26 U.S.C. § 382: Limitation on net operating loss carryforwards and certain built-in losses following ownership change

(a) General rule 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.

Amended 1964

1964 Pub. L. 88-554 Pub. L. 88–554 inserted reference to section 318(a)(3)(C) of this title.

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(b) Section 382 limitation For purposes of this section—

Amended 1980, 1981

1981 Pub. L. 97-34 Pub. L. 97–34 designated existing provisions as subpar. (A) and added subpar. (B).
1980 Pub. L. 96-589 Pub. L. 96–589 added par. (7).

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(1) In general Except as otherwise provided in this section, the section 382 limitation for any post-change year is an amount equal to—

Amended 1984

1984 Pub. L. 98-369 Pub. L. 98–369, in section as amended by Pub. L. 94–455, substituted “subparagraph (A), (B), (C), or (F) of section 368(a)(1) or subparagraph (D) or (G) of section 368(a)(1) (but only if the requirements of section 354(b)(1) are met)” for “section 368(a)(1)(A), (B), (C), (D) (but only if the requirements of section 354(b)(1) are met, or (F)”.

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(A) the value of the old loss corporation, multiplied by

(B) the long-term tax-exempt rate.

(2) Carryforward of unused limitation If the section 382 limitation for any post-change year exceeds the taxable income of the new loss corporation for such year which was offset by pre-change losses, the section 382 limitation for the next post-change year shall be increased by the amount of such excess.

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(3) Special rule for post-change year which includes change date In the case of any post-change year which includes the change date—

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(A) Limitation does not apply to taxable income before change 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.

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(B) Limitation for period after change For purposes of applying the limitation of subsection (a) to the remainder of the taxable income for such year, the section 382 limitation shall be an amount which bears the same ratio to such limitation (determined without regard to this paragraph) as—

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(i) the number of days in such year after the change date, bears to

(ii) the total number of days in such year.

(c) Carryforwards disallowed if continuity of business requirements not met

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(1) In general 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.

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(2) Exception for certain gains The section 382 limitation for any post-change year shall not be less than the sum of—

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(A) any increase in such limitation under—

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(i) subsection (h)(1)(A) for recognized built-in gains for such year, and

(ii) subsection (h)(1)(C) for gain recognized by reason of an election under section 338, plus

(B) any increase in such limitation under subsection (b)(2) for amounts described in subparagraph (A) which are carried forward to such year.

(d) Pre-change loss and post-change year For purposes of this section—

(1) Pre-change loss The term “pre-change loss” means—

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(A) any net operating loss carryforward of the old loss corporation to the taxable year ending with the ownership change or in which the change date occurs, and

(B) the net operating loss of the old loss corporation for the taxable year in which the ownership change occurs to the extent such loss is allocable to the period in such year on or before the change date.

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Except as provided in subsection (h)(5) and in regulations, the net operating loss shall, for purposes of subparagraph (B), be allocated ratably to each day in the year.

(2) Post-change year The term “post-change year” means any taxable year ending after the change date.

(3) Application to carryforward of disallowed interest The term “pre-change loss” shall include any carryover of disallowed interest described in section 163(j)(2) under rules similar to the rules of paragraph (1).

Amended 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 13301(b)(2), added par. (3).

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(e) Value of old loss corporation For purposes of this section—

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(1) In general Except as otherwise provided in this subsection, the value of the old loss corporation is the value of the stock of such corporation (including any stock described in section 1504(a)(4)) immediately before the ownership change.

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(2) Special rule in the case of redemption or other corporate contraction If a redemption or other corporate contraction occurs in connection with an ownership change, the value under paragraph (1) shall be determined after taking such redemption or other corporate contraction into account.

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(1)(A), inserted “or other corporate contraction” after “redemption” in heading and in two places in text.

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(3) Treatment of foreign corporations Except as otherwise provided in regulations, in determining the value of any old loss corporation which is a foreign corporation, there shall be taken into account only items treated as connected with the conduct of a trade or business in the United States.

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(17)(A), added par. (3).

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(f) Long-term tax-exempt rate For purposes of this section—

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(1) In general The long-term tax-exempt rate shall be the highest of the adjusted Federal long-term rates in effect for any month in the 3-calendar-month period ending with the calendar month in which the change date occurs.

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(2) Adjusted Federal long-term rate For purposes of paragraph (1), the term “adjusted Federal long-term rate” means the Federal long-term rate determined under section 1274(d), except that—

(A) paragraphs (2) and (3) thereof shall not apply, and

(B) such rate shall be properly adjusted for differences between rates on long-term taxable and tax-exempt obligations.

(g) Ownership change For purposes of this section—

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(1) In general There is an ownership change if, immediately after any owner shift involving a 5-percent shareholder or any equity structure shift—

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(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

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(21)(A), struck out “new” after “stock of the”.

(B) the lowest percentage of stock of the loss corporation (or any predecessor corporation) owned by such shareholders at any time during the testing period.

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(21)(B), struck out “old” after “stock of the”.

(2) Owner shift involving 5-percent shareholder There is an owner shift involving a 5-percent shareholder if—

(A) there is any change in the respective ownership of stock of a corporation, and

(B) 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.

(3) Equity structure shift defined

(A) In general The term “equity structure shift” means any reorganization (within the meaning of section 368). Such term shall not include—

(i) any reorganization described in subparagraph (D) or (G) of section 368(a)(1) unless the requirements of section 354(b)(1) are met, and

(ii) any reorganization described in subparagraph (F) of section 368(a)(1).

(B) Taxable reorganization-type transactions, etc. To the extent provided in regulations, the term “equity structure shift” includes taxable reorganization-type transactions, public offerings, and similar transactions.

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(4) Special rules for application of subsection

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(A) Treatment of less than 5-percent shareholders Except as provided in subparagraphs (B)(i) and (C), in determining whether an ownership change has occurred, all stock owned by shareholders of a corporation who are not 5-percent shareholders of such corporation shall be treated as stock owned by 1 5-percent shareholder of such corporation.

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(B) Coordination with equity structure shifts For purposes of determining whether an equity structure shift (or subsequent transaction) is an ownership change—

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(i) Less than 5-percent shareholders Subparagraph (A) shall be applied separately with respect to each group of shareholders (immediately before such equity structure shift) of each corporation which was a party to the reorganization involved in such equity structure shift.

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(ii) Acquisitions of stock Unless a different proportion is established, acquisitions of stock after such equity structure shift shall be treated as being made proportionately from all shareholders immediately before such acquisition.

(C) Coordination with other owner shifts Except as provided in regulations, rules similar to the rules of subparagraph (B) shall apply in determining whether there has been an owner shift involving a 5-percent shareholder and whether such shift (or subsequent transaction) results in an ownership change.

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(2), inserted “rules similar to” after “provided in regulations,”.

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(D) Treatment of worthless stock If any stock held by a 50-percent shareholder is treated by such shareholder as becoming worthless during any taxable year of such shareholder and such stock is held by such shareholder as of the close of such taxable year, for purposes of determining whether an ownership change occurs after the close of such taxable year, such shareholder—

Amended 1987

1987 Pub. L. 100-203 Pub. L. 100–203, § 10225(a), added subpar. (D).

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(i) shall be treated as having acquired such stock on the 1st day of his 1st succeeding taxable year, and

(ii) shall not be treated as having owned such stock during any prior period.

For purposes of the preceding sentence, the term “50-percent shareholder” means any person owning 50 percent or more of the stock of the corporation at any time during the 3-year period ending on the last day of the taxable year with respect to which the stock was so treated.

(h) Special rules for built-in gains and losses and section 338 gains For purposes of this section—

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(1) In general

(A) Net unrealized built-in gain

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(i) In general If the old 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 gains for such taxable year.

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(ii) Limitation The increase under clause (i) for any recognition period taxable year shall not exceed—

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(I) the net unrealized built-in gain, reduced by

(II) recognized built-in gains for prior years ending in the recognition period.

(B) Net unrealized built-in loss

(i) In general If the old loss corporation has a net unrealized built-in loss, the recognized built-in loss for any recognition period taxable year shall be subject to limitation under this section in the same manner as if such loss were a pre-change loss.

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(ii) Limitation Clause (i) shall apply to recognized built-in losses for any recognition period taxable year only to the extent such losses do not exceed—

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(I) the net unrealized built-in loss, reduced by

(II) recognized built-in losses for prior taxable years ending in the recognition period.

(C) Special rules for certain section 338 gains If an election under section 338 is made in connection with an ownership change and the net unrealized built-in gain is zero by reason of paragraph (3)(B), then, with respect to such change, the section 382 limitation for the post-change year in which gain is recognized by reason of such election shall be increased by the lesser of—

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(3)(A), substituted “Special rules for certain section 338 gains” for “Section 338 gain” in heading and amended text generally. Prior to amendment, text read as follows: “The section 382 limitation for any taxable year in which gain is recognized by reason of an election under section 338 shall be increased by the excess of—
“(i) the amount of such gain, over
“(ii) the portion of such gain taken into account in computing recognized built-in gains for such taxable year.”

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(i) the recognized built-in gains by reason of such election, or

(ii) the net unrealized built-in gain (determined without regard to paragraph (3)(B)).

(3) Net unrealized built-in gain and loss defined

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(A) Net unrealized built-in gain and loss

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(i) In general The terms “net unrealized built-in gain” and “net unrealized built-in loss” mean, with respect to any old loss corporation, the amount by which—

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(I) the fair market value of the assets of such corporation immediately before an ownership change is more or less, respectively, than

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(II) the aggregate adjusted basis of such assets at such time.

(ii) Special rule for redemptions or other corporate contractions If a redemption or other corporate contraction occurs in connection with an ownership change, to the extent provided in regulations, determinations under clause (i) shall be made after taking such redemption or other corporate contraction into account.

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(28)(A), inserted “to the extent provided in regulations,” after “an ownership change,”.
1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(1)(B), inserted “or other corporate contractions” after “redemptions” in heading and “or other corporate contraction” after “redemption” in two places in text.

(B) Threshold requirement

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(i) In general If the amount of the net unrealized built-in gain or net unrealized built-in loss (determined without regard to this subparagraph) of any old loss corporation is not greater than the lesser of—

Amended 1989

1989 Pub. L. 101-239 Pub. L. 101–239, § 7205(a), amended cl. (i) generally. Prior to amendment, cl. (i) read as follows: “If the amount of the net unrealized built-in gain or net unrealized built-in loss (determined without regard to this subparagraph) of any old loss corporation is not greater than 25 percent of the amount determined for purposes of subparagraph (A)(i)(I), the net unrealized built-in gain or net unrealized built-in loss shall be zero.”

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(I) 15 percent of the amount determined for purposes of subparagraph (A)(i)(I), or

(II) $10,000,000,

the net unrealized built-in gain or net unrealized built-in loss shall be zero.

(ii) Cash and cash items not taken into account In computing any net unrealized built-in gain or net unrealized built-in loss under clause (i), except as provided in regulations, there shall not be taken into account—

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(26), inserted “except as provided in regulations,” after “under clause (i),”.

(I) any cash or cash item, or

(II) any marketable security which has a value which does not substantially differ from adjusted basis.

(4) Disallowed loss allowed as a carryforward If a deduction for any portion of a recognized built-in loss is disallowed for any post-change year, such portion—

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(20), substituted “allowed as a carryforward” for “treated as a net operating loss” in heading and inserted “(or to the extent the amount so disallowed is attributable to capital losses, under rules similar to the rules for the carrying forward of net capital losses)” after “net operating losses” in subpar. (A).

(A) shall be carried forward to subsequent taxable years under rules similar to the rules for the carrying forward of net operating losses (or to the extent the amount so disallowed is attributable to capital losses, under rules similar to the rules for the carrying forward of net capital losses), but

(B) shall be subject to limitation under this section in the same manner as a pre-change loss.

(5) Special rules for post-change year which includes change date For purposes of subsection (b)(3)—

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(A) in applying subparagraph (A) thereof, taxable income shall be computed without regard to recognized built-in gains to the extent such gains increased the section 382 limitation for the year (or recognized built-in losses to the extent such losses are treated as pre-change losses), and gain described in paragraph (1)(C), for the year, and

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(3)(B), substituted “recognized built-in gains to the extent such gains increased the section 382 limitation for the year (or recognized built-in losses to the extent such losses are treated as pre-change losses)” for “recognized built-in gains and losses”.

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(B) in applying subparagraph (B) thereof, the section 382 limitation shall be computed without regard to recognized built-in gains, and gain described in paragraph (1)(C), for the year.

(6) Treatment of certain built-in items

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(22), substituted “Treatment of certain built-in items” for “Secretary may treat certain deductions as built-in losses” in heading and amended text generally. Prior to amendment, text read as follows: “The Secretary may by regulation treat amounts which accrue on or before the change date but which are allowable as a deduction after such date as recognized built-in losses.”

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(A) Income items Any item of income which is properly taken into account during the recognition period but which is attributable to periods before the change date shall be treated as a recognized built-in gain for the taxable year in which it is properly taken into account.

(B) Deduction items Any amount which is allowable as a deduction during the recognition period (determined without regard to any carryover) but which is attributable to periods before the change date shall be treated as a recognized built-in loss for the taxable year for which it is allowable as a deduction.

Amended 1989

1989 Pub. L. 101-239 Pub. L. 101–239, § 7811(c)(5)(A)(i), inserted “(determined without regard to any carryover)” after “during the recognition period”.

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(C) Adjustments The amount of the net unrealized built-in gain or loss shall be properly adjusted for amounts which would be treated as recognized built-in gains or losses under this paragraph if such amounts were properly taken into account (or allowable as a deduction) during the recognition period.

Amended 1989

1989 Pub. L. 101-239 Pub. L. 101–239, § 7811(c)(5)(A)(ii), substituted “which would be treated as recognized built-in gains or losses under this paragraph if such amounts were properly taken into account (or allowable as a deduction) during the recognition period” for “treated as recognized built-in gains or losses under this paragraph”.

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(7) Recognition period, etc.

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(A) Recognition period The term “recognition period” means, with respect to any ownership change, the 5-year period beginning on the change date.

(B) Recognition period taxable year The term “recognition period taxable year” means any taxable year any portion of which is in the recognition period.

(8) Determination of fair market value in certain cases If 80 percent or more in value of the stock of a corporation is acquired in 1 transaction (or in a series of related transactions during any 12-month period), for purposes of determining the net unrealized built-in loss, the fair market value of the assets of such corporation shall not exceed the grossed up amount paid for such stock properly adjusted for indebtedness of the corporation and other relevant items.

(9) Tax-free exchanges or transfers The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection where property held on the change date was acquired (or is subsequently transferred) in a transaction where gain or loss is not recognized (in whole or in part).

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(23), substituted “was acquired (or is subsequently transferred)” for “is transferred”.

(i) Testing period For purposes of this section—

(1) 3-year period 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.

(2) Shorter period where there has been recent ownership change 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.

(3) Shorter period where all losses arise after 3-year period begins The testing period shall not begin before the earlier of the 1st day of the 1st taxable year from which there is a carryforward of a loss or of an excess credit to the 1st post-change year or the taxable year in which the transaction being tested occurs. Except as provided in regulations, this paragraph shall not apply to any loss corporation which has a net unrealized built-in loss (determined after application of subsection (h)(3)(B)).

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(4), inserted “the earlier of” after “not begin before” and “or the taxable year in which the transaction being tested occurs” after “1st post-change year”.

(j) Change date For purposes of this section, the change date is—

(1) in the case where the last component of an ownership change is an owner shift involving a 5-percent shareholder, the date on which such shift occurs, and

(2) in the case where the last component of an ownership change is an equity structure shift, the date of the reorganization.

(k) Definitions and special rules For purposes of this section—

(1) Loss corporation 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.

Amended 1988, 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 13301(b)(3), inserted after first sentence “Such term shall include any corporation entitled to use a carryforward of disallowed interest described in section 381(c)(20).”
1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(5)(A), inserted “or having a net operating loss for the taxable year in which the ownership change occurs” after “operating loss carryover”.

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(2) Old loss corporation The term “old loss corporation” means any corporation—

“any corporation—” Opening words

Textual readingALL OF= an old loss corporation

(A) with respect to which there is an ownership change, and

(B) which (before the ownership change) was a loss corporation.

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(5)(B), amended par. (2) generally. Prior to amendment, par. (2) read as follows: “The term ‘old loss corporation’ means any corporation with respect to which there is an ownership change—
“(A) which (before the ownership change) was a loss corporation, or
“(B) with respect to which there is a pre-change loss described in subsection (d)(1)(B).”

(3) New loss corporation The term “new loss corporation” 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.

(4) Taxable income Taxable income shall be computed with the modifications set forth in section 172(d).

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(5) Value The term “value” means fair market value.

(6) Rules relating to stock

(A) Preferred stock Except as provided in regulations and subsection (e), the term “stock” means stock other than stock described in section 1504(a)(4).

(B) Treatment of certain rights, etc. The Secretary shall prescribe such regulations as may be necessary—

(i) to treat warrants, options, contracts to acquire stock, convertible debt interests, and other similar interests as stock, and

(ii) to treat stock as not stock.

(C) Determinations on basis of value Determinations of the percentage of stock of any corporation held by any person shall be made on the basis of value.

(7) 5-percent shareholder The term “5-percent shareholder” means any person holding 5 percent or more of the stock of the corporation at any time during the testing period.

(l) Certain additional operating rules For purposes of this section—

(1) Certain capital contributions not taken into account

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(A) In general 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.

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(B) Certain contributions treated as part of plan For purposes of subparagraph (A), 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).

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(2) Ordering rules for application of section

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(A) Coordination with section 172(b) carryover rules In the case of any pre-change loss for any taxable year (hereinafter in this subparagraph referred to as the “loss year”) subject to limitation under this section, for purposes of determining under the 2nd sentence of section 172(b)(2) the amount of such loss which may be carried to any taxable year, taxable income for any taxable year shall be treated as not greater than—

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(i) the section 382 limitation for such taxable year, reduced by

(ii) the unused pre-change losses for taxable years preceding the loss year.

Similar rules shall apply in the case of any credit or loss subject to limitation under section 383.

(B) Ordering rule for losses carried from same taxable year In any case in which—

Textual readingALL OF= limited loss treated as offsetting first

(i) a pre-change loss of a loss corporation for any taxable year is subject to a section 382 limitation, and

(ii) a net operating loss of such corporation from such taxable year is not subject to such limitation,

taxable income shall be treated as having been offset first by the loss subject to such limitation.

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(3) Operating rules relating to ownership of stock

Amended 1989

1989 Pub. L. 101-239 Pub. L. 101–239, § 7304(d)(1), redesignated subpar. (D) as (C).

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(A) Constructive ownership Section 318 (relating to constructive ownership of stock) shall apply in determining ownership of stock, except that—

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(i) paragraphs (1) and (5)(B) of section 318(a) shall not apply and an individual and all members of his family described in paragraph (1) of section 318(a) shall be treated as 1 individual for purposes of applying this section,

(ii) paragraph (2) of section 318(a) shall be applied—

(I) without regard to the 50-percent limitation contained in subparagraph (C) thereof, and

(II) except as provided in regulations, by treating stock attributed thereunder as no longer being held by the entity from which attributed,

(iii) paragraph (3) of section 318(a) shall be applied only to the extent provided in regulations,

(iv) except to the extent provided in regulations, an option to acquire stock shall be treated as exercised if such exercise results in an ownership change, and

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(6), added cls. (iv) and (v) and struck out former cl. (iv) which read as follows: “except to the extent provided in regulations, paragraph (4) of section 318(a) shall apply to an option if such application results in an ownership change.”

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(v) in attributing stock from an entity under paragraph (2) of section 318(a), there shall not be taken into account—

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(6), added cls. (iv) and (v) and struck out former cl. (iv) which read as follows: “except to the extent provided in regulations, paragraph (4) of section 318(a) shall apply to an option if such application results in an ownership change.”

(I) in the case of attribution from a corporation, stock which is not treated as stock for purposes of this section, or

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(II) in the case of attribution from another entity, an interest in such entity similar to stock described in subclause (I).

A rule similar to the rule of clause (iv) shall apply in the case of any contingent purchase, warrant, convertible debt, put, stock subject to a risk of forfeiture, contract to acquire stock, or similar interests.

(B) Stock acquired by reason of death, gift, divorce, separation, etc. If—

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(i) the basis of any stock in the hands of any person is determined—

(I) under section 1014 (relating to property acquired from a decedent),

(II) section 1015 (relating to property acquired by a gift or transfer in trust), or

(III) section 1041(b)(2) (relating to transfers of property between spouses or incident to divorce),

Amended 1989

1989 Pub. L. 101-239 Pub. L. 101–239, § 7841(d)(11), substituted “incident to divorce),” for “incident to divorce,”.

(ii) stock is received by any person in satisfaction of a right to receive a pecuniary bequest, or

(iii) stock is acquired by a person pursuant to any divorce or separation instrument (within the meaning of section 121(d)(3)(C)),

Amended 2017

2017 Pub. L. 115-97 Pub. L. 115–97, § 11051(b)(3)(F), substituted “section 121(d)(3)(C)” for “section 71(b)(2)”.

such person shall be treated as owning such stock during the period such stock was owned by the person from whom it was acquired.

(C) Certain changes in percentage ownership which are attributable to fluctuations in value not taken into account Except as provided in regulations, any change in proportionate ownership which is attributable solely to fluctuations in the relative fair market values of different classes of stock shall not be taken into account.

Amended 1988, 1989

1989 Pub. L. 101-239 Pub. L. 101–239, § 7304(d)(1), redesignated subpar. (D) as (C) and struck out former subpar. (C) which related to special rule for employee stock ownership plans.
1989 Pub. L. 101-239 Pub. L. 101–239, § 7815(h), substituted “For purposes of subclause (III),” for “for purposes of subclause (III),” in concluding provisions.
1988 Pub. L. 100-647 Pub. L. 100–647, § 5077(a), added subcl. (III) and concluding provisions.

(4) Reduction in value where substantial nonbusiness assets

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(A) In general If, immediately after an ownership change, the new loss corporation has substantial nonbusiness assets, the value of the old loss corporation shall be reduced by the excess (if any) of—

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(i) the fair market value of the nonbusiness assets of the old loss corporation, over

(ii) the nonbusiness asset share of indebtedness for which such corporation is liable.

(B) Corporation having substantial nonbusiness assets For purposes of subparagraph (A)—

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(i) In general The old loss corporation shall be treated as having substantial nonbusiness assets if at least ⅓ of the value of the total assets of such corporation consists of nonbusiness assets.

(ii) Exception for certain investment entities A regulated investment company to which part I of subchapter M applies, a real estate investment trust to which part II of subchapter M applies, or a REMIC to which part IV of subchapter M applies, shall not be treated as a new loss corporation having substantial nonbusiness assets.

Amended 1988, 1996, 2004

2004 Pub. L. 108-357 Pub. L. 108–357 substituted “or a REMIC to which part IV of subchapter M applies,” for “a REMIC to which part IV of subchapter M applies, or a FASIT to which part V of subchapter M applies,”.
1996 Pub. L. 104-188 Pub. L. 104–188 substituted “a REMIC to which part IV of subchapter M applies, or a FASIT to which part V of subchapter M applies” for “or a REMIC to which part IV of subchapter M applies”.
1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(t)(22)(A), substituted “REMIC” for “real estate mortgage pool”.

(C) Nonbusiness assets For purposes of this paragraph, the term “nonbusiness assets” means assets held for investment.

(D) Nonbusiness asset share For purposes of this paragraph, the nonbusiness asset share of the indebtedness of the corporation is an amount which bears the same ratio to such indebtedness as—

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(i) the fair market value of the nonbusiness assets of the corporation, bears to

(ii) the fair market value of all assets of such corporation.

(E) Treatment of subsidiaries For purposes of this paragraph, stock and securities in any subsidiary corporation shall be disregarded and the parent corporation shall be deemed to own its ratable share of the subsidiary’s assets. For purposes of the preceding sentence, a corporation shall be treated as a subsidiary if the parent owns 50 percent or more of the combined voting power of all classes of stock entitled to vote, and 50 percent or more of the total value of shares of all classes of stock.

(5) Title 11 or similar case

Amended 2014

2014 Pub. L. 113-295 Pub. L. 113–295 redesignated subpars. (G) and (H) as (F) and (G), respectively, and struck out former subpar. (F) which related to a special rule for certain financial institutions for certain equity structure shifts and transactions occurring before May 10, 1989.

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(A) In general Subsection (a) shall not apply to any ownership change if—

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(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 (or stock of a controlling corporation if also in bankruptcy) which meets the requirements of section 1504(a)(2) (determined by substituting “50 percent” for “80 percent” each place it appears).

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(25), substituted “stock of a controlling corporation” for “stock of controlling corporation”.
1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(7), substituted “after such ownership change and as a result of being shareholders or creditors immediately before such change” for “immediately after such ownership change”.

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(B) Reduction for interest payments to creditors becoming shareholders In any case to which subparagraph (A) applies, the pre-change losses and excess credits (within the meaning of section 383(a)(2)) which may be carried to a post-change year shall be computed as if no deduction was allowable under this chapter for the interest paid or accrued by the old loss corporation on indebtedness which was converted into stock pursuant to title 11 or similar case during—

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(27), substituted “the pre-change losses and excess credits (within the meaning of section 383(a)(2)) which may be carried to a post-change year shall be computed” for “the net operating loss deduction under section 172(a) for any post-change year shall be determined”.

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(i) any taxable year ending during the 3-year period preceding the taxable year in which the ownership change occurs, and

(ii) the period of the taxable year in which the ownership change occurs on or before the change date.

(C) Coordination with section 108 In applying section 108(e)(8) to any case to which subparagraph (A) applies, there shall not be taken into account any indebtedness for interest described in subparagraph (B).

Amended 1988, 1993

1993 Pub. L. 103-66 Pub. L. 103–66 amended heading and text of subpar. (C) generally. Prior to amendment, text read as follows:
1993 “(i) In general.—In any case to which subparagraph (A) applies, 50 percent of the amount which, but for the application of section 108(e)(10)(B), would have been applied to reduce tax attributes under section 108(b) shall be so applied.
1993 “(ii) Clarification with subparagraph (b).—In applying clause (i), there shall not be taken into account any indebtedness for interest described in subparagraph (B).”
1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(18), substituted “tax attributes” for “carryforwards” in heading and amended text generally. Prior to amendment, text read as follows: “In any case to which subparagraph (A) applies, the pre-change losses and excess credits (within the meaning of section 383(a)(2)) which may be carried to a post-change year shall be computed as if 50 percent of the amount which, but for the application of section 108(e)(10)(B), would have been includible in gross income for any taxable year had been so included.”

(D) Section 382 limitation zero if another change within 2 years If, during the 2-year period immediately following an ownership change to which this paragraph applies, an ownership change of the new loss corporation occurs, this paragraph shall not apply and the section 382 limitation with respect to the 2nd ownership change for any post-change year ending after the change date of the 2nd ownership change shall be zero.

(E) Only certain stock taken into account For purposes of subparagraph (A)(ii), stock transferred to a creditor shall be taken into account only to the extent such stock is transferred in satisfaction of indebtedness and only if such indebtedness—

“to the extent such stock is transferred in satisfaction of indebtedness” Opening words

Textual readingANY OF= stock transferred to creditor taken into account

(i) was held by the creditor at least 18 months before the date of the filing of the title 11 or similar case, or

(ii) arose in the ordinary course of the trade or business of the old loss corporation and is held by the person who at all times held the beneficial interest in such indebtedness.

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(19), substituted “taken into account” for “of creditors taken into account” in heading and amended introductory provisions generally. Prior to amendment, introductory provisions read as follows: “For purposes of subparagraph (A)(ii), stock transferred to a creditor in satisfaction of indebtedness shall be taken into account only if such indebtedness—”.

(F) Title 11 or similar case For purposes of this paragraph, the term “title 11 or similar case” has the meaning given such term by section 368(a)(3)(A).

Amended 1988, 1989, 2014

2014 Pub. L. 113-295 Pub. L. 113–295 redesignated subpars. (G) and (H) as (F) and (G), respectively, and struck out former subpar. (F) which related to a special rule for certain financial institutions for certain equity structure shifts and transactions occurring before May 10, 1989.
1989 Pub. L. 101-73 Pub. L. 101–73 substituted “on or after May 10, 1989” for “after December 31, 1989” in last sentence.
1988 Pub. L. 100-647 Pub. L. 100–647, § 4012(a)(3), substituted “1989” for “1988” in last sentence.
1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(8)(A), inserted “ ‘1504(a)(2)(B)’ for ‘1504(a)(2)’ and” after “by substituting”.
1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(8)(B), substituted “the amount of deposits in the new loss corporation immediately after the change” for “deposits described in subclause (II)”.
1988 Pub. L. 100-647 Pub. L. 100–647, § 4012(b)(1)(B), inserted “(as modified by section 368(a)(3)(D)(iv))” after “section 368(a)(3)(D)(ii)”.
1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(29), which directed amendment of subcl. (I) by substituting “section 368(a)(3)(D)(ii)” for “section 368(a)(D)(ii)”, could not be executed because “section 368(a)(3)(D)(ii)” appeared and “section 368(a)(D)(ii)” did not appear.

(G) Election not to have paragraph apply A new loss corporation may elect, subject to such terms and conditions as the Secretary may prescribe, not to have the provisions of this paragraph apply.

Amended 2014

2014 Pub. L. 113-295 Pub. L. 113–295 redesignated subpars. (G) and (H) as (F) and (G), respectively, and struck out former subpar. (F) which related to a special rule for certain financial institutions for certain equity structure shifts and transactions occurring before May 10, 1989.

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(6) Special rule for insolvency transactions If paragraph (5) does not apply to any reorganization described in subparagraph (G) of section 368(a)(1) or any exchange of debt for stock in a title 11 or similar case (as defined in section 368(a)(3)(A)), the value under subsection (e) shall reflect the increase (if any) in value of the old loss corporation resulting from any surrender or cancellation of creditors’ claims in the transaction.

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(9), substituted “shall reflect the increase (if any) in value of the old loss corporation resulting from any surrender or cancellation of creditors’ claims in the transaction” for “shall be the value of the new loss corporation immediately after the ownership change”.

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(7) Coordination with alternative minimum tax The Secretary shall by regulation provide for the application of this section to the alternative tax net operating loss deduction under section 56(d).

(8) Predecessor and successor entities Except as provided in regulations, any entity and any predecessor or successor entities of such entity shall be treated as 1 entity.

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(10), added par. (8).

(m) Regulations The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section and section 383, including (but not limited to) regulations—

(1) providing for the application of this section and section 383 where an ownership change with respect to the old loss corporation is followed by an ownership change with respect to the new loss corporation, and

(2) providing for the application of this section and section 383 in the case of a short taxable year,

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(3) providing for such adjustments to the application of this section and section 383 as is necessary to prevent the avoidance of the purposes of this section and section 383, including the avoidance of such purposes through the use of related persons, pass-thru entities, or other intermediaries,

(4) providing for the application of subsection (g)(4) where there is only 1 corporation involved, and

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(1)(C), redesignated par. (5) as (4) and struck out former par. (4) which read as follows: “providing for the treatment of corporate contractions as redemptions for purposes of subsections (e)(2) and (h)(3)(A), and”.

(5) providing, in the case of any group of corporations described in section 1563(a) (determined by substituting “50 percent” for “80 percent” each place it appears and determined without regard to paragraph (4) thereof), appropriate adjustments to value, built-in gain or loss, and other items so that items are not omitted or taken into account more than once.

Amended 1988

1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(24), added par. (5).
1988 Pub. L. 100-647 Pub. L. 100–647, § 1006(d)(1)(C), redesignated former par. (5) as (4).

(n) Special rule for certain ownership changes

Amended 2009

2009 Pub. L. 111-5 Pub. L. 111–5 added subsec. (n).

(1) In general The limitation contained in subsection (a) shall not apply in the case of an ownership change which is pursuant to a restructuring plan of a taxpayer which—

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(A) is required under a loan agreement or a commitment for a line of credit entered into with the Department of the Treasury under the Emergency Economic Stabilization Act of 2008, and

(B) is intended to result in a rationalization of the costs, capitalization, and capacity with respect to the manufacturing workforce of, and suppliers to, the taxpayer and its subsidiaries.

(2) Subsequent acquisitions Paragraph (1) shall not apply in the case of any subsequent ownership change unless such ownership change is described in such paragraph.

(3) Limitation based on control in corporation

(A) In general Paragraph (1) shall not apply in the case of any ownership change if, immediately after such ownership change, any person (other than a voluntary employees’ beneficiary association under section 501(c)(9)) owns stock of the new loss corporation possessing 50 percent or more of the total combined voting power of all classes of stock entitled to vote, or of the total value of the stock of such corporation.

(B) Treatment of related persons

(i) In general Related persons shall be treated as a single person for purposes of this paragraph.

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(ii) Related persons For purposes of clause (i), a person shall be treated as related to another person if—

Textual readingANY OF= a person treated as related

(I) such person bears a relationship to such other person described in section 267(b) or 707(b), or

(II) such persons are members of a group of persons acting in concert.