Tax Attribute Change Rules

Overview

This unit covers limitations on tax attributes (net operating losses, capital losses, foreign tax credits, general business credits, earnings and profits) following ownership changes of corporations, focusing on IRC Sections 269, 382, 383, and 384 across days 13–16.

Tax Attributes & NOL Deductibility Rules

• Two types of NOLs matter: those arising before 2018 and those after 2017.
• Pre-2018 NOLs: carryback two years, carryforward 20 years, offset 100% of taxable income.
• Post-2017 NOLs: no carryback, indefinite carryforward, offset only 80% of taxable income after deducting pre-2018 NOLs.
• Tax attributes carry over in tax-deferred acquisitions (stock purchases, mergers) but not in taxable asset acquisitions.
• NOLs exist to balance variable corporate income across years and prevent unfair taxation.

Section 269 – Acquisition for Tax Avoidance

• Disallows NOL deductions when control is acquired with the principal purpose of avoiding taxes.
• Treasury Secretary has discretion to disallow deductions under this subjective standard.
• Rarely applied due to subjective nature; taxpayers can argue legitimate business purposes.
• Presence of Section 269 may deter aggressive tax-motivated transactions.

Section 382 – Ownership Change Limitations

• Enacted in Tax Reform Act of 1986 to limit (not eliminate) NOL deductions after ownership changes.
• Applies when five percent shareholders' ownership changes by more than 50 percentage points.
• Triggered by stock sales or mergers, even if the loss corporation continues to exist.
• Five percent shareholders determined using modified IRC Section 318 attribution rules (family attribution modified, no 50% threshold for paragraph 2 rules).
• Old loss corporation: entity with loss before ownership change; new loss corporation: entity with loss after change.

Key Steps to Test for Ownership Change:

• Identify five percent shareholders using attribution rules.
• Aggregate or segregate ownership based on specific rules.
• Determine if ownership shift exceeds 50 percentage points.

Section 382 Limitation Calculation (Day 14)

• Post-change year: period after ownership change when pre-change losses may offset post-change income.
• Section 382 limit restricts annual use of pre-change losses to offset post-change income.
• Theory: limit equals tax-exempt interest that would have been earned if acquiring corporation bought tax-exempt securities instead of loss corporation.
• Annual limitation formula: value of old loss corporation × long-term tax-exempt rate at ownership change date.
• January 2023 tax-exempt rate: 3.84%; January 2022 rate: 1.82% (limitation fixed at ownership change).
• Mid-year ownership change: prorate taxable income and annual limit between pre-change and post-change periods; limit applies only to post-change portion.
• Unused annual limit carries over to subsequent years (not use-it-or-lose-it).
• Multiple ownership changes may create multiple Section 382 limits; lowest limit applies.

Built-in Gains and Losses (Day 15)

• Loss corporations may have net unrealized built-in gain (NUBIG) or net unrealized built-in loss (NUBIL) at ownership change date.
• NUBIG: increases Section 382 limit when built-in gains are recognized during five-year recognition period.
• Rationale: gains existed pre-change; corporation could have sold property and offset gains with NOLs without limitation.
• NUBIL: built-in losses recognized after ownership change are treated as pre-change losses subject to Section 382 limit.
• Total recognized built-in gains or losses during recognition period cannot exceed NUBIG or NUBIL at ownership change.
• If NUBIG exists, unrealized losses on individual assets are not subject to Section 382 when later recognized.
• If NUBIL exists, unrealized gains on individual assets do not change Section 382 limit when recognized.
• Special rules apply for depreciable and amortizable assets to recognize built-in gains/losses without sale.

NUBIG Summary:

• Section 382 limit increases by built-in gain recognized during the year.
• Total increase capped at NUBIG amount at ownership change.

NUBIL Summary:

• Recognized built-in losses treated as NOLs subject to Section 382 but not the 80% rule.
• Total recognized losses capped at NUBIL amount at ownership change.

Section 383 – Other Tax Attributes (Day 16)

• Section 382 limit also applies to net capital losses, foreign tax credits, and unused general business credits.
• Establishes ordering rules when multiple tax attributes exist alongside NOLs.

Ordering of Tax Attribute Limitations:

1. Capital losses
2. Built-in capital losses
3. Capital loss carryovers
4. Built-in ordinary losses (NUBIL rules)
5. NOL carryovers
6. Foreign tax credits
7. Unused general business credits

Section 384 – Gain Corporation Acquisitions

• Applies when a loss corporation acquires a gain corporation (corporation with NUBIG).
• Prevents pre-acquisition losses of loss corporation from offsetting built-in gains recognized by acquired gain corporation.
• Complements Section 382: Section 382 limits use of target losses; Section 384 limits use of gains against acquirer losses.
• Both sections can apply to the same transaction; apply Section 382 first, then further limit under Section 384.

Key Terms & Definitions

• Net Operating Loss (NOL): excess of deductions over income in a tax year.
• Ownership change: more than 50 percentage point change in ownership by five percent shareholders.
• Old loss corporation: corporation with loss before ownership change.
• New loss corporation: corporation with loss after ownership change.
• Five percent shareholders: individuals (with attribution) owning ≥5% of corporation stock.
• Pre-change loss: NOL arising before ownership change date.
• Post-change year: tax year or period after ownership change.
• Section 382 limit: annual cap on deducting pre-change losses against post-change income.
• NUBIG (Net Unrealized Built-in Gain): excess of FMV over basis of assets at ownership change.
• NUBIL (Net Unrealized Built-in Loss): excess of basis over FMV of assets at ownership change.
• Recognition period: five years after ownership change for built-in gain/loss purposes.