• Six IRS Notices Ease the Use of Losses Following Certain Equity Transactions
  • November 19, 2008 | Authors: Sabino (Rod) Rodriguez; David A. Sussman
  • Law Firms: Day Pitney LLP - New York Office; Day Pitney LLP - Morristown Office; Day Pitney LLP - Hartford Office
  • The Internal Revenue Service has eased the ability of a company with built-in losses and net operating losses to utilize them following an applicable change in ownership notwithstanding the limitation that would otherwise be applicable under Section 382 of the Internal Revenue Code of 1986, as amended.  The guidance is in six Notices issued during September and October, 2008.  

    The guidance addresses the treatment of a so-called "loss corporation" that has undergone an "ownership change" or would undergo an "ownership change" absent the guidance, as such terms are defined in Section 382, which for this purpose limits the use of two kinds of tax loss attributes:  net operating losses (NOLs) and net unrealized built-in losses (NUBILs).

    What is a NUBIL? A NUBIL is the amount by which the aggregate adjusted tax basis of the assets of a loss corporation at the time of the ownership change exceeds the fair market value of those assets.  If the NUBIL exceeds a threshold amount (the lesser of $10 million or 15% of the fair market value of the assets at the date of the ownership change), then the built-in loss is recognized only over a five-year period beginning on the date of the ownership change, and subject to limitation as if it were a pre-change loss.

    What is a Loss Corporation? A "loss corporation" is a corporation with an NOL carryover or having an NOL or NUBIL for the tax year in which the ownership change occurs.

    What is an Ownership Change?  An "ownership change" has occurred if the percentage of the stock owned by one or more of the loss corporation’s five-percent shareholders (measured by value) has increased by more than 50 percentage points over the lowest percentage of stock owned by such shareholders at any time during a three-year "testing period" prior to the ownership change. (Options to acquire stock are treated as exercised if doing so would trigger an ownership change.) 

    The guidance excludes certain US Treasury stock acquisitions in determining if Ownership Change has occurred: 

    • Housing Act Acquisitions.  Under the new guidance, the "testing date" will not include any date on or after the date on which the Treasury acquires stock (including preferred stock) or an option to acquire stock pursuant to the Housing and Economic Recovery Act of  2008.[1] Notice 2008-76 (September 7, 2008).[2]
    • Certain Other Acquisitions. In addition, the "testing date" will not include any date as of the close of which the US government directly or indirectly owns a greater than 50% (by vote or value) interest in a loss corporation (whether the acquisition is of stock or an option) even if the acquisition was not pursuant to the Housing and Economic Recovery Act of 2008. Notice 2008-84 (September 26, 2008).[3]
    • Treasury’s TARP CPP Purchases. Under other new guidance, the Treasury’s transactions in securities issued under the TARP Capital Purchase Program (CPP) (including acquisitions, redemptions and capital contributions), whether in preferred stock, warrants or options, will not be considered in determining whether an ownership change has occurred and, thus, will not result in a Section 382 limitation on NOLs and NUBILs.  Notice 2008-100 (October 15, 2008).[4]

    What is the Section 382 limitation?  Section 382 imposes an annual limit on the amount of taxable income that can be offset by pre-ownership change NOLs or NUBILs, equal to the product of (A) the equity "value" of the corporation immediately before the ownership change times (B) the long-term tax-exempt rate in effect for the month of the ownership change. 

    • New rule for Banks.  Under the new guidance, the NUBIL limitation will not apply to built-in losses on loans or bad debts (including a deduction for reasonable additions to a reserve for bad debts) of an entity that is a bank both before and after an ownership change. (This Notice specifically does not apply to NOLs recognized prior to the ownership change.)  Notice 2008-83 (October 1, 2008).[5]

    Can Loss Corporation’s Value Take Account of Pre-Ownership Change Capital Contributions? To avoid artificially inflating values, an "anti-stuffing" rule[6] applies to ignore certain pre-ownership change capital contributions in determining the loss corporation’s equity value, which has the effect of lowering the Section 382 limitation. 

    • New rule for certain capital contributions.  Under the new guidance, certain capital contributions made to a loss corporation will be taken into account where an ownership change has occurred, with the effect of increasing the amount of NOLs and NUBILs that may be used to reduce taxable income of the loss corporation. Notice 2008-78 (September 26, 2008).[7] The guidance establishes the following safe-harbors from the anti-stuffing rule: [8]
      • Contribution is by an unrelated person, no more than 20% of loss corporation’s equity value was issued in exchange and the ownership change occurs more than six months after the contribution.[9]
      • Contribution is by a related person  and  no more than 10% of loss corporation’s equity value was issued in exchange, or contribution is by an unrelated person, and the ownership change occurs more than one year after the contribution.[10]
      • Contribution is in exchange for stock issued in connection with the performance of services or stock acquired by a retirement plan[11] or was received (A) in connection with the formation of the loss corporation (as long as NUBIL assets were not incorporated), or (B) before the first year it had a carryforward NOL, capital loss, excess credit or excess foreign taxes (or in which a NUBIL arose).[12]
    • Treasury’s TARP CPP Purchases. Similarly, Notice 2008-100 (discussed above) also provides that any capital contribution made by Treasury to a loss corporation will not be subject to the anti-stuffing rule.[13]  
    • New rule: Treasury bank infusions are not "federal financial assistance." Under the new guidance, amounts provided by the Treasury to financial institutions under any of the programs under the Emergency Economic Stabilization Act of 2008 Troubled Assets Relief Program will not be deemed "federal financial  assistance" for purposes of Section 597, avoiding their having to recognize the assistance as income against which NOLs and NUBILs would have to be offset.  Notice 2008-101 (October 15, 2008).[14]


    [1]  Pub. L. 110-289 (2008), §§ 1117(a) and (b) authorizing Treasury purchase of securities ("Housing Act Acquisitions").

    [2]  "Testing date" is defined in Treas Reg. § 1.382-2(a)(4). The regulations will apply from the date of the Notice.  For a copy of Notice 2008-76,

    [3]  The covered acquisitions by the US government are ones that are not Housing Act Acquisitions governed by Notice 2008-76, supra note 2.  The regulations will apply from the date of the Notice.  For a copy of Notice 2008-84,

    [4]  For a copy of Notice 2008-100,

    [5]  See Code § 382(h).  The Notice can be relied upon until there is additional guidance.  For a copy of Notice 2008-83,

    [6]  Code § 382(l)(1).  "Value" is the fair market value (Code § 382(k)(5)), with this adjustment if applicable.

    [7]  For a copy of Notice 2008-78,

    [8] Code § 382(l)(1).  Absent the safe-harbors, the anti-stuffing rule has a presumption that contributions within two years of the change date are part of a plan, the principal purpose of which is to avoid or increase the Section 382 limitation.

    [9]  Notice 2008-78, Section B(2)(a).

    [10]  Notice 2008-78, Section B(2)(b).

    [11] Notice 2008-78, Section B(2)(c).  The rule references the safe-harbors in Treas. Reg. § 1.355-7(d)(8) and (9), but substitutes Section 382 terms to put the rule in context. 

    [12]  Notice 2008-78, Section B(2)(d). 

    [13]  Notice 2008-100 (October 15, 2008). For a copy, see note 4, supra.

    [14]  For a copy of Notice 2008-101,