Publish Date

Jul 06, 2020

Limitations On Corporate Tax Attributes: An Analysis Of Section 382 And Related Provisions

A&M Tax Advisor Weekly

As a result of the economic recession caused by the COVID-19 pandemic, many corporations find themselves with unprecedented losses from investments and operations. These losses will result in the creation of tax attributes, that may be used as deductions against past or future profits.

Corporations with tax attributes will need to understand the rules that limit their use.

Sections 382 of the tax code limits the use of net operating losses (NOLs) and certain other tax attributes (e.g. business interest expense carryforwards and built-in losses) by corporations. These provisions apply after a company undergoes an ownership change (i.e., a greater than 50% increase in stock ownership by 5% shareholders and shareholder groups over, generally, a three-year period). Corporations that have specified tax attributes are required by regulations to determine (and disclose on their tax return) whether they have had an ownership change.

Linked below is a detailed report on the section 382 rules, that provide limitations on the use of tax attributes (carryforwards and built-in items) by corporations. The report also discusses the related rules under section 384 and the separate return limitation year (SRLY) limitation rules that apply to consolidated subsidiaries.

This updated version of the report discusses at length the proposed built-in gain or loss rules under section 382(h) that were issued last year. When finalized, these proposed rules, will supersede Notice 2003-65 (the current guidance in effect) prospectively.

Notice 2003-65 allowed taxpayers to choose from two different alternative approaches: section 338 and section 1374 approaches. The section 338 approach, generally more favorable to taxpayers with a built-in gain, allowed for increases in the section 382 limitation for foregone amortization (i.e. depreciation and amortization that would have been available in a taxable asset purchase). The section 1374 approach, generally more favorable to taxpayers with a built-in loss, allowed for favorable rules for the treatment of built-in deductions.

These proposed rules support a single approach (a variation on the section 1374 approach). As a result, they are not as favorable as Notice 2003-65 for taxpayers with a built-in gain (since foregone amortization will not be allowed). They also include more complicated rules regarding the treatment of cancellation of debt (COD) income.

The proposed regulations are generally intended to apply to ownership changes that occur 30 days after the rules are finalized (the applicability date). In addition, many transactions that are in process on the applicability date, but result in an ownership change after such date, will be exempt from the forthcoming final regulations. Taxpayers can continue to apply Notice 2003-65 if the forthcoming final regulations do not apply…

Click here to read the full Report.