Sec. 382 may indirectly limit carrybacks.

• Author: Farber, Paul
• Position: IRC s. 382

On Dec. 31, 1997, a C corporation underwent an ownership change (as defined in Sec. 382(g)). The corporation at that point had no net operating loss (NOL) carryforward, and indeed had taxable income and paid taxes in both 1996 and 1997.

In 1998, under the new ownership, the corporation incurred a tax loss of $100,000, none of which was attributable to a recognized built-in loss. There were no adjustments under Sec. 172(d), so that the 1998 NOL was also $100.000. This $100,000 NOL may be carried back to 1996 and possibly 1997. Sec. 382 does not limit NOL carrybacks, even though the loss was incurred when there were new owners and the taxes recovered related to a period when the old ownership existed.

The corporation had an unrealized built-in loss on Dec. 31, 1997 of $120,000 and no unrealized built-in gain), all of which was, in addition to the $100,000 NOL, realized in 1998. The "annual" Sec. 382 limitation (as defined in Sec. 382(b)(1)), was $25,000 and the "threshold" rule of Sec. 382(b)(3) did not apply.

Under these circumstances the corporation's taxable loss for 1998 appears to be $125,000. the sum of the $100,000 plus the $25,000 deductibility limit on the $120,000 built-in loss. Sec 382(h)(1)(B) provides that a recognized built-in loss is "sut2iect to limitation ... in the same manner as if such loss were a pre-change loss" (i.e., limited to $25,000. Does the clause "as if such toss were a pre-change loss" assimilate an allowed recognized built-in loss to a carryforward NOL deduction, because Sec. 382(d), in effect, defines a "pre-change loss" as NOL carryforwards from pre-change periods?

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