"Working capital" contribution can increase allowable sec. 382 NOL carryforward.

• Author: Collins, Bryan P.
• Position: Net operating loss - Brief Article

In general, Sec. 382 limits a corporation's ability to carry forward net operating losses (NOLs) following an ownership change to an amount equal to the value of the corporation's stock at the time of the change multiplied by the long-term tax-exempt rate. Sec. 382 has several anti-avoidance rules. One rule provides that, in determining a corporation's value, a capital contribution will not be taken into account if it is part of an avoidance plan. Under this provision, a contribution made within two years of the ownership change is presumed to be part of an avoidance plan unless regulations provide otherwise. To date, no regulations have been issued. In Letter Ruling 9508035, however, the IRS found certain contributions made within the two-year period to a bank were not part of an avoidance plan and, therefore, could be taken into account in measuring the corporation's value. The Service relied on the legislative history of Sec. 382, which provides that regulations should be written excepting contributions made to continue basic corporate operations. In this case, the IRS ruled that the proceeds were needed to meet a capitalization ratio imposed by Federal statute and, as a result, were within the scope of the intended exception.

The letter ruling is consistent with an earlier technical advice memorandum in which the...