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Net Operating Loss Carryovers
Following Changes in Ownership

This portion of the introduction to the basic principles of United States federal income taxation of corporate acquisitions is part of the Pillsbury Winthrop Shaw Pittman LLP Tax Page, a World Wide Web demonstration project. Comments are welcome on the design or content of this material.

The information presented is only of a general nature, intended simply as background material, is current only as of the latest revision date, October 15, 2007, , omits many details and special rules and cannot be regarded as legal or tax advice.

Internal Revenue Code § 382

In general, the rules of section 382 apply to limit a corporation's ability to utilize existing net operating loss ("NOL") carryovers once the corporation experiences an "ownership change."

    Generally, an ownership change occurs when, within a span of 36 months (or, if shorter, the period beginning the day after the most recent ownership change), there is an increase in the stock ownership by one or more shareholders of more than 50 percentage points.

    For example, if Shareholder A owned 25 percent of Corporation X, and within a space of three years, acquired another 51 percent, there would be an ownership change, triggering section 382.

In general, the rules of section 382 allow post-change corporations to use pre-change NOLs, but limit the amount that may be used annually to a percentage of the entity value of the corporation at the date of change of ownership. That percentage is the highest "federal long-term tax-exempt rate," for the month during which the change in ownership occurs and the preceding two months; the federal long-term tax-exempt rate is determined monthly by the IRS along with other "applicable federal rates."

Numerous special rules and limitations apply, including provisions dealing with "built-in gains and losses."

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