okay this is going to be an overview of unit 4 limitations on tax attributes and it's going to cover days 13 14 15 and 16. so let's first talk about day 13 material and just understand let's make sure we understand what some common tax attributes are net operating losses that's going to be our emphasis for this unit there are also Capital losses foreign tax credits General business credits earnings and profits there are a lot of different tax attributes and an important question is well what happens to those tax attributes when or when can a corporation use those tax attributes to offset its income or tax liability and when when is it not able to and that'll be our our Focus for our discussion here today but let's let's make sure we're on the same page in terms of nol deductibility rules so right now there are really two types of nols that matter their nols are rising in tax years beginning before 2018 we can carry those back to forward 20 offset 100 of taxable income before the nol deduction and then there are also nols in taxes beginning after 2017 and these we can't carry back the carryover periods indefinite and then we can only reduce our income use the nol to reduce taxable income by 80 percent of our taxable income left after deducting the pre 2018 nols so that those are just some basic uh limitations for deducting net operating losses so now what happens with these tax attributes when a corporation is acquired well if it's just a stock acquisition so the shareholders might be changing well the the tax attributes like an nol stays with that Target Corporation if we have a merger uh then and the the target merges into the acquiring and the target has an nol that would that would carry over so nol's carry over and tax deferred Acquisitions but they don't carry over in taxable Acquisitions taxable asset acquisitions okay so why let's talk about net operating losses why do we have net operating losses from a big picture perspective well we have them because core percent corporations may have variable income from year to year and it wouldn't necessarily be fair to tax one Corporation for all their income in one year and then they have a big loss to next year and they that doesn't offset any taxable income whereas another Corporation might have the same income uh over two years but it's but it's balanced balanced out and so they would have a lesser taxable income than a corporation that that had all of their income taxed in one year and then a loss in the next year so so the the carryover's there to let us just balance out these the losses to offset income when we have that variable income from year to year but that reason uh the fact that we have these net operating loss carryovers means that a corporation that has that lost carryover you know it may be That Others May acquire that Corporation so they can use the loss from the from the target Corporation so there are some Provisions in place to prevent taxpayers from deducting net operating losses in certain circumstances and there are several Provisions here that that limit those uh deductibility of nols so section 1069 382 that's what we'll be hitting on mostly today 384 and then some Surly separate return limitation years we'll cover that when we cover Consolidated tax returns so 382 is our primary focus but section 269 has been around the longest and that really just says hey if if we acquire control of another corporation that has this loss and carryover in a and we do that with the principal purpose of avoiding taxes then the Secretary of the Treasury can come in and just disallow the deduction but for the for the net operating loss the problem is is that this is really a subjective determination because it requires this tax avoidance principal purpose or tax avoidance so we don't really see section 269 actually applied too much but the fact that it's there may prevent some corporations from engaging in in transactions that may be considered to be aggressive but it's not again not really effective because it's just a subjective determination so if a taxpayer wants to say hey it wasn't for principal purpose of tax avoidance and they they would need to say well here is my good business purpose and this is why this wasn't for tax avoidance okay let's move on let's hit 382. so this was put into place with the tax reform Act of 1986 and it's designed to limit not not eliminate the deductibility of nol carryovers when the shareholders of a corporation a loss corporation that has an nol when the shareholders change enough or when that corporation that created the nol ceases to to exist so there's a rule that just says a single rule in section 382 that says hey if we have a change in ownership by the five percent shareholders of the corporation then section 382 applies and we have a limitation on our ability to deduct the losses of that Corporation so even though that Corporation is still in existence just because the owners changed that could trigger this limitation and limit our ability to deduct those net operating laws likewise if if we're a Target Corporation and we merge into another profitable Corporation section 382 could limit the ability of that new Corporation or that the profitable Corporation to debt the losses of the Lost Corporation so when we say five percent shareholders we'll talk about this more in class but this this includes uh we're getting to who are the and owners of these corporations so they got to be individuals and we use attribution rules to find out who the five percent shareholders are of a particular corporation in order to determine if we if we're going to change that if there's going to be a change in that ownership but these are details we'll talk about more more in class but when we're using the 318 rules for these purposes we modify but we modify the attribution rules we modify the family attribution rules and we modify the paragraph two attribution rules so that there's no 50 threshold but we'll talk about that attribution in class okay let's so we we can have an ownership change when there's an ownership so that means the five percent shareholders in the aggregate before this shift that when that ownership percentage changes by more than 50 percent then we have a section 382 applies and we have a we have an ownership change and these ownership and ownership chains can happen based on a lot of different types of transactions the one will primarily be dealing with is just one shareholders just selling their stock or one Corporation merging into another Corporation and they're going to be a lot of definitions when we get into section 382. we'll just hit on a couple of them here so one is the old loss Corporation so this is the corporation that has an ownership change but they were a lost Corporation before the ownership change and then the new loss Corporation is a corporation it has that loss after the ownership change and that same Corporation could be both the Old and the the old loss and the new loss Corporation if we're just selling stock if if one Corporation merges into another then the old loss and the new loss corporations could be different corporations so we're going to talk about some steps to go through to determine when we test for an ownership change and whether we have an ownership change so we'll get a lot of practice with that in class now when we're talking about ownership there are going to be certain situations when we're going to aggregate the ownership of several shareholders together and treat them as one those are aggregation rules and then they're also going to be segregation rules where even though we would normally put them together we're going to keep them separate keep the ownership separate as separate shareholders for purposes of determining whether there's an ownership change and then as I mentioned there's a lot of vocabulary in section 382 and these are a lot of the terminology that we're going to become familiar with become familiar with those definitions because these are all important in terms of understanding section 382. okay let's go to day 14. so now we figured out do we have an ownership change and if we do then we've got to figure out well what is our limit on our ability to deduct the net operating loss so section 382 a limitation is saying the amount of taxable income of any new loss Corporation so this is a corporation that have an ownership change and they have the loss after the ownership change so the amount of taxable income for any post change year so that's the year after the ownership change including the period of the year after the ownership change which may be offset by pre-change losses shall not exceed the section 382 limit so what this is saying is if we have losses before the change we're going to limit the ability we're going to limit how much we can use of that pre-change loss to offset post change income so the theory for Section 382 let's look here here we've got a profitable Corporation a lost Corporation and loss merges into the profitable Corporation in a tax deferred merger so the Lost Corporation goes out of existence but now the profitable Corporation has the nol from the Lost Corporation so how much of that L's nol can the profitable Corporation use to offset its income and so the theory for Section 382 is we're going to limit your ability each year to deduct the loss from l and we're going to figure that limit by figuring out what you would have made earned in tax-exempt interest if instead of investing in L you had just purchased tax-exempt Securities so if we just bought tax-exempt Securities instead of Corporation L then we would get some income that wouldn't be taxed but in this case we're actually getting L and the loss so the amount of loss that we're able to deduct from L that offsets P's income so that's like getting taxed a certain amount of tax exempt income each year so we're just trying to equate uh or estimate the make the deduction be about what it would be if we'd invested in tax-exempt Securities instead of the L assets and so how do we figure out the the annual limitation so this is the amount we can deduct each year well that's the value of the Old Law score times the long-term tax exempt rate as uh the fair market value measured immediately before the ownership change and so in January of 2023 the tax exempt rate was 3.84 percent whereas a year ago look we were at 1.82 so we've had quite a bit of a you know an increase in our interest rates which means that greater amount that corporations can deduct based on the section 382 limitation but that 382 limitation which applies each year is fixed in that in that first year so that's not going to change even if the interest rate continues to go up whatever it is at the time that we figured the limitation that that limitation stays the same uh indefinitely okay so if we have an ownership change in the middle of the year the change is effective the day after the exchange and then we just prorate the taxable income for the year to the pre-change and post change person portion and we also prorate that annual limit to the pre and the post change portion and the 382 limit only applies to the post change portion of the year because remember the limitation is limiting our ability to deduct pre-change losses against post change income so once that 382 limitation attaches to a particular nol and that's an annual limitation that limit stays with the nol until the nol is fully used or or it expires and in fact we may have one another well and we'll see this in class that that we have an nol because there's an ownership change and there's another ownership change well there could be multiple 382 limits attached to that nol and the lowest limit is the one that that applies because that limits how much of the nol we can we can deduct okay some other issues then that well one other thing let me point out if if we have this annual 382 limit and we don't use it all in one year then that that limit carries over to the next year so it's not user or lose it each year whatever we don't use this year carries over and is added to the next year okay some other issues that come up are you know we've been talking about net operating losses but what about corporations that have this built-in gain or they have a built-in loss at the time they're acquired well if those losses that operating losses are limited then that could be a good deal for entities that have a built-in loss then they have the ownership change then they sell and they recognize loss well in theory those losses wouldn't be subject to 382. uh but what what happens is we're going to do a test to see if we have a significant amount of built-in gains or built-in losses if we have built-in gains at the time of the ownership change then we're going to be able to increase our limitation when we recognize those gains or likewise if we have built-in losses at the time of the change and then we recognize those built-in losses after the change then those losses are also going to be subject to 382 just like they were net operating losses to begin with and that's our topic for day 15. this is our built-in gains and losses so on the date of the ownership change the Lost Corporation may have either a net unrealized built and gain or net unrealized built-in loss can't have both we're going to have one or the other and it turns out just Pi level net unrealized built-in gains are good for deducting losses going forward and that unrealized built-in losses are limiting because when we recognize those built-in losses they're still going to be subject to section 382. now when that when The Game net I realized built-in gains or losses if they're small enough then we don't even we don't even worry about them okay so let's talk about net unrealized built-in gain so we we have a corporation with an ownership change and that Corporation has this net unrealized built-in gain on the date of the ownership change so then what that means is that 382 limit when we recognize those unrealized built-in gains when we do recognize them if we recognize them during a certain period then we get to increase our 382 limit which means we get to use our nol to offset those built-in gains and the reason is because those gains existed before uh before the ownership change so we could have sold that property and used it offset that with our net operating losses so without without being limited so we're gonna the code's gonna allow us to increase our limitation when we recognize those net unrealized built-in gains after the ownership change now just the opposite of this rent then the net unrealized built-in losses if those were nols and the date of the ownership change they would be subject to 382 and so what what the code says is now okay if you have those net unrealized built-in losses and then you recognize them after the ownership change they're still going to be subject to the 382 limit because those losses were economically accrued at the time of the change and they should be subject to 382 limitations so we're going to treat those like pre-change losses okay now this is a subtlety that we'll see more when we do examples but the total amount of recognized metal realized built-in gains or losses during this five-year recognition period can't exceed the amount of the new bigger the new new uh Bill and and that's that that's something that we're going to need to see an example on that and we will we will in class we'll see how this limitation how this limitation applies okay so if a loss Corporation has a new big then those unrealized losses at the time of ownership so we could have a new big but have some losses and some gains built into each asset but those unrealized losses aren't subject to 382 when we when we recognize those later and likewise if the corporation has a net unrealized built-in loss those unrealized gains when we sell those at a game those don't change the section 382 limit and again that may be something that we'll need to see in the example to to get a Clarity on that so new Big's summary of Court president new big then the 382 limitation and that's an annual limitation that's increased for a particular year in the recognition period by the amount of the built and gain recognized during the year and that total recognized built-in gain that increases the 382 limit that's that's Limited in the aggregate to what the new big was at the time of the ownership change and then likewise the new net unrealized built-in loss uh if we recognize that built-in loss after the ownership change we're going to treat it like an nol but it wasn't an animal so it's not going to be subject to the 80 percent rule but it's going to be subject to the 382 limitation and then the total recognized built-in loss that we're going to be subject to 382 limit during the recognition period that can't exceed in the aggregate more than the net unrealized built-in loss that we had at the time of the ownership change then there are some special rules that we really aren't going to hit on but but these are methods for recognizing the net and realized built-in gain or net and realize built-in loss for assets like depreciable assets because we're not selling them but we are depreciating them and having expenses relating to those assets so there's some special rules for how we recognize the new bigs or new bills when we have these types amortizable or depreciable assets all right day 16 where we're moving out of 382 we're going to talk about 383 and 384. so remember the 382 so the 382 limit we've talked about that in terms of nol but that also that 382 limit well section 383 tells us that the 382 limit also applies to net capital losses carryovers foreign tax credit carryovers and unused General business credit carryovers and it tells us when we have net operating losses and these types of tax attributes when we have an ownership change it tells us which order we apply those limitations and you see that net operating losses are actually number four in the ordering we'd first deal with the capital loss so again we're going to have one limitation and we're going to first use it up with the capital losses the built-in Capital losses and then the capital loss carryovers and then the built-in ordinary losses under the new new bill rules and then you know all carryovers and then foreign tax credits and then the unused General business credit so this just gives us an order for applying that 382 or absorbing that 382 limitation when we have these other types of tax attributes and then finally section 384 382 applies when we acquire a loss Corporation 384 saying hey if you are a lost Corporation and you acquire a gain Corporation so gain Corporation is a corporation that has a new big then we're going to have 384 is going to kick in it's going to say the pre-acquisition losses of that loss Corporation can't offset the built-in gains recognized by that gain Corporation so 382 is there to prevent us from getting a lost Corporation using that loss corporation's losses against our gains 384 is there to prevent us to prevent a lost Corporation from acquiring a game Corporation using the gains to offset the acquiring corporations losses so we will we'll show you some examples in class on that but it could be that these transactions because 384 applies in certain circumstances when ownership changes it could be that section 382 and 384 apply to the same uh to the same transaction and so if that happens then we're first going to determine our deductible nol under 382 and then we'll limit it further under Section 384. so we'll again when we get to class we'll look at some examples and talk about how those limitations apply but again unifor looking at how we can use those tax attributes from another entity or from our own entity when that ownership changes and it provides us the limitations for our ability to deduct some of those losses and use some of those tax attributes so we'll we'll see a lot we'll see more of this in class and get into some more specific examples but hopefully this gives us just a basic understanding of these uh limitations see you in class