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Section 382(1) applies when a loss corporation undergoes a change of ownership. A loss corporation is any corporation that, in the taxable year in which an ownership change occurs, has a net operating loss ("NOL") carryover or an operating loss in the taxable year in which that ownership change occurs.2
For purposes of sec 382, an ownership change occurs when there is a transfer of ownership of more than 50 percentage points of the stock of the loss corporation.3 In measuring the percentage points that have changed hands, only stock owned by "5-percent shareholders" is counted.4 The date of an ownership change that meets this sec 382 test is called the "change date."%
When a loss corporation has an ownership change, sec 382 imposes a limitation on the use of its NOLs after the change date. The limitation is applied to postchange income, rather than to the NOLs themselves. The new loss corporation is permitted to deduct those NOLs against only a certain amount of its income. That amount is called the sec 382 limitation.6 The sec 382 limitation is the product of multiplying (1) the value of the old loss corporation on the change date by (2) an interest rate (called the long-term tax-exempt rate).7 The interest rate is published monthly by the IRS in the Internal Revenue Bulletin.
CONTINUITY OF BUSINESS REQUIRED
If there is an ownership change, sec. 382(c) requires the new loss corporation8 to continue the business enterprise of the old loss corporation. If the new loss corporation fails this continuity of business enterprise ("COBE") test, then the ifew loss corporation's sec. 382 limitation is severely penalized.9 The effect is to deny the new loss corporation most, if not all, of the benefits of the NOL carryovers of the old loss corporation. Thus COBE becomes an essential element in any acquisition of a loss corporation.
The new loss corporation must maintain COBE for a period of two years beginning on the change date.10 When Congress created the new version of sec. 382 as a part of the 1986 Code, it adopted the Regs. sec. 1.3681(d) COBE rules that apply to reorganizations." Those Regulations were extensively rewritten by the IRS during the ten years after Congress enacted the 1986 version of...