Aranca’s in-depth understanding of US Tax Provisions, extensive experience of dealing with Net Operating Losses, Complex Capital Structures and expertise in business valuation services can help companies to deal with the challenges posed by IRC 382.

1. Carry Forward of Net Operating Losses
(NOL) (IRC382)
IRC 382 is considered as one of the Code’s most complex sections enacted for preventing
“trafficking” in Net Operating losses (NOLs). This section limits the utilization of corporate
NOLs against profits in the event of an “ownership change”, hence is of critical importance for
corporations with significant NOLs. In the context of this section, an ownership change is
defined as more than 50% change in ownership of stock involving 5% shareholders within three
year period, occurring as a result of a merger, significant funding or other shifts in equity
ownership structure. However, it is important to note that this change in ownership has to be
calculated in terms of the fair market value and not the % of equity stake held based on
outstanding shares.
If an ‘ownership change’ event is triggered under IRC 382, the ability of a company to utilize
NOLs is dependent upon its assessed value at time such change as the limit on utilization of
NOLs is calculated by multiplying the value of ‘loss corporation’ with long term tax-exempt
rate. Therefore, the lower the value of ‘loss corporation’, lower the resulting limitation;
restricting its ability to utilize NOLs against future income in future years.
In addition, IRC 382 rules prescribe certain limitations for calculating the value of ‘loss
corporation’ like capital contribution limitation (generally referred as the “anti-stuffing” rule),
which requires an analysis of capital contributions for a period of three years preceding the date
of ownership change. Equally, the IRS has also issued notices that provide limited relief and
improve ability of profitable entities to utilize the target loss corporation’s tax attributes to offset
its income in future years.
Hence, in order to assess the availability of NOLs under IRC 382, companies need to conduct a
detailed analysis of changes in capital and ownership structure over a three-year period as well as
valuation of the company at different dates. Given the complexities involved, companies should
be cautious in relying on rough estimations and other short cuts to determine applicability of IRC
382.
Aranca’s in-depth understanding of tax provisions, extensive experience of dealing with complex
capital structures and expertise in business valuation services can help companies to deal with
the challenges posed by IRC 382. Our highly qualified professionals work collaboratively with
clients to ensure that they stay compliant with the rules and achieve effective corporate tax
planning.