Federal Tax Advisory

Importance of Conducting/Updating Section 382 Studies 

Many companies may have existing net operating loss/credit carryforwards or are experiencing current losses. Accordingly, it is important for these companies to conduct or update their Section 382 studies in order to determine the amount of losses/credits that are available to offset current or future taxable income. Also, FIN 48 requires companies to disclose any net operating losses that it believes, more likely than not, will never become utilizable.

In addition, companies that have sustained changes in ownership pursuant to Section 382 may find that there is planning available for increasing the utilization of their losses/credits. Section 382 Studies are invaluable before a major stock issuance or transaction in determining whether the timing or structure of the proposed issuance or transaction would result in a change of ownership.

Recent Development 

IRS Notice 2008-78, released in September 2008, has liberalized the rules of determining value of a loss corporation that experiences a change in ownership. Previously, capital contributions made within two years prior to a change in ownership were presumed to be for the purpose of avoiding or increasing a Section 382 limitation and were discounted in calculating value (the "anti-stuffing rule"). There were exceptions, but the burden was on the taxpayer to rebut the presumption.

Notice 2008-78 provides that these contributions increase value unless it was part of a plan to increase the Section 382 limitation, based upon all the facts or circumstances. However, the notice contains safe harbor provisions that would ensure that the contributions increase the value if certain requirements are met.

While the Notice applies to ownership changes that occur in any taxable year that ends on or after September 26, 2008, forthcoming regulations by the IRS may allow for retroactive relief.


Whether a company has already undergone an ownership change or is anticipating an equity transaction, there are a host of planning alternatives to minimize the impact of Section 382.

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