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Section 382 - Complexity and Simplicity at Its Finest


Section 382 can be described as an intricate construct that is extremely complex and often baffles the mind with its result. Since its revision as part of the Tax Reform Act of 1986, Section 382 has largely been a form-driven provision filled with objective rules and confusing interpretations. Taxpayers and practitioners often note both the administrative burden associated with preparing and maintaining the required analyses, as well as the lack of clarity in applying key components of the Regulations. The Internal Revenue Service has strived, with varying degrees of success, to clarify and simplify the application of Section 382. Taxand US explores the new regulations to find out if indeed the IRS has simplified Section 382 for US taxpayers.

It is important for corporate taxpayers to understand how the Service is approaching these matters and whether it impacts their overall tax attribute posture. For better or worse, in today's tax world, every corporate tax department should have a clear understanding of the value and availability of its tax attributes regardless of whether it is for financial reporting purposes, determining the impact of potential merger and acquisition transactions, or basic tax planning analyses.

IRC Section 382 - In General

Section 382 imposes an annual limitation on the amount of taxable income that may be offset by net operating loss carry forwards to the extent a loss corporation experiences an ownership change. An "ownership change" occurs in the event one or more 5 percent shareholders increase their ownership in the loss corporation stock by more than 50 percentage points over their lowest ownership percentage during the testing period (generally the three years immediately prior to the change date). If an ownership change occurs, the annual Section 382 limitation is calculated by multiplying the fair market value of the loss corporation's stock immediately before the ownership change by the federal long-term tax-exempt rate.

Taxand US provides a view of the proposed regulations in greater depth plus a look at anti-Stuffing Rules

Taxand's Take

The IRS guidance provided over the past few years has significantly changed the Section 382 landscape for the better. The IRS's efforts in this area have gone a long way toward simplifying a complex area of the US Tax Code. Taxpayers need to be mindful of these changes (and opportunities) in their tax planning, specifically with regard to understanding the ability to choose and apply various methodologies. Having your Section 382 model updated and current is no longer just a best practice but essentially a requirement in today's tax world.

James Carreon
T. +1 415 490 2121

Christopher Howe
T. +1 212 763 9607

Taxand's Take Author