26 U.S.C. § 382 — Limitation on net operating loss carryforwards and certain built-in losses following ownership change

(a) General rule. If a corporation has an ownership change, the taxable income of the "new loss corporation" for any post-change year that can be offset by "pre-change losses" is capped at the section 382 limitation for that year. (b) Section 382 limitation. (1) In general. Except where this section says otherwise, the section 382 limitation for a post-change year equals (A) the value of the old loss corporation, multiplied by (B) the long-term tax-exempt rate. (2) Carryforward of unused limitation. If the limitation for a post-change year is bigger than the taxable income actually offset by pre-change losses that year, the leftover amount is added to the limitation for the next post-change year. (3) Special rule for the post-change year that includes the change date. (A) The cap in subsection (a) doesn't apply to the part of that year's taxable income that's allocable to the period on or before the change date — income is spread evenly across each day of the year unless subsection (h)(5) or regulations say otherwise. (B) For the rest of that year's income, after the change date, the limitation is scaled down: it equals the full-year limitation multiplied by (the number of days in the year after the change date) divided by (the total days in the year). (c) Carryforwards disallowed if continuity of business requirements not met. (1) In general. Except as (2) provides, if the new loss corporation doesn't keep running the old loss corporation's business at all times during the 2 years starting on the change date, the section 382 limitation for every post-change year becomes zero. (2) Exception for certain gains. Even then, the limitation can't be less than the sum of (A) any increase from recognized built-in gains under subsection (h)(1)(A), or from section 338 election gains under subsection (h)(1)(C), plus (B) any increase carried forward from those amounts under subsection (b)(2). (d) Pre-change loss and post-change year. (1) Pre-change loss means (A) any net operating loss carryforward to the tax year that ends with the ownership change (or in which the change date falls), plus (B) the net operating loss for the year the change occurs in, to the extent it's allocable to the period on or before the change date — spread evenly across the days of the year unless subsection (h)(5) or regulations say otherwise. (2) Post-change year means any tax year ending after the change date. (3) "Pre-change loss" also includes carryovers of disallowed business interest under section 163(j)(2), following rules like those in paragraph (1). (e) Value of old loss corporation. (1) In general. Except as this subsection otherwise provides, the value of the old loss corporation is the value of its stock (including certain stock described in section 1504(a)(4)) right before the ownership change. (2) Special rule for redemption or other corporate contraction. If a redemption or similar contraction happens along with the ownership change, the value is figured after taking that redemption or contraction into account. (3) Treatment of foreign corporations. Except as regulations provide, when the old loss corporation is a foreign corporation, only items connected with its U.S. trade or business count toward its value. (f) Long-term tax-exempt rate. (1) In general. This is the highest of the adjusted federal long-term rates in effect for any month in the 3 calendar months ending with the month the change date falls in. (2) Adjusted federal long-term rate. This means the federal long-term rate under section 1274(d), except (A) section 1274(d)(2) and (3) don't apply, and (B) the rate is properly adjusted to reflect the difference between rates on taxable and tax-exempt long-term obligations. (g) Ownership change. (1) In general. There's an ownership change if, right after an owner shift involving a 5-percent shareholder or an equity structure shift, the percentage of stock owned by one or more 5-percent shareholders has gone up by more than 50 percentage points compared to the lowest percentage those same shareholders owned at any point during the testing period. (2) Owner shift involving a 5-percent shareholder. This happens when there's any change in who owns a corporation's stock, and that change affects the percentage owned by someone who is a 5-percent shareholder either before or after the change. (3) Equity structure shift defined. (A) This generally means any reorganization under section 368, except it does not include (i) a reorganization under section 368(a)(1)(D) or (G) unless the requirements of section 354(b)(1) are met, or (ii) a reorganization under section 368(a)(1)(F). (B) To the extent regulations provide, it also includes taxable reorganization-type transactions, public offerings, and similar transactions. (4) Special rules for applying this test. (A) Except as (B)(i) and (C) provide, all stock owned by shareholders who are not 5-percent shareholders is treated as owned by one single 5-percent shareholder, when figuring whether an ownership change happened. (B) For equity structure shifts: (i) that rule in (A) is applied separately to each group of pre-shift shareholders of each corporation that was a party to the reorganization; and (ii) unless a different split is shown, stock acquired after the equity structure shift is treated as bought proportionally from everyone who held stock right before that acquisition. (C) Except as regulations provide, rules like (B) also apply to owner shifts involving a 5-percent shareholder. (D) If a 50-percent shareholder treats stock as worthless during a tax year and still holds it at the end of that year, then for purposes of ownership changes after that year, the shareholder is treated as having acquired the stock on the first day of the next tax year — and not as having owned it before that. A "50-percent shareholder" here means anyone who owned 50 percent or more of the corporation's stock at any point during the 3 years ending on the last day of that tax year. (h) Special rules for built-in gains and losses and section 338 gains. (1) In general. (A) Net unrealized built-in gain. If the old loss corporation has a net unrealized built-in gain, the section 382 limitation for a recognition-period taxable year goes up by that year's recognized built-in gains — but the increase can't exceed the net unrealized built-in gain minus recognized built-in gains from earlier years in the recognition period. (B) Net unrealized built-in loss. If the old loss corporation has a net unrealized built-in loss, its recognized built-in loss for a recognition-period year is limited under this section just like a pre-change loss would be — but only up to the net unrealized built-in loss minus recognized built-in losses from earlier years in the recognition period. (C) Special rule for certain section 338 gains. If a section 338 election is made along with the ownership change, and the net unrealized built-in gain is zero because of paragraph (3)(B), the section 382 limitation for the year the section 338 gain is recognized goes up by the smaller of (i) the recognized built-in gains from that election, or (ii) the net unrealized built-in gain figured without paragraph (3)(B). (2) Recognized built-in gain and loss. (A) Recognized built-in gain means gain recognized during the recognition period on selling an asset, if the new loss corporation proves the asset was held by the old loss corporation right before the change date, and the gain doesn't exceed the asset's fair market value on the change date minus its adjusted basis then. (B) Recognized built-in loss means loss recognized during the recognition period on selling an asset, unless the new loss corporation proves either that the asset wasn't held by the old loss corporation right before the change date, or that the loss is more than the asset's adjusted basis on the change date minus its fair market value then. This term also includes depreciation, amortization, or depletion allowed during the recognition period, unless the new loss corporation proves that amount isn't due to that same built-in loss. (3) Net unrealized built-in gain and loss defined. (A) These terms mean the amount by which the fair market value of the old loss corporation's assets right before the ownership change is more (gain) or less (loss) than their total adjusted basis at that time — figured after any redemption or corporate contraction connected to the change, to the extent regulations provide. (B) Threshold requirement. If the net unrealized built-in gain or loss (figured without this threshold rule) isn't more than the smaller of 15 percent of the total asset value, or $10,000,000, then it's treated as zero. Except as regulations provide, cash, cash items, and marketable securities whose value is close to their basis are left out of this calculation. (4) Disallowed loss allowed as a carryforward. If a deduction for part of a recognized built-in loss is disallowed for a post-change year, that part carries forward under rules like the ones for net operating losses (or net capital losses, if it's a capital loss) — but it's still limited under this section like a pre-change loss. (5) Special rules for the post-change year including the change date. For subsection (b)(3): (A) when applying (b)(3)(A), taxable income is figured without counting recognized built-in gains that already increased that year's limitation (or built-in losses treated as pre-change losses), and without counting section 338 gain under paragraph (1)(C); and (B) when applying (b)(3)(B), the limitation itself is figured the same way. (6) Treatment of certain built-in items. (A) Income items properly counted during the recognition period, but earned before the change date, are treated as recognized built-in gain for the year they're counted. (B) Deductible amounts allowed during the recognition period (not counting carryovers), but attributable to periods before the change date, are treated as recognized built-in loss for the year they're deductible. (C) The net unrealized built-in gain or loss amount is adjusted to properly reflect these treated amounts. (7) Recognition period, etc. (A) The recognition period is the 5 years starting on the change date. (B) A "recognition period taxable year" is any tax year any part of which falls in the recognition period. (8) Determining fair market value in certain cases. If 80 percent or more of a corporation's stock (by value) is bought in one transaction or a series of related transactions within any 12-month period, then for figuring net unrealized built-in loss, the assets' fair market value can't exceed the grossed-up price paid for the stock, adjusted for the corporation's debt and other relevant items. (9) Tax-free exchanges or transfers. The Secretary must write regulations needed to apply this subsection when property held on the change date was acquired, or is later transferred, in a transaction where gain or loss isn't recognized, in whole or part. (i) Testing period. (1) The testing period is generally the 3 years ending on the day of any owner shift involving a 5-percent shareholder or equity structure shift. (2) If there was already an ownership change, the testing period for a possible second ownership change can't start before the day after the change date of that earlier change. (3) The testing period can't start before the earlier of the first day of the first tax year that has a loss or excess credit carryforward to the first post-change year, or the tax year the transaction being tested happens in — except, absent regulations, this shorter-period rule doesn't apply to a loss corporation with a net unrealized built-in loss (as figured after applying subsection (h)(3)(B)). (j) Change date. The change date is (1) the date of the owner shift, if the last piece of the ownership change is an owner shift involving a 5-percent shareholder, or (2) the date of the reorganization, if the last piece is an equity structure shift. (k) Definitions and special rules. (1) Loss corporation means a corporation that can use a net operating loss carryover, or that has a net operating loss for the year the ownership change happens. It also includes a corporation that can use a carryforward of disallowed interest under section 381(c)(20), and, except as regulations provide, any corporation with a net unrealized built-in loss. (2) Old loss corporation means a corporation that had an ownership change and was a loss corporation right before it. (3) New loss corporation means a corporation that is a loss corporation after an ownership change. The same corporation can be both the old and the new loss corporation. (4) Taxable income is figured with the adjustments in section 172(d). (5) Value means fair market value. (6) Rules relating to stock. (A) Except as regulations and subsection (e) provide, "stock" excludes the preferred stock described in section 1504(a)(4). (B) The Secretary must write regulations treating warrants, options, contracts to buy stock, convertible debt, and similar interests as stock when needed — and treating stock as not-stock when needed. (C) Stock percentages held by any person are determined based on value. (7) 5-percent shareholder means anyone who held 5 percent or more of the corporation's stock at any point during the testing period. (l) Certain additional operating rules. (1) Certain capital contributions not taken into account. (A) A capital contribution the old loss corporation gets, if a main purpose is to avoid or increase a limitation under this section, doesn't count for this section's purposes. (B) Except as regulations provide, any capital contribution made during the 2 years ending on the change date is treated as made for that avoidance purpose. (2) Ordering rules. (A) Coordination with section 172(b) carryover rules: for figuring how much of a pre-change loss can carry to a later year under section 172(b)(2)'s second sentence, taxable income for any year is treated as no more than that year's section 382 limitation, minus unused pre-change losses from years before the loss year. A similar rule applies to credits or losses limited under section 383. (B) Ordering rule for losses from the same year: if a pre-change loss from a year is limited under section 382, and a net operating loss from that same year is not, taxable income is treated as offset first by the loss that is limited. (3) Operating rules on stock ownership. (A) Constructive ownership rules under section 318 apply to figure stock ownership, with several modifications: (i) the family-attribution and re-attribution rules in section 318(a)(1) and (5)(B) don't apply — instead, an individual and family members described in 318(a)(1) are treated as one individual; (ii) the entity-attribution rule in 318(a)(2) applies without the 50-percent ownership floor, and, except as regulations provide, attributed stock is treated as no longer held by the entity it came from; (iii) the rule in 318(a)(3) applies only as regulations provide; (iv) except as regulations provide, an option to buy stock is treated as exercised if that would cause an ownership change; and (v) when attributing stock from an entity under 318(a)(2), stock that doesn't count as "stock" for this section, or a similar interest in another type of entity, is left out. A similar rule to (iv) applies to contingent purchases, warrants, convertible debt, puts, stock subject to forfeiture risk, contracts to acquire stock, or similar interests. (B) Stock acquired by reason of death, gift, divorce, or separation. If a person's basis in stock is set under section 1014 (property from a decedent), section 1015 (gift or trust transfer), or section 1041(b)(2) (transfers between spouses or due to divorce); or if the person got the stock to satisfy a pecuniary bequest, or through a divorce or separation instrument — that person is treated as having owned the stock for as long as the person they got it from owned it. (C) Except as regulations provide, changes in ownership percentage caused only by fluctuations in the relative value of different stock classes don't count. (4) Reduction in value where substantial nonbusiness assets. (A) If, right after an ownership change, the new loss corporation has substantial nonbusiness assets, the old loss corporation's value is reduced by the amount that the fair market value of its nonbusiness assets exceeds the "nonbusiness asset share" of its debt. (B) A corporation has "substantial nonbusiness assets" if at least one-third of its total asset value is nonbusiness assets — except this doesn't apply to a regulated investment company, a REIT, or a REMIC. (C) "Nonbusiness assets" means assets held for investment. (D) The "nonbusiness asset share" of debt is the debt amount times the ratio of nonbusiness-asset value to total-asset value. (E) For a group with subsidiaries, stock in a subsidiary is disregarded, and the parent is treated as owning its share of the subsidiary's assets directly — where "subsidiary" means the parent owns 50 percent or more of both voting power and value. (5) Title 11 or similar case. (A) Subsection (a)'s limitation doesn't apply to an ownership change if the old loss corporation was, right before the change, under a bankruptcy court's jurisdiction (a "title 11 or similar case"), and the old shareholders and creditors end up owning — because they were shareholders or creditors before the change — stock of the new loss corporation (or a bankrupt parent corporation) that meets section 1504(a)(2)'s test, with "50 percent" substituted for "80 percent." (B) In that situation, the pre-change losses and excess credits carried to a post-change year are computed as if no deduction had been allowed for interest the old loss corporation paid or accrued on debt that was converted to stock in the bankruptcy, for the 3 years before the change year and for the pre-change-date part of the change year itself. (C) When applying section 108(e)(8) to such a case, the interest debt described in (B) is left out. (D) If, within 2 years after this kind of ownership change, the new loss corporation has another ownership change, this exception stops applying, and the section 382 limitation for the second change is zero for any post-change year ending after that second change date. (E) Stock transferred to a creditor only counts toward the shareholder/creditor ownership test if it was transferred to satisfy debt that either was held by the creditor at least 18 months before the bankruptcy filing, or arose in the ordinary course of the old loss corporation's business and is held by the person who always held the beneficial interest in it. (F) "Title 11 or similar case" has the meaning given in section 368(a)(3)(A). (G) A new loss corporation can elect, under terms the Secretary sets, not to have this paragraph apply. (6) Special rule for insolvency transactions. If paragraph (5) doesn't apply to a reorganization under section 368(a)(1)(G), or to a debt-for-stock exchange in a title 11 or similar case, the value under subsection (e) must reflect any increase in the old loss corporation's value that comes from creditors surrendering or canceling their claims in that transaction. (7) Coordination with alternative minimum tax. The Secretary must issue regulations applying this section to the alternative tax net operating loss deduction under section 56(d). (8) Predecessor and successor entities. Except as regulations provide, an entity and its predecessor or successor entities are treated as one entity. (m) Regulations. The Secretary must issue regulations needed to carry out this section and section 383, including regulations covering: (1) a second ownership change of the new loss corporation following the first; (2) short tax years; (3) adjustments needed to stop people from avoiding this section's and section 383's purposes, including through related persons, pass-through entities, or other intermediaries; (4) applying subsection (g)(4) when only one corporation is involved; and (5) for a group of corporations under section 1563(a) (using "50 percent" instead of "80 percent," and ignoring section 1563(a)(4)), adjustments to value, built-in gain or loss, and other items so nothing is double-counted or left out. (n) Special rule for certain ownership changes. (1) In general. Subsection (a)'s limitation doesn't apply to an ownership change made under a restructuring plan that (A) a loan agreement or line-of-credit commitment with the Treasury Department under the Emergency Economic Stabilization Act of 2008 requires, and (B) is meant to rationalize the costs, capital structure, and capacity of the taxpayer's and its subsidiaries' manufacturing workforce and suppliers. (2) Subsequent acquisitions. This exception doesn't apply to a later ownership change unless that later change is also described in paragraph (1). (3) Limitation based on control. (A) This exception doesn't apply if, right after the ownership change, any person (other than a voluntary employees' beneficiary association under section 501(c)(9)) owns 50 percent or more of the new loss corporation's voting power or stock value. (B) Related persons are treated as one person for this test — two persons are "related" if they have a relationship described in section 267(b) or 707(b), or if they're part of a group acting in concert.