Corporate Tax | Just Tax

NOL Limitation After Ownership Change (§§ 382, 383)

This checklist computes the annual NOL utilization limit following an ownership change under §§ 382 and 383, applies the RBIG and RBIL recognition-period framework, and extends the limitation to credits and capital loss carryforwards. Use it whenever a loss corporation experiences a greater-than-50-percentage-point ownership shift among five-percent shareholders.

Step 1. The Loss Corporation Definition

§ 382(k)(1) provides that the term "loss corporation" means a corporation entitled to use a net operating loss carryover or having a net operating loss for the taxable year in which the ownership change occurs. Such term shall include any corporation entitled to use a carryforward of disallowed interest described in section 381(c)(20). Except to the extent provided in regulations, such term includes any corporation with a net unrealized built-in loss.

• The statutory definition covers four categories. (1) A corporation entitled to use an NOL carryover. (2) A corporation with a current-year NOL in the change year. (3) A corporation entitled to use a disallowed interest carryforward under § 381(c)(20) (added by TCJA). (4) A corporation with a NUBIL.
• Treas. Reg. § 1.382-2(a)(1) expands the definition beyond NOLs to include a corporation entitled to use a capital loss carryover, a carryover of excess foreign taxes under § 904(c), a carryforward of a general business credit under § 39, a carryover of a minimum tax credit under § 53, or a section 382 disallowed business interest carryforward.
• The regulatory test for current-year attributes at Treas. Reg. § 1.382-2(a)(1)(B) looks to whether the corporation has a net operating loss, net capital loss, excess foreign taxes, unused general business credits, or unused minimum tax credit for the taxable year that includes a testing date.
• Old loss corporation under § 382(k)(2) means any corporation with respect to which there is an ownership change that was a loss corporation immediately before the ownership change.
• New loss corporation under § 382(k)(3) means a corporation which after an ownership change is a loss corporation. Nothing in this section shall be treated as implying that the same corporation may not be both the old loss corporation and the new loss corporation.
• Practitioner task - catalog all attributes. Open the engagement by preparing a complete inventory of every attribute that could make the client a loss corporation. Include NOL carryovers, current-year NOLs, capital loss carryovers, excess foreign taxes, general business credits, minimum tax credits, disallowed business interest carryforwards under § 163(j), and NUBIL status.
• Successor corporation treatment. Under Treas. Reg. § 1.382-2(a)(5), a successor corporation includes a distributee or transferee that succeeds to items under § 381(c) and also any corporation that receives assets where basis is determined by reference to the transferor's basis and the aggregate difference between basis and value is material.
• Predecessor corporation treatment. Under Treas. Reg. § 1.382-2(a)(6), a predecessor corporation includes a distributor or transferor in a § 381(a) transaction and any corporation that transfers assets where the transferee's basis is determined by reference to the transferor's basis and the aggregate basis-value difference is material.

Step 2. The Ownership Change Test Under § 382(g)

§ 382(g)(1) provides that there is an ownership change if, immediately after any owner shift involving a 5-percent shareholder or any equity structure shift, (A) the percentage of the stock of the loss corporation owned by 1 or more 5-percent shareholders has increased by more than 50 percentage points, over (B) the lowest percentage of stock of the loss corporation owned by such shareholders at any time during the testing period.

• The threshold is more than 50 percentage points. The test measures whether the aggregate percentage increase by one or more 5-percent shareholders exceeds 50 percentage points. A 50.01 percentage point increase triggers an ownership change. A 50.00 percentage point increase does not.
• The increase is cumulative across all 5-percent shareholders. The test aggregates the increases of all 5-percent shareholders. It is not limited to the increase by any single shareholder. A shareholder who decreases their ownership can offset another's increase only to the extent the decreasing shareholder's ownership is removed from the calculation.
• The comparison point is the lowest percentage during the testing period. The increase is measured against the lowest aggregate ownership percentage of the relevant 5-percent shareholders at any time during the testing period. This is not a beginning-to-end comparison. It is a lowest-point-to-end comparison.
• All determinations are by value, not share count. § 382(k)(5) defines "value" as fair market value. § 382(k)(6)(C) requires that determinations of percentage ownership be made on the basis of value. A shareholder with 5% of the shares by count but 10% by value is a 5-percent shareholder.
• Small shareholder aggregation under § 382(g)(4)(A). All shareholders owning less than 5% of the stock are aggregated and treated as a single fictional 5-percent shareholder (a "public group" under the regulations). This administrative convenience rule means the corporation need not track every small shareholder individually.
• The 5-percent shareholder definition. § 382(k)(7) defines a 5-percent shareholder as any person holding 5 percent or more of the stock of the corporation at any time during the testing period. Treas. Reg. § 1.382-2T(g)(1) elaborates to include individuals owning directly or indirectly through first tier or higher tier entities, and public groups identified under the segregation rules.
• Public group defined. Under Treas. Reg. § 1.382-2T(f)(13), a public group is a group of individuals, entities, or other persons each of whom owns directly or constructively less than five percent of the loss corporation.
• Case law - Garber Industries Holding Co. v. Commissioner, 124 T.C. 1 (2005), aff'd 435 F.3d 555 (5th Cir. 2006). The Tax Court (affirmed by the Fifth Circuit) held that siblings are NOT aggregated as family members under § 382(l)(3)(A). Only spouse, children, grandchildren, and parents are treated as one individual. The court reasoned that a determination of family must start with an actual living shareholder.

Step 3. Testing Period and Testing Dates

§ 382(i)(1) provides that except as otherwise provided in this section, the testing period is the 3-year period ending on the day of any owner shift involving a 5-percent shareholder or equity structure shift. § 382(i)(2) provides that if there has been an ownership change under this section, the testing period for determining whether a 2nd ownership change has occurred shall not begin before the 1st day following the change date for such earlier ownership change.

• The standard testing period is 3 years ending on the testing date. Under § 382(i)(1), the testing period is the three-year period ending on the day of the relevant transaction. Treas. Reg. § 1.382-2T(d)(1) confirms that the testing period for any testing date is the three-year period ending on the testing date.
• The testing period shortens after a prior ownership change. Under § 382(i)(2) and Treas. Reg. § 1.382-2T(d)(2), following an ownership change the testing period for a subsequent ownership change begins no earlier than the first day following the change date of the most recent ownership change. The testing period never extends backward through a prior change date.
• The testing period also shortens where losses arose after the period began. Under § 382(i)(3), the testing period shall not begin before the earlier of the first day of the first taxable year from which there is a carryforward of a loss or excess credit to the first post-change year or the taxable year in which the transaction being tested occurs. This provision does not apply to a loss corporation that has a NUBIL.
• Testing date defined. Treas. Reg. § 1.382-2(a)(4) defines a testing date as the date immediately after any owner shift or issuance or transfer of an option treated as exercised under § 1.382-4(d)(2). All computations of increases in percentage ownership are made as of the close of the testing date, and transactions on that date are treated as occurring simultaneously at the close.
• Change date defined. § 382(j)(1) provides that where the last component of an ownership change is an owner shift involving a 5-percent shareholder, the change date is the date on which such shift occurs. § 382(j)(2) provides that where the last component is an equity structure shift, the change date is the date of the reorganization.
• Computations as of close of testing date. Under Treas. Reg. § 1.382-2(a)(4), all computations are made as of the close of the testing date. Any transactions described in the regulation that occur on that date are treated as occurring simultaneously at the close.
• Testing dates prior to November 5, 1992. Under Treas. Reg. § 1.382-2T(a)(2)(i), for testing dates prior to November 5, 1992, a loss corporation must determine whether an ownership change has occurred immediately after any owner shift, any equity structure shift, or any transaction in which an option is transferred to or by a 5-percent shareholder or issued by the loss corporation.

Step 4. Owner Shifts, Equity Structure Shifts, and Stock Counting

§ 382(g)(2) provides that there is an owner shift involving a 5-percent shareholder if there is any change in the respective ownership of stock of a corporation, and such change affects the percentage of stock of such corporation owned by any person who is a 5-percent shareholder before or after such change.

• Owner shift defined broadly. Under Treas. Reg. § 1.382-2T(e)(1), an owner shift is any change in the ownership of the stock of a loss corporation that affects the percentage of such stock owned by any 5-percent shareholder. This includes a purchase or disposition by a 5-percent shareholder, a § 351 exchange, a redemption, a recapitalization, a stock issuance, or an equity structure shift.
• Transfers among non-5-percent shareholders are disregarded. Under Treas. Reg. § 1.382-2T(e)(1)(ii), an owner shift does not include a transfer of stock that does not affect the percentage owned by any 5-percent shareholder. Small shareholder trades among themselves generally do not trigger owner shifts.
• Equity structure shift defined. § 382(g)(3)(A) defines an equity structure shift as any reorganization within the meaning of § 368. This term does not include any reorganization described in § 368(a)(1)(D) or (G) unless the requirements of § 354(b)(1) are met, and does not include any reorganization described in § 368(a)(1)(F).
• Excluded reorganizations. Divisive D reorganizations and G reorganizations (unless § 354(b)(1) is met) are excluded from the equity structure shift definition. F reorganizations (mere changes in identity, form, or place of organization) are also excluded.
• § 1504(a)(4) preferred stock excluded from "stock." § 382(k)(6)(A) provides that except as provided in regulations and subsection (e), the term "stock" means stock other than stock described in section 1504(a)(4). Straight preferred stock (non-voting, limited and preferred as to dividends, limited redemption/liquidation rights, non-convertible) is not treated as stock for ownership change purposes.
• TRAP. Preferred stock counts for value determination. While § 1504(a)(4) stock is excluded from the ownership change calculation, it IS included in determining the value of the old loss corporation under § 382(e)(1). Do not exclude preferred stock from the value computation.
• Options and warrants generally NOT treated as exercised. Under Treas. Reg. § 1.382-4(d)(1), the general rule is that an option is not treated as exercised under § 382(l)(3)(A). The temporary regulation rule of automatic deemed exercise was replaced by the final regulation three-test framework.
• Option defined broadly. Treas. Reg. § 1.382-4(d)(9) defines an option to include any contingent purchase, warrant, convertible debt, put, stock subject to a risk of forfeiture, contract to acquire stock, or similar interest, regardless of whether contingent or not currently exercisable.
• Poison pill exception. Rev. Rul. 90-11, 1990-1 C.B. 10, held that contingent rights issued to shareholders pursuant to a poison pill rights plan are not subject to option attribution as long as the loss corporation could redeem the rights for little or no consideration without shareholder approval.

Step 5. Constructive Ownership and the Look-Through Rules

§ 382(l)(3)(A) provides that section 318(a) shall apply in determining ownership of stock, except that (i) paragraphs (1) and (5)(B) of section 318(a) shall not apply, but (ii) an individual and all members of his family (within the meaning of section 318(a)(1)) shall be treated as 1 individual.

• § 318(a) applies with modifications. The constructive ownership rules of § 318(a) generally apply for purposes of determining ownership of loss corporation stock. Treas. Reg. § 1.382-2T(h)(1) confirms that the constructive ownership rules apply subject to the modifications in § 382(l)(3)(A) and the regulations.
• Family members treated as one individual. Under § 382(l)(3)(A)(ii), an individual and all members of his family within the meaning of § 318(a)(1) are treated as one individual. The family members under § 318(a)(1) are spouse, children, grandchildren, and parents.
• Siblings are NOT included in the family unit. § 318(a)(1) does not include siblings. The § 382(l)(3)(A)(i) cross-reference to § 318(a)(1) means brothers and sisters are not aggregated. Garber Industries Holding Co. v. Commissioner, 124 T.C. 1 (2005), aff'd 435 F.3d 555 (5th Cir. 2006) definitively establishes this rule.
• § 318(a)(5)(B) chain attribution does not apply. § 382(l)(3)(A)(i) explicitly excludes § 318(a)(5)(B) from application. Stock attributed from one entity to another is not reattributed under the chain attribution rules.
• The look-through rule for entities. Under Treas. Reg. § 1.382-2T(h)(2)(i), stock owned directly or indirectly by an entity is attributed to its owners by treating the stock attributed pursuant to § 318(a)(2) as no longer being owned by the entity from which it is attributed. This is the core recharacterization approach.
• The 50% corporate attribution limitation removed. § 382(l)(3)(A)(ii)(I) provides that § 318(a)(2) is applied without regard to the 50-percent limitation contained in § 318(a)(2)(C). A corporation with any ownership interest in the loss corporation looks through completely to its shareholders regardless of the percentage owned.
• First tier entity defined. Under Treas. Reg. § 1.382-2T(f)(9), a first tier entity is an entity that at any time during the testing period owns a five percent or more direct ownership interest in the loss corporation.
• Higher tier entity defined. Under Treas. Reg. § 1.382-2T(f)(14), a higher tier entity is any entity that at any time during the testing period owns a five percent or more direct ownership interest in a first tier entity or in any higher tier entity.
• 5-percent owner defined. Under Treas. Reg. § 1.382-2T(f)(10), a 5-percent owner is any individual that at any time during the testing period owns a five percent or more direct ownership interest in a first tier entity or a higher tier entity.
• Limitation on attribution from certain entities. Under Treas. Reg. § 1.382-2T(h)(2)(iii), certain entities are treated as unrelated individuals for attribution purposes. These include any entity other than a higher tier entity that owns five percent or more of the loss corporation, a qualified trust described in § 401(a), and any state, foreign government, or political subdivision.
• Smallest increase rule for overlapping family members. Under Treas. Reg. § 1.382-2T(h)(6)(iv), where individuals can be members of more than one family and each family would be a 5-percent shareholder, overlapping individuals are treated as members of the family that results in the smallest increase in total percentage stock ownership.

Step 6. The § 382 Limitation Formula

§ 382(a) provides that the amount of the taxable income of any new loss corporation for any post-change year which may be offset by pre-change losses shall not exceed the section 382 limitation for such year. § 382(b)(1) provides that the section 382 limitation for any post-change year is an amount equal to (A) the value of the old loss corporation, multiplied by (B) the long-term tax-exempt rate.

• The fundamental cap. § 382(a) establishes the ceiling. The taxable income of a new loss corporation for any post-change year that may be offset by pre-change losses cannot exceed the § 382 limitation for that year. This is an annual limitation applied separately to each post-change year.
• The limitation applies to taxable income, not to the NOLs themselves. Pre-change NOLs retain their full amounts and carryforward periods under § 172. The limitation caps the amount of taxable income that can be offset by those pre-change losses. Excess NOLs that cannot be used because of the limitation carry forward subject to their § 172 expiration period.
• The limitation formula is value times rate. § 382(b)(1) provides that the § 382 limitation equals the value of the old loss corporation multiplied by the long-term tax-exempt rate. No other formula applies to compute the base limitation.
• Value of the old loss corporation under § 382(e)(1). The value is the fair market value of the stock of the old loss corporation immediately before the ownership change. This includes all classes of stock including § 1504(a)(4) preferred stock. The valuation is based on fair market value, not book value, par value, or adjusted tax basis.
• Long-term tax-exempt rate under § 382(f)(1). The rate is the highest of the adjusted Federal long-term rates in effect for any month in the three-calendar-month period ending with the calendar month in which the change date occurs. The IRS publishes this rate monthly in a Revenue Ruling (Table 3 labeled "Rates Under § 382").
• The rate is fixed for the ownership change. Once determined for a given ownership change, the long-term tax-exempt rate remains fixed and does not change with subsequent rate fluctuations. The rate applies for all post-change years subject to that ownership change.
• Unused limitation carries to the next post-change year. § 382(b)(2) provides that if the § 382 limitation for any post-change year exceeds the taxable income offset by pre-change losses, the § 382 limitation for the next post-change year shall be increased by the amount of such excess. This is a one-year carryforward only, though cascading can occur if the increased limitation is also unused.
• Adjustment for redemptions and corporate contractions. § 382(e)(2) provides that if a redemption or other corporate contraction occurs in connection with an ownership change, the value shall be determined after taking such redemption or corporate contraction into account. Treas. Reg. § 1.1502-93(b)(2)(i) provides that redemptions and contractions not effecting a transfer of value outside the group are disregarded.
• EXAMPLE. The limitation computation. A loss corporation has an ownership change on June 15, Year 1. The FMV of its stock immediately before the change is $50 million. The three-month period ending with June includes adjusted federal long-term rates of 3.50%, 3.58%, and 3.71%. The highest rate is 3.71%. The base § 382 limitation is $50,000,000 × 3.71% = $1,855,000 per year. For the change year, the limitation is prorated. If the change year is a calendar year, there are 199 days after the change date. The prorated limitation is $1,855,000 × (199 / 365) = $1,011,356.

Step 7. Adjustments to Value and Anti-Avoidance Rules

§ 382(l)(1)(A) provides that any capital contribution received by an old loss corporation as part of a plan a principal purpose of which is to avoid or increase any limitation under this section shall not be taken into account for purposes of this section. § 382(l)(1)(B) provides that any capital contribution made during the 2-year period ending on the change date shall, except as provided in regulations, be treated as part of a plan described in subparagraph (A).

• The anti-stuffing rule. § 382(l)(1) disregards capital contributions made as part of a plan to avoid or increase the § 382 limitation. Any capital contribution received by the old loss corporation as part of such a plan is not taken into account in determining the value of the old loss corporation.
• The 2-year presumption. § 382(l)(1)(B) establishes a rebuttable presumption. Any capital contribution made during the 2-year period ending on the change date is treated as part of a prohibited plan unless regulations provide otherwise. The statute uses "a principal purpose" not "the principal purpose" (see H.R. Rep. No. 99-841 (Conf. Rep.)).
• Notice 2008-78 safe harbors. Notice 2008-78, 2008-41 I.R.B. 898, provides that a capital contribution shall not be presumed to be part of a prohibited plan solely as a result of having been made during the 2-year period. The Notice provides three safe harbors. (1) Non-controlling/non-related contribution under 20% with no pre-existing transaction agreement and change more than 6 months after contribution. (2) Related party contribution under 10% with no agreement and change more than 1 year after contribution. (3) Service/retirement plan stock. A fourth safe harbor applies to formation contributions and contributions before the first loss year.
• Substantial non-business assets under § 382(l)(4). If immediately after an ownership change the new loss corporation has substantial non-business assets, the value of the old loss corporation is reduced. The old loss corporation is treated as having substantial non-business assets if at least one-third of the value of total assets consists of non-business assets (defined as assets held for investment). RICs, REITs, and REMICs are excepted. Stock in subsidiaries is disregarded and the parent is deemed to own its ratable share of subsidiary assets.
• The value reduction formula. Under § 382(l)(4)(A), the value is reduced by the excess of the FMV of non-business assets over the non-business asset share of indebtedness. The non-business asset share of indebtedness bears the same ratio to total indebtedness as non-business asset FMV bears to total asset FMV.
• CAUTION. Cash and marketable securities. The Conference Report indicates that cash and marketable securities are generally included in non-business assets. A loss corporation holding significant cash reserves may face a § 382(l)(4) reduction even if the cash is held for legitimate business purposes.
• § 269 acquisitions made to evade or avoid income tax. § 269(a) provides that if a person acquires control of a corporation (or a corporation acquires property of another corporation in a non-control transaction) and the principal purpose is evasion or avoidance of federal income tax by securing the benefit of a deduction, credit, or other allowance, the Secretary shall disallow such benefit. § 269 may apply even where § 382 does not produce a limitation. Treas. Reg. § 1.269-7 provides that § 269 may be applied notwithstanding that the utilization of a deduction or credit is limited by § 382 or § 383.
• Structured ownership to circumvent § 382. Treas. Reg. § 1.382-2T(k)(4) provides special rules if a person structures an ownership interest to avoid treatment as a 5-percent shareholder for a principal purpose of circumventing a § 382 limitation. In such cases several exemptions from entity attribution rules do not apply.

Step 8. Built-In Gains and Losses Under § 382(h) and Notice 2003-65

§ 382(h)(1)(A) provides that if a loss corporation has a net unrealized built-in gain, the section 382 limitation for any recognition period taxable year shall be increased by the recognized built-in gain for such taxable year. § 382(h)(1)(B) provides that if a loss corporation has a net unrealized built-in loss, any recognized built-in loss for any taxable year within the 5-year recognition period is subject to the section 382 limitation.

• NUBIG increases the § 382 limitation. If the old loss corporation has a net unrealized built-in gain immediately before the ownership change, the § 382 limitation for any recognition period taxable year is increased by recognized built-in gain for that year. Cumulative increases are limited to the amount of NUBIG.
• NUBIL makes RBIL subject to the § 382 limitation. If the old loss corporation has a NUBIL, any recognized built-in loss for any taxable year within the recognition period is treated as a pre-change loss subject to the § 382 limitation. Cumulative RBIL is limited to the amount of NUBIL.
• NUBIG/NUBIL defined under § 382(h)(3)(A). NUBIG is the amount by which the aggregate FMV of the assets immediately before the ownership change exceeds the aggregate adjusted basis of such assets. NUBIL is the amount by which aggregate adjusted basis exceeds aggregate FMV. A loss corporation cannot have both a NUBIG and a NUBIL, but it can have neither.
• The de minimis threshold under § 382(h)(3)(B). If the NUBIG or NUBIL is not greater than the lesser of (i) 15 percent of the aggregate FMV of the assets or (ii) $10,000,000, the NUBIG or NUBIL is zero. This threshold prevents the built-in items rules from applying to small amounts.
• RBIG definition under § 382(h)(2)(A). Recognized built-in gain means any gain recognized during the recognition period on the disposition of any asset to the extent the new loss corporation establishes that the asset was held immediately before the change date and the gain does not exceed the excess of FMV over adjusted basis on the change date. The burden of proof is on the taxpayer.
• RBIL definition under § 382(h)(2)(B). Recognized built-in loss means any loss recognized during the recognition period on the disposition of any asset except to the extent the new loss corporation establishes the asset was not held before the change date or the loss exceeds the excess of adjusted basis over FMV. Depreciation, amortization, and depletion are automatically treated as RBIL unless the taxpayer establishes otherwise.
• § 382(h)(6) income and deduction items. § 382(h)(6)(A) provides that any item of income properly taken into account during the recognition period but attributable to periods before the change date is treated as RBIG. § 382(h)(6)(B) provides that any deduction amount allowable during the recognition period but attributable to pre-change periods is treated as RBIL.
• § 382(h)(6)(C) NUBIG/NUBIL adjustment. The amount of NUBIG or NUBIL must be adjusted for amounts that would be treated as RBIG or RBIL under § 382(h)(6) if recognized during the recognition period. This adjustment can increase NUBIG, decrease NUBIL, or convert NUBIL to NUBIG.
• 5-year recognition period. § 382(h)(7)(A) defines the recognition period as the 5-year period beginning on the change date. The recognition period taxable year is any taxable year any portion of which is in the recognition period.
• § 382(h)(8) FMV cap for 80%+ acquisitions. If 80% or more in value of the stock of a corporation is acquired in one transaction (or related transactions within 12 months), for purposes of determining NUBIL the FMV of assets cannot exceed the grossed-up amount paid for the stock properly adjusted for indebtedness.
• Notice 2003-65 safe harbor approaches. Notice 2003-65, 2003-2 C.B. 747, provides two safe harbor approaches for identifying RBIG and RBIL. Taxpayers may rely on these approaches until temporary or final regulations are issued. The 2019/2020 proposed regulations (REG-125710-18) were withdrawn in July 2025. Taxpayers continue to rely on Notice 2003-65.

Step 9. The 1374 Approach and 338 Approach

• Two safe harbor methods. Notice 2003-65 provides two alternative safe harbor approaches for identifying RBIG and RBIL during the recognition period. The loss corporation must choose one approach and apply it consistently for the entire recognition period. Switching between approaches is not permitted once an election is made.
• The 1374 approach is realization-based. Under this approach, items of income, gain, deduction, and loss are generally treated as RBIG or RBIL based on actual realization events. The approach borrows from § 1374 principles (the S corporation built-in gains tax). Gain or loss recognized on the sale or exchange of an asset during the recognition period is treated as RBIG or RBIL. Accrual method income or deduction items attributable to pre-change periods are treated as RBIG or RBIL. Depreciation and amortization deductions are treated as RBIL. Income from the satisfaction of receivables existing at the change date is treated as RBIG.
• EXAMPLE. Accounts receivable under the 1374 approach. A loss corporation has $2 million of accounts receivable on its balance sheet immediately before an ownership change. The receivables are collected during the recognition period for their full $2 million face amount. Under the 1374 approach, the $2 million of collection income is treated as RBIG because the receivables were earned before the change date. The RBIG increases the § 382 limitation dollar for dollar.
• The 338 approach uses hypothetical cost recovery. Under this approach, the loss corporation computes the difference between (1) the hypothetical depreciation/amortization deductions that would have been allowable if a § 338 deemed sale and purchase had occurred on the change date, and (2) the actual depreciation/amortization deductions taken. The excess of hypothetical deductions over actual deductions is treated as RBIG for assets that would have had a stepped-up basis under § 338. The excess of actual deductions over hypothetical deductions is treated as RBIL.
• NUBIG/NUBIL computed identically under both approaches. Both approaches require computing NUBIG or NUBIL based on a hypothetical sale of all assets at FMV immediately before the ownership change. This is the starting point for both methods. The difference between the approaches lies solely in how RBIG and RBIL are identified during the recognition period.
• EXAMPLE. Patent amortization under the 338 approach. A loss corporation owns a patent with FMV of $10 million and adjusted basis of $4 million immediately before an ownership change. Under § 338, the stepped-up basis would be $10 million. The hypothetical annual amortization would be $10 million over the patent's remaining 10-year useful life, or $1 million per year. The actual annual amortization on the $4 million adjusted basis is $400,000 per year. Under the 338 approach, the $600,000 excess of hypothetical over actual amortization is RBIG, which increases the § 382 limitation each recognition period taxable year.
• Method selection considerations. The 1374 approach is simpler and more intuitive for corporations with primarily tangible assets and ordinary course income/deduction items. The 338 approach may produce more favorable results for corporations with significant depreciable or amortizable intangible assets that have large built-in gains. The key driver is whether the hypothetical cost recovery under § 338 exceeds actual cost recovery.
• Neither approach is mandatory. A loss corporation may use a methodology other than the two safe harbors if it can demonstrate that the alternative method produces results consistent with § 382(h). However, most practitioners choose one of the two safe harbor approaches to avoid disputes.
• TRAP. Five-year election commitment. Once a taxpayer elects the 1374 approach or the 338 approach, the election applies for the entire 5-year recognition period. If the taxpayer elects the 338 approach and later realizes that actual cost recovery exceeds hypothetical cost recovery (producing RBIL rather than RBIG), the taxpayer cannot switch methods.

Step 10. Continuity of Business Enterprise Under § 382(c)

§ 382(c)(1) provides that except as provided in paragraph (2), if the new loss corporation does not continue the business enterprise of the old loss corporation at all times during the 2-year period beginning on the change date, the section 382 limitation for any post-change year shall be zero.

• The COBE requirement. The new loss corporation must continue the business enterprise of the old loss corporation during the entire 2-year period beginning on the change date. The requirement is based on Rev. Rul. 63-29 standard from the reorganization context (adopted by Treas. Reg. § 1.368-1(d)).
• Standard for satisfaction. Treas. Reg. § 1.368-1(d)(1) provides that a business enterprise is continued if the acquiring corporation either continues the significant line of business historically operated by the acquired corporation, or uses a significant portion of the acquired corporation's historic business assets in a business. The COBE requirement is satisfied if either prong is met, though typically practitioners seek to satisfy both.
• Failure means zero limitation. § 382(c)(2) provides that if COBE is not satisfied during the 2-year period, the § 382 limitation is zero. This is the most severe penalty in the § 382 regime. No pre-change losses can offset post-change taxable income. The unused limitation carryover under § 382(b)(2) is also effectively eliminated because the limitation is zero.
• Exceptions to zero limitation. § 382(c)(2) preserves the availability of built-in gains under § 382(h)(1)(A) and gains under § 382(h)(1)(C) (the § 338 deemed sale gains). Even if COBE fails, RBIGs still increase the § 382 limitation. This means a corporation with significant NUBIG assets may still be able to use some pre-change losses by recognizing built-in gains.
• Case law - Libson Shops, Inc. v. Koehler, 353 U.S. 382 (1957). The Supreme Court held that NOL carryovers are not available to a reorganized corporation where the corporation's business had fundamentally changed, establishing the continuity of business enterprise requirement. The Court reasoned that "there is, however, no indication in their legislative history that these provisions were designed to permit the averaging of the pre-merger losses of one business with the post-merger income of some other business which had been operated and taxed separately before the merger."
• Case law - Maxwell Hardware Co. v. Commissioner, 343 F.2d 713 (9th Cir. 1965). The Ninth Circuit rejected Libson Shops under the 1954 Code where the same business continued. The court held that in single corporation cases involving post-1954 carryovers, the statutory restrictions in the Code are exclusive. When those restrictions do not apply, the Libson Shops doctrine may not be used to disallow the carryover.
• Case law - National Tea Co. v. Commissioner, 793 F.2d 864 (7th Cir. 1986). The Seventh Circuit held that Libson Shops was displaced by the comprehensive Code provisions. Congress later resolved any remaining uncertainty by explicitly codifying COBE in § 382(c)(1).
• Partial discontinuance allowed. The COBE requirement is satisfied if the new loss corporation continues at least one significant line of the historic business. It need not continue every line of business. A corporation can discontinue some business lines as long as one significant line continues.
• CAUTION. COBE applies to the corporation's own business, not a parent or affiliate. The requirement applies to the new loss corporation itself. If the new loss corporation is a member of an affiliated group that continues the business, but the new loss corporation itself does not operate a continuing business, COBE may not be satisfied.

Step 11. Bankruptcy Exceptions Under § 382(l)(5) and § 382(l)(6)

§ 382(l)(5)(A) provides that subsection (a) shall not apply to any ownership change if (i) the old loss corporation is (immediately before such ownership change) under the jurisdiction of the court in a title 11 or similar case, and (ii) the shareholders and creditors of the old loss corporation (determined immediately before such ownership change) own (after such ownership change and as a result of being shareholders or creditors immediately before such change) stock of the new loss corporation which meets the requirements of section 1504(a)(2) (determined by substituting "50 percent" for "80 percent" each place it appears).

• § 382(l)(5) eliminates the § 382 limitation entirely. Where the requirements are met, § 382(a) does not apply at all. Pre-change NOLs can be used without the normal annual limitation. This is the most favorable outcome for a bankrupt loss corporation with NOLs.
• Requirement (i) - jurisdiction of bankruptcy court. The old loss corporation must be, immediately before the ownership change, under the jurisdiction of the court in a title 11 or similar case. "Title 11 or similar case" is defined by reference to § 368(a)(3)(A), meaning a case under title 11 of the United States Code, a receivership, a foreclosure, or a similar proceeding in a federal or state court.
• Requirement (ii) - 50% continuity of shareholders and creditors. The pre-change shareholders and qualified creditors must own, after the ownership change and as a result of being shareholders or creditors immediately before such change, at least 50% of both the vote and value of the new loss corporation's stock. The test uses the § 1504(a)(2) standard modified to 50%.
• The "as a result of" requirement. Stock received by a former stockholder for new consideration (fresh capital, guarantees) or purchased from other shareholders does not count. Only stock received in exchange for pre-change stock or qualified indebtedness counts toward the 50% test.
• Qualified indebtedness under § 382(l)(5)(E). For a creditor to count toward the 50% ownership test, the creditor's indebtedness must either (i) have been held by the creditor at least 18 months before the date of the bankruptcy filing ("old and cold" debt), or (ii) have arisen in the ordinary course of the trade or business of the old loss corporation and be held by the person who at all times held the beneficial interest. Beneficial ownership is determined without applying attribution rules. Treas. Reg. § 1.382-9(d)(2)(iv) gives examples including trade debt, tax liability, employment-related liabilities, and claims arising from rejection of contracts or leases in the title 11 case.
• Tacking of ownership periods. Under Treas. Reg. § 1.382-9(d)(5), a transferee of indebtedness in a "qualified transfer" is treated as having owned the indebtedness for the period it was owned by the transferor. Qualified transfers include transfers between related parties, syndication transactions within 90 days, transfers by an underwriter, subrogation transactions, customary commercial factoring transactions within 30 days, and debt-for-debt exchanges.
• The interest haircut under § 382(l)(5)(B). In exchange for eliminating the § 382 limitation, pre-change NOLs must be reduced as if no deduction had been allowable for interest paid or accrued on indebtedness converted to stock during (i) any taxable year ending in the 3-year period preceding the change year, and (ii) the portion of the change year through the change date. This is a recalculation, not a direct subtraction.
• The "one bite" rule under § 382(l)(5)(D). If a second ownership change occurs within 2 years of the ownership change to which § 382(l)(5) applied, the § 382 limitation for the second ownership change is zero. All pre-second-change losses are eliminated. § 382(l)(5) continues to apply between the first and second changes. The second ownership change cannot itself qualify for § 382(l)(5). PLR 200751011 confirms that § 382(l)(5)(D) does not retroactively disqualify the first ownership change.
• COBE does not apply under § 382(l)(5). Treas. Reg. § 1.382-9(m)(1) provides that if § 382(l)(5) applies, § 382(c) and the regulations thereunder do not apply with respect to the ownership change. However, Treas. Reg. § 1.269-3(d)(1) imposes a strong presumption of tax avoidance absent strong evidence to the contrary, unless the corporation carries on more than an insignificant amount of an active trade or business during and subsequent to the title 11 or similar case.
• § 382(l)(6) alternative valuation. If § 382(l)(5) does not apply (requirements not met or corporation elects out under § 382(l)(5)(G)), § 382(l)(6) provides that the value under § 382(e) shall reflect the increase (if any) in value resulting from any surrender or cancellation of creditors' claims in the transaction. The value is the lesser of (A) the value of stock immediately after the ownership change, or (B) the value of pre-change assets without regard to liabilities. Treas. Reg. § 1.382-9(j). COBE applies under § 382(l)(6). Treas. Reg. § 1.382-9(m)(2).
• TRAP. The election out of § 382(l)(5) is irrevocable. Under Treas. Reg. § 1.382-9(i), the election not to have § 382(l)(5) apply must be made by attaching a specific statement to the tax return for the change year by the due date including extensions. Once made, it cannot be revoked.

Step 12. The Change Year and Closing-of-Books Election

§ 382(b)(3)(A) provides that in the case of any post-change year which includes the change date, subsection (a) shall not apply to the portion of the taxable income for such year which is allocable to the period in such year on or before the change date. Except as provided in subsection (h)(5) and in regulations, taxable income shall be allocated ratably to each day in the year.

• The default rule is ratable allocation. § 382(b)(3)(A) provides that § 382(a) does not apply to taxable income allocable to the pre-change portion of the change year. The default method allocates taxable income ratably to each day in the year. The § 382 limitation applies only to taxable income allocable to the post-change period.
• The proration formula. Under § 382(b)(3)(B), the § 382 limitation for the post-change portion of the change year bears the same ratio to the full-year limitation as the number of days after the change date bears to the total number of days in the year.
• Closing-of-books election. Treas. Reg. § 1.382-6(b)(1) allows a loss corporation to elect to allocate NOL, taxable income, net capital loss, and modified capital gain net income as if the corporation's books were closed on the change date. The election overrides the default ratable allocation.
• When to consider the election. The closing-of-books election benefits the taxpayer if the corporation had lower taxable income (or a larger loss) in the pre-change period than a ratable allocation would produce. The election is most valuable when the corporation has large pre-change losses that would be allocated to the pre-change period and thus not subject to the § 382 limitation.
• How to make the election. Under Treas. Reg. § 1.382-6(b)(2)(i), the election is made by including the exact statement on the information statement required by § 1.382-11(a). The exact language required is "THE CLOSING-OF-THE-BOOKS ELECTION UNDER § 1.382-6(b) IS HEREBY MADE WITH RESPECT TO THE OWNERSHIP CHANGE OCCURRING ON [INSERT DATE]."
• The election is irrevocable. Treas. Reg. § 1.382-6(b)(2)(ii) provides that an election under paragraph (b) is irrevocable. The election must be made on or before the due date (including extensions) of the loss corporation's income tax return for the change year.
• Consolidated group consistency. Under Treas. Reg. § 1.382-6(b)(3)(i), if the election is made for an ownership change in a consolidated return year, all allocations must be consistent with the election. Under paragraph (b)(3)(ii), if two or more members of a controlled group have ownership changes as part of the same plan or arrangement, the election applies only if all members make the election.
• Late election relief under § 301.9100-3. Treas. Reg. § 301.9100-3 provides that requests for relief from a missed regulatory election will be granted when the taxpayer establishes that it acted reasonably and in good faith and the grant of relief will not prejudice the interests of the government. Circumstances deemed reasonable include failing to make the election because of intervening events beyond the taxpayer's control or because after exercising reasonable diligence the taxpayer was unaware of the necessity for the election. Circumstances deemed NOT reasonable include seeking to alter a return position for which an accuracy-related penalty could be imposed, or using hindsight in requesting relief. Numerous PLRs (including PLR 202614017 and PLR 202518015) have granted § 301.9100-3 relief for late closing-of-books elections.
• TRAP. The election deadline is strict. The due date includes extensions but does not include subsequent amended returns. If the taxpayer files the original return without the election and later discovers the value of the election, relief requires a PLR under § 301.9100-3 with user fee of $14,500 (for the extension of time ruling request).

Step 13. § 383 Limitation on Credits and Capital Losses

§ 383(a)(1) provides that under regulations, if an ownership change occurs with respect to a corporation, the amount of any excess credit for any taxable year which may be used in any post-change year shall be limited to an amount determined on the basis of the tax liability which is attributable to so much of the taxable income as does not exceed the section 382 limitation for such post-change year to the extent available after the application of section 382 and subsections (b) and (c) of this section.

• § 383 operates alongside § 382. While § 382 limits the use of pre-change losses (NOLs, NUBIL/RBIL) to offset post-change taxable income, § 383 limits the use of pre-change credits and pre-change capital losses. The two sections work together as a unified attribute preservation framework.
• § 383(a) limits excess credits. § 383(a)(2) defines "excess credit" as any unused general business credit under § 39 and any unused minimum tax credit under § 53. § 383(c) separately addresses excess foreign taxes under § 904(c). The credit limitation is computed based on the tax liability attributable to taxable income that exceeds the § 382 limitation.
• § 383(b) limits net capital losses and reduces § 382 limitation dollar-for-dollar. § 383(b) provides that any net capital loss used in a post-change year shall reduce the § 382 limitation applied to pre-change losses. This is a critical mechanic. When a pre-change capital loss carryover is used to offset capital gains (or ordinary income to the extent allowed), each dollar used reduces the § 382 limitation by one dollar.
• Pre-change capital loss defined. Under Treas. Reg. § 1.383-1(c)(2), pre-change capital loss means (i) any capital loss carryover under § 1212, (ii) any net capital loss of the change year allocable to the pre-change period, and (iii) if the old loss corporation has a NUBIL, any RBIL that is a capital loss.
• Pre-change credit defined. Under Treas. Reg. § 1.383-1(c)(3), pre-change credit means (i) any excess foreign taxes under § 904(c), (ii) any general business credit under § 38, and (iii) any available minimum tax credit under § 53, each to the extent attributable to the pre-change period.
• § 383 credit limitation computation. Under Treas. Reg. § 1.383-1(c)(6)(i), the § 383 credit limitation equals the excess of (A) the regular tax liability computed after allowing pre-change losses to offset taxable income, over (B) the regular tax liability computed after allowing an additional deduction equal to the § 382 limitation remaining after pre-change losses. In practical terms, the credit limitation is the tax on the difference between taxable income and the § 382 limitation.
• EXAMPLE. Credit limitation computation. L has taxable income of $100,000, a § 382 limitation of $25,000, a pre-change NOL of $12,000, and a pre-change general business credit of $50,000. After the NOL deduction, taxable income is $88,000 with regular tax liability of $18,480. The remaining § 382 limitation is $13,000 ($25,000 minus $12,000). Taxable income with the additional deduction is $75,000 with regular tax liability of $15,750. The § 383 credit limitation is $2,730 ($18,480 minus $15,750). L can use $2,730 of its $50,000 general business credit. This example is drawn from Treas. Reg. § 1.383-1(c)(6)(ii).
• Eight-tier ordering rules under § 1.383-1(d)(2). The § 382 limitation and § 383 credit limitation are absorbed in the following order. (i) RBIL capital losses. (ii) Capital loss carryovers and change-year net capital losses. (iii) RBIL non-capital losses. (iv) For ownership changes on or after November 13, 2020, section 382 disallowed business interest carryforwards. (v) Other pre-change losses (e.g., NOLs). (vi) Excess foreign taxes. (vii) General business credits. (viii) Minimum tax credits.
• Credits absorb the § 383 credit limitation, not the § 382 limitation. Pre-change losses absorb the § 382 limitation (tiers i through v). Pre-change credits absorb the § 383 credit limitation (tiers vi through viii). Capital losses absorb the § 382 limitation.
• The credit reduction amount. Under Treas. Reg. § 1.383-1(e)(2), the section 383 credit reduction amount equals the amount of taxable income attributable to the portion of regular tax liability offset by pre-change credits. Each dollar of tax offset by a credit is "grossed up" by dividing by the effective marginal rate to determine the § 382 limitation consumed.
• § 383 credit limitation carryforward. Under Treas. Reg. § 1.383-1(e)(1), the § 382 limitation carried to the next year is the excess of the § 382 limitation remaining after tiers i through v, over the § 383 credit reduction amount. This means credit usage reduces the § 382 limitation carryforward.

Step 14. Multiple Ownership Changes and Successive Limitations

• The compounding problem. When a loss corporation undergoes a second ownership change, the interaction of the two limitations can severely erode the usability of pre-change losses. This is one of the most complex areas of § 382 practice.
• Later change yields lesser limitation. Under Treas. Reg. § 1.382-5(d), following a second ownership change, the applicable § 382 limitation is the lesser of (A) the limitation attributable to the first ownership change (as adjusted for carryovers and built-in items), or (B) the limitation computed with respect to the second ownership change. The limitation from a later change can never be greater than the limitation from an earlier change.
• Pre-change losses from before the first change are subject to BOTH limitations. Losses that arose before the first ownership change are subject to the first § 382 limitation. If a second ownership change occurs, those same pre-first-change losses are also subject to the second § 382 limitation. The taxpayer must apply both limitations simultaneously, effectively using the lesser of the two.
• Losses arising between changes subject only to the second limitation. Losses that arise after the first ownership change but before the second ownership change are "post-change" losses with respect to the first change and "pre-change" losses with respect to the second change. They are subject only to the second § 382 limitation.
• The limitation carryover from the first change is carried into the second change computation. Under § 382(b)(2), any unused limitation from the first ownership change carries to the next post-change year. If a second ownership change occurs before the carryover is used, the carryover is incorporated into the second change's limitation framework under Treas. Reg. § 1.382-5(d).
• TRAP. The 2-year rule under § 382(l)(5)(D). If § 382(l)(5) applied to the first ownership change and a second ownership change occurs within 2 years, the § 382 limitation for the second change is zero. This is the most severe form of successive limitation.
• Practical impact of successive changes. A loss corporation that experiences two ownership changes within a short period may find that its pre-change NOLs are effectively unusable. The first limitation may already be low (due to a low stock value or low tax-exempt rate), and the second limitation may be even lower (due to a further decline in value).
• Monitoring for second ownership changes. For loss corporations that have undergone an ownership change, continuous monitoring of ownership shifts during the subsequent testing period is essential. Even small transactions can trigger a second change when combined with prior shifts. All subsequent stock issuances, redemptions, option exercises, and secondary market trades must be tracked.

Step 15. TCJA and Post-2017 Amendments

§ 172(a)(2)(A)(ii)(I) provides that the aggregate amount of net operating losses arising in taxable years beginning after December 31, 2017, carried to such taxable year, shall not exceed 80 percent of the excess (if any) of (aa) the taxable income of the taxpayer for such taxable year computed without regard to any deduction under this section, reduced by the amount of pre-2018 NOLs, over (bb) zero.

• 80% taxable income limitation for post-2017 NOLs. The TCJA amended § 172(a)(2) to limit NOL deductions arising in taxable years beginning after December 31, 2017 to 80% of taxable income (computed without regard to the NOL deduction). This limitation is separate from and in addition to the § 382 limitation. A post-change corporation must apply the § 382 limitation first, then apply the 80% limitation.
• Pre-2018 and post-2017 NOLs are tracked separately. § 172(a)(2) applies separately to pre-2018 NOLs and post-2017 NOLs. The 80% limitation applies only to post-2017 NOLs. Pre-2018 NOLs are limited to 100% of taxable income (subject to the ordering rules in § 172(a)(2)(A)(i)).
• No carryback for post-2017 NOLs (except as temporarily changed by CARES Act). The TCJA repealed the 2-year carryback for NOLs arising in taxable years ending after December 31, 2017. Post-2017 NOLs carry forward indefinitely (replacing the prior 20-year carryforward). The CARES Act temporarily provided a 5-year carryback for NOLs arising in taxable years beginning after December 31, 2017 and before January 1, 2021, and temporarily suspended the 80% limitation for such NOLs deducted through 2020. These CARES Act changes have expired.
• § 163(j) business interest limitation. The TCJA amended § 163(j) to limit business interest deductions to the sum of (A) business interest income, (B) 30% of adjusted taxable income (reduced to EBITDA-based for post-2021 years by ARPA), and (C) floor plan financing interest. Disallowed business interest carries forward indefinitely to succeeding taxable years.
• Disallowed interest carryforwards subject to § 382. The TCJA amended § 382(k)(1) to provide that "loss corporation" includes any corporation entitled to use a carryforward of disallowed interest described in § 381(c)(20). A corporation with only a disallowed interest carryforward (and no NOLs or NUBIL) is now a loss corporation subject to the § 382 ownership change rules. Treas. Reg. § 1.382-2(a)(7) defines "section 382 disallowed business interest carryforward" as the amount of disallowed business interest subject to § 382.
• Interaction between § 382 and § 163(j). If a loss corporation with disallowed interest carryforwards undergoes an ownership change, its ability to deduct those carryforwards is limited by the § 382 annual limitation. The § 163(j) limitation and the § 382 limitation are applied in sequence. The corporation first computes its § 163(j) limitation for the year. Any disallowed interest that could be deducted under § 163(j) is then subject to the § 382 limitation.
• Farming and insurance company exceptions. The 80% limitation does not apply to non-life insurance companies (as defined in § 816(a)). Farming losses retain a 2-year carryback period. These exceptions apply independently of the § 382 rules.
• TRAP. The § 382 limitation and 80% limitation compound. A post-change corporation with post-2017 NOLs must satisfy both the § 382 limitation and the § 172(a)(2) 80% limitation. The § 382 limitation caps the taxable income that can be offset by pre-change losses. The 80% limitation caps the total NOL deduction relative to taxable income. The effective result is that pre-change post-2017 NOLs can offset at most 80% of the § 382 limitation amount.

Step 16. Consolidated Return Rules

• §§ 1.1502-91 through 1.1502-99 apply § 382 to consolidated groups. Treasury Regulations §§ 1.1502-91 through 1.1502-99 (finalized in TD 8824, December 1999) establish the framework for applying § 382 within consolidated groups. Treas. Reg. § 1.1502-98 coordinates these rules with § 383.
• Loss group defined. Under Treas. Reg. § 1.1502-91(c)(1), a loss group is a consolidated group that (i) is entitled to use a non-SRLY NOL carryover, (ii) has a NUBIL, (iii) has a recognized built-in loss with respect to a prior ownership change, or (iv) has a section 382 disallowed business interest carryforward.
• Loss subgroup defined. Under Treas. Reg. § 1.1502-91(d), a loss subgroup consists of two or more corporations that were affiliated in a former group, bear a § 1504(a)(1) relationship immediately after joining the new group, and carry over a non-SRLY NOL or have an aggregate NUBIL. A five-year affiliation requirement applies to the NUBIL subgroup test.
• Single entity approach for COBE. Under Treas. Reg. § 1.1502-91(a), the ownership change and § 382 limitation are determined for the group (or loss subgroup) on a single entity basis, not for members separately. Pre-change consolidated attributes are subject to a single consolidated § 382 limitation.
• Parent change method. Under Treas. Reg. § 1.1502-92(b)(1), a loss group has an ownership change only if the common parent has an ownership change. The losses described in § 1.1502-91(c) are treated as net operating losses of the common parent. The common parent determines the earliest testing period beginning date by reference to only the attributes that make the group a loss group.
• Supplemental change method. Under Treas. Reg. § 1.1502-92(c), if a person who is a 5-percent shareholder of the common parent (or any person acting pursuant to a plan or arrangement with such shareholder) increases its percentage ownership both in the common parent and in any subsidiary of the group within the same testing period, the group must also determine whether it had an ownership change by treating the common parent as though it had issued stock equal in value to the subsidiary stock acquired.
• Consolidated § 382 limitation. Under Treas. Reg. § 1.1502-93(a)(1), the consolidated § 382 limitation equals the value of the loss group multiplied by the long-term tax-exempt rate. The value of the loss group is the value, immediately before the ownership change, of the stock of each member, other than stock owned directly or indirectly by another member.
• Apportionment upon departure. Under Treas. Reg. § 1.1502-95(c), when a member ceases to be a member of the consolidated group, the common parent may elect to apportion all or any part of the consolidated § 382 limitation to the former member. If no apportionment is made, the former member has a § 382 limitation of zero with respect to pre-change consolidated attributes.
• CAUTION. The zero default for departing members. If the common parent fails to make a timely apportionment election under § 1.1502-95(c), a departing member has a § 382 limitation of zero for all pre-change consolidated attributes. This can result in complete forfeiture of NOLs for a spun-off or sold subsidiary.
• Separate tracking ends under § 1.1502-96. Under Treas. Reg. § 1.1502-96(a), separate tracking of certain losses ends if there is an ownership change within 6 months before, on, or after the members become members of the group, or if a period of 5 years elapses during which the loss subgroup does not have an ownership change (a "fold-in event"). After separate tracking ends, the losses are treated as pre-change consolidated attributes.
• § 383 applies with appropriate adjustments. Under Treas. Reg. § 1.1502-98, the consolidated group rules also apply for purposes of § 383, with adjustments to reflect that § 383 applies to credits and net capital losses. The consolidated section 383 credit limitation is computed by applying the principles of § 1.383-1(c)(6) and § 1.1502-93.

Step 17. Documentation, Reporting, and Elections

• Information statement required under Treas. Reg. § 1.382-11(a). A loss corporation must include a statement entitled "STATEMENT PURSUANT TO § 1.382-11(a) BY [INSERT NAME AND EIN], A LOSS CORPORATION" on or with its income tax return for each taxable year that it is a loss corporation in which an owner shift, equity structure shift, or other transaction described in § 1.382-2T(a)(2)(i) occurs. The statement must include the dates of any such transactions, the dates of any ownership changes, and the amount of any attributes that caused the corporation to be a loss corporation.
• Filing deadline. The statement must be filed on or with the income tax return for the taxable year. For the change year, this means the original return (including extensions). An amended return filed after the due date (including extensions) does not satisfy the filing requirement.
• Closing-of-books election statement. Under Treas. Reg. § 1.382-6(b)(2)(i), the closing-of-books election is made by including the exact statement on the § 1.382-11(a) information statement for the change year. The election must be made on or before the due date (including extensions) of the return for the change year.
• Late election relief under § 301.9100-3. If the taxpayer misses the election deadline, relief is available through a private letter ruling. The taxpayer must demonstrate it acted reasonably and in good faith and that relief will not prejudice the interests of the government. Treas. Reg. § 301.9100-3(b)(1) lists safe harbor circumstances including failure due to intervening events beyond the taxpayer's control and failure despite reasonable diligence. The user fee for a § 301.9100-3 ruling is $14,500 as of the 2025 fee schedule (Rev. Proc. 2025-1). Relief is routinely granted for missed closing-of-books elections.
• Option disregard election. Treas. Reg. § 1.382-2T(h)(4)(vi)(B) permits an election to disregard the deemed exercise of an option if the actual exercise occurred within 120 days of the ownership change. This election is also made on the § 1.382-11(a) statement.
• Best practices for § 382 study documentation. A comprehensive § 382 study should include the following components. (1) Executive summary with conclusions. (2) Corporate structure charts. (3) Complete stock ownership history for the testing period. (4) 5-percent shareholder schedules for each testing date. (5) Testing date analyses with computations. (6) Ownership change determination with cumulative ownership tables. (7) Value computation of the old loss corporation. (8) § 382 limitation calculation. (9) NUBIG/NUBIL analysis. (10) RBIG/RBIL tracking under the elected safe harbor. (11) Attribute analysis (NOLs, credits, capital losses, disallowed interest). (12) Change year allocation method. (13) Consolidated group issues if applicable. (14) State tax considerations. (15) Elections and filing documentation checklist.
• State tax conformity issues. Approximately 35 states conform to IRC § 382, but application varies significantly. Some states apply the limitation on a pre-apportioned basis (California). Others apply it on a post-apportioned basis. Some states (Arizona, Arkansas, Illinois, Pennsylvania) do not conform to § 382 at all. A multistate loss corporation must analyze each jurisdiction separately.
• California applies § 382 on a pre-apportioned basis. Per the California FTB Technical Advice Memorandum (2017), the § 382(b)(1) limitation and the § 383 credit limitation are applied on a pre-apportioned basis. NUBIG/NUBIL and RBIG/RBIL are applied on a post-apportioned basis. The California corporate franchise tax rate is substituted for the federal rate in computing the § 383 credit limitation. California does not conform to the TCJA amendments to § 382(k)(1) regarding disallowed interest carryforwards or to § 382(n).
• TRAP. State non-conformity can create unexpected limitations. A loss corporation may be able to use its full federal NOLs subject to the federal § 382 limitation but face a separate state limitation (or loss forfeiture) in states that do not conform to federal § 382 rules or that apply different computation methodologies.
• Document retention. § 382 ownership studies, shareholder analyses, and limitation computations should be retained permanently (or at least until all pre-change losses and credits have either expired or been used, plus the statute of limitations). Stock ownership records, SEC filings (Schedules 13D, 13G, 13F, Forms 3, 4, 5), capitalization tables, and option/warrant records should be maintained contemporaneously.
• Practitioner engagement letter considerations. When engaged to perform a § 382 analysis, the engagement letter should clearly define the scope (ownership change determination, limitation computation, NUBIG/NUBIL analysis, consolidated group issues, state tax analysis), the deliverables (memorandum, spreadsheet models, § 1.382-11 statement draft), and any exclusions (valuation disputes, litigation support, PLR preparation). The engagement should also address the need for ongoing monitoring if the engagement is limited to a point-in-time analysis.