Maximizing built-in loss benefits under Sec. 382.

• Author: Klein, Thomas D.

Sec. 382 limits the availability of a corporate net operating loss (NOL) following an ownership change. A corporation undergoing an ownership change an use preexisting NOLs for any postchange year only to the extent of the corporation's value multiplied by the long-term federal tax-exempt rate, until the prechange losses are either used up or expire. This amount may be increased by the net unrealized built-in gain (which meets a certain de minimis threshold requirement) existing on the ownership change date that is recognized during the subsequent five-year period.

An ownership change can occur at the end of the tax year or at any time during the year. If the change date falls on the last day of the year, no income or loss allocation for the current year is necessary. If, however, the ownership change occurs during the year, that year's income or loss must be allocated. A loss allocated to the period after the change date is not subject to limitation, while any loss allocated to the period ending on the change date is subject to limitation under Sec. 382, since it is considered part of the "prechange" NOL.

Unless a letter ruling is obtained from the IRS to permit a corporation to close its books as of the change date so as to determine the loss suffered before that date, the taxable income must be prorated on a daily basis. The proration of income or loss is computed without regard to any recognized built-in gains (if the corporation has a net unrealized built-in gain) or built-in recognized losses (if the corporation has a net unrealized built-in loss).

Example 1: N Co., a calendar-year corporation, undergoes a change of ownership culminating on Apr. 1, 1992. N has neither a net unrealized built-in gain nor a net unrealized built-in loss. N suffers a loss of $800 during the 1992 calendar year. Since the ownership change took place on the ninety-second day of a 366-day year (1992 is a leap year), 92/366 of the loss, or $201, will be allocated to the prechange period. This amount will be added to the existing NOL carryforwards and will be subject to the Sec. 382 limitation. On the other hand, 274 days remain after the change date; therefore, 274/366 of the loss, or $599, will be attributable to the postchange period and will be eligible for carry-forward without application of the Sec. 382 limitation.

If the corporation has a net unrealized built-in loss (which meets certain de minimis threshold requirements), the daily proration can...