Limitations on NOL carryforwards.

• Author: Lewis, Sandra K.

The IRS has issued proposed regulations under Sec. 382 providing rules on indebtedness that qualifies for favorable treatment under Sec. 382(1)(5)(E); stock transferred to a creditor in satisfaction of the indebtedness may be taken into account in determining whether the benefits of Sec. 382(1)(5) are available to a loss corporation that has an ownership change in a title 11 or similar case.

Sec. 382(1)(5) provides that the Sec. 382(a) loss limitation does not apply after a loss corporation's ownership change if (1) the corporation is under court jurisdiction in a title 11 or similar case immediately before the change and (2) the corporation's pre-change shareholders and qualified creditors own at least 50% of the value and voting power of the loss corporation's stock immediately after the ownership change and as a result of being prechange shareholders or qualified creditors immediately before the ownership change (the 50% test).

The proposed regulations contain rules for determining whether stock of a loss corporation that has an ownership change in a title 11 or similar case is owned as a result of being a qualified creditor. A qualified creditor is the beneficial owner, immediately before the change, of qualified indebtedness of the loss corporation. Beneficial ownership is determined without applying the Sec. 382 attribution rules.

Indebtedness is qualified if it (1) has been owned by the same beneficial owner since the day that is 18 months before the date of the filing of the petition in the title 11 or similar case or (2) arose in the ordinary course of the loss corporation's trade or business and has been owned at all times by the same beneficial owner.

Under the proposed regulations, a loss corporation may treat a portion of each class of its "widely held indebtedness" owned on the change date by "less-than-5% beneficial owners" as always having been owned by the same beneficial owners, regardless of how long those beneficial owners have actually owned the indebtedness. The amount of the class that may be so treated is the least of (1) the amount owned on the "plan date" by less-than-5% beneficial owners, (2) the amount owned on the change date by less-than-5% beneficial owners (reduced by the amount, if any, of the class so owned that is exchanged for stock owned by a 5% shareholder immediately after the change), or (3) the least amount that the loss corporation actually knows was owned by less-than-5% beneficial owners on any...