribute schedules for federal and state tax purposes.
  • State NOLs may have different carryforward periods, different limitation percentages, and different suspension periods.
  • A § 382 ownership change at the federal level may or may not trigger a state-level limitation depending on state conformity.
• TRAP. Even in rolling conformity states, specific provisions may be decoupled. Always verify the current state of conformity for each state in which the acquiring or transferor corporation files.

Step 18. Documentation, Reporting, and Disclosure

• Reorganization disclosure statements.
  • Treas. Reg. § 1.368-3(a) requires each corporate party to a reorganization to file a statement with its return for the taxable year of the reorganization. The statement must include (1) names and EINs of all parties, (2) date of the reorganization, (3) FMV and basis of assets transferred, (4) any private letter ruling numbers, and (5) the Code section under which the reorganization is claimed.
  • Treas. Reg. § 1.368-3(b) requires each "significant holder" (any person who, immediately before the reorganization, owned 5% or more of the stock of any party, or any person who received securities in the reorganization with a basis of $1M or more) to file a statement describing the securities received and surrendered.
  • Both statements must be filed with the return for the taxable year of the reorganization. (Treas. Reg. § 1.368-3(c))
• § 381 transfer statements.
  • If the acquiring corporation and transferor corporation agree on a date of transfer that differs from the actual distribution date, a consent statement must be attached to both returns electing the agreed date. (Treas. Reg. § 1.381(b)-1(b)(3))
  • The transferor corporation must file a short-period return for the taxable year ending on the date of transfer. (Treas. Reg. § 1.381(b)-1(c))
• § 382 Information Statement.
  • Treas. Reg. § 1.382-11(a) requires the new loss corporation to file an information statement with its return for the taxable year of the ownership change describing the change, the computation of the § 382 limitation, and the value of the loss corporation.
  • The closing-of-the-books election under § 1.382-6(b) requires an election statement attached to the return.
• Substantiation records.
  • Treas. Reg. § 1.381(a)-1(d) requires taxpayers to retain permanent records including the amount, basis, and fair market value of all transferred property, and relevant facts regarding any liabilities assumed or extinguished.
  • Maintain schedules showing the origin, age, and amount of each NOL, capital loss, credit carryover, and other attribute.
  • Document the § 382 ownership change analysis, including ownership tracking and 5-percent shareholder identification.
  • Document the § 384 gain corporation analysis if applicable.
  • Retain business purpose documentation for the reorganization.
  • Keep all reorganization agreements, plans of liquidation, and board resolutions.
• Schedule UTP (Uncertain Tax Positions).
  • Corporations with $10 million or more in assets must file Schedule UTP with Form 1120 if they have uncertain tax positions.
  • Positions relating to reorganization qualification, § 382 limitation computations, and attribute carryover treatment may require disclosure.
• Common audit issues.
  • Transaction qualification challenges (whether the transaction actually qualifies as a § 332 liquidation or § 368 reorganization)
  • § 382 ownership change computation errors
  • E&P carryover miscalculations (failure to apply the hovering deficit rule)
  • Improper accounting method changes without IRS consent
  • § 269 business purpose challenges
  • § 384 pre-acquisition loss limitations
  • Missing or incomplete disclosure statements
  • Failure to maintain separate pre-2018 and post-2017 NOL tracking
  • CAMT attribute tracking failures
• Document retention period.
  • Permanent records must be retained for as long as they may be material to the administration of the tax law. (Treas. Reg. § 1.6001-1(e))
  • For attribute carryovers, retain all documentation until the last carried-over attribute is either fully utilized or expired, PLUS the statute of limitations period for the final year of utilization.
  • CAUTION. Because NOL carryforwards may have 20-year or indefinite carryforward periods, documentation may need to be retained for decades.