Bankruptcy Plan Does Not Constitute Ownership Change To Limit Net Operating Loss Carryforwards Under Section 382

In PLR 201322032 (5/31/2013), the National Office ruled that an ownership change under a plan of reorganization will constitute a Title 11 ownership change in accordance with Section 382(l)(5)(A) and therefore there will be no NOL cut-back or ownership change limitation resulting by virtue of application of Section 382(a).

Summary of Section 382(a): Application to Title 11 Proceedings

Section 382(a) provides that the taxable income of any "new loss corporation" with respect to any "post-change year" which may be offset by "pre-change losses" shall not exceed the Section 382 limitation for such year. Under Section 382(b)(1), generally, the Section 382 limitation for any post-change year will be an amount equal to (A) the value of the old loss corporation as of the change date, multiplied by (B) the long-term tax exempt rate. Under Section 382(b)(2), if the Section 382 limitation for any post-change year exceeds the taxable income of the "new loss corporation" for such year which was offset by "pre-change losses" the Section 382 limitation for the next post-change year is increased by the amount of such offsets. Where the new loss corporation does not carry on the business enterprise of the old loss corporations continuously for a minimum period of 2 years beginning with the change date, Section 382(c) provides that the Section 382(c) limitation will be zero.

The Section 382 limitation does not apply to an ownership change if the old loss corporation is a debtor in bankruptcy. Generally, where the bankruptcy rule under Section 382 applies, the pre-change net operating losses and excess credits that can be carried forward to a post-change year are reduced. A new loss corporation, however, may elect not to have the bankruptcy exception apply. More specifically, under Section 382(l)(5), Section 382(a) does not apply with respect to any ownership change where the old loss corporation is immediately prior to such ownership change under the jurisdiction of the court in a title 11 or similar case and the shareholders and creditors of the old loss corporation (determined just prior to such ownership change) own (immediately after such ownership change and as a result of being shareholders or creditors before such change) stock of the new loss corporation (or stock of a controlling corporation if also in bankruptcy) meets the requirements under Section 1504(a)(2) (substituting 50% for 80% each place it appears). Other special rules apply under Section 382(l)(5).

Facts In Private Letter Ruling

Taxpayer is a State corporation that files a federal income tax return on a calendar year basis. Taxpayer produces and sells products to...