Sec. 382 limit: special rule for controlled groups.

• Author: Zarzar, Robert
• Position: Tax calculation following ownership change

The most difficult technical issue under Sec. 382 often involves determining whether a loss corporation has experienced an "ownership change." Once it is determined that an ownership change has occurred, the tax practitioner faces another daunting task--calculating the annual "Sec. 382 limit"

One component of the annual limit described below, the stock value of the loss corporation, is not as simple to determine as it first appears. Several potential adjustments to value are reflected in the law and regulations, including a special rule (Regs. Sec. 1.382-8) that in some circumstances requires a downward adjustment to value of stock of a loss corporation that is a member of a nonconsolidated controlled group. This important (although sometimes overlooked) adjustment effectively requires a controlled group to allocate value of its members so that the same value is not included more than once in calculating the Sec. 382 limit. Unfortunately, the interpretation of the antiduplication rule in the regulations seems to go beyond the rule's legislative purpose.

Sec. 382 Limits

In general, Sec. 382 limits use of a loss corporation's pre-change losses to offset post-change income when an ownership change occurs. A loss corporation is a corporation that either has a net operating loss (NOL) for the tax year in which an ownership change occurs or is entitled to use an NOL carryover. An ownership change is defined (in very complex rules) as a more-than-50% increase in the stock of the loss corporation owned by five-percent shareholders.

Under Sec. 382(a), the taxable income of a loss corporation for any post-change year that may be offset by pre-change losses may not exceed the Sec. 382 limit for the year. The Sec. 382 limit is calculated by multiplying the value of the loss corporation by the long-term tax-exempt rate. The fair market value (FMV) of the loss corporation's stock (including Sec. 1504(a) (4) stock) is determined immediately prior to the ownership change.

The value of the loss corporation used in determining the annual Sec. 382 limit must be reduced for:

* Tax-motivated capital contributions preceding the ownership change under Sec. 382(1)(1);

* Redemptions or corporate contractions in connection with the ownership change under Sec. 382(e)(2);

* The value of substantial nonbusiness assets under Sec. 382(1)(4); and

* Stock owned in certain controlled but nonconsolidated corporations under Regs. Sec. 1.382-8.

Taxpayers typically are familiar...