Page 140 - Bankruptcy Volume 1

It should be noted that the statutory exclusion of COD income under Section 108(a) does not apply to
the assignment or extinguishment of an intercompany debt between members of a consolidated group. fn
28 Instead, the debt is generally treated as satisfied for an amount equal to its fair market value, giving
rise to taxable income to the debtor and a corresponding loss to the creditor member of the group.

IRC Section 382 — Limitations on Use of Net Operating Losses

Section 382 (and, with respect to certain credit carryovers, Section 383) generally imposes a limitation
on a corporation’s use of its NOLs and built-in losses (BILs) after the corporation undergoes an owner-
ship change. fn 29 In general, an ownership change occurs when there has been a greater than 50 percent-
age-point increase in stock ownership by 5% shareholders during a rolling three-year period. fn 30 If a
corporation has undergone an "ownership change," the use of NOL carryovers to offset post-change tax-
able income is generally restricted to an annual limitation. This limitation is the fair market value of the
stock of the corporation, valued immediately before the change date, multiplied by the long-term tax ex-
empt rate (published monthly by the IRS).

For the purpose of applying Section 382, a number of special rules govern the determination of stock
value. First, an "anti-stuffing rule" prevents including capital contributions to the corporation in its stock
value if the purpose of the contributions was to avoid or increase the Section 382 limitation. Historically,
such a purpose was conclusively presumed for any contribution made within two years before the
change date, with very limited exceptions. fn 31 However, in 2008, the IRS issued a revenue ruling that
eliminated this two-year presumption, and for ownership changes that occur after the effective date of
the revenue ruling the capital contribution rule is based on all the facts and circumstances. fn 32 Second, a
"nonbusiness asset rule" requires reducing the stock value of a corporation with "substantial nonbusiness
assets" by the amount, if any, by which the fair market value of the nonbusiness assets exceeds the cor-
poration’s liabilities allocable to those assets. fn 33 Third, a "corporate contraction rule" requires valuing
the corporation after taking into account any redemption or other corporate contraction that occurs in
connection with the ownership change. fn 34

Thus, if a bankrupt corporation issues all or a majority of its stock to its creditors in its reorganization, it
generally will undergo an ownership change within the meaning of Section 382. As noted, an ownership
change during the pendency of the case (for example, through active trading or worthless stock deduc-
tion claimed by 50% shareholder) would usually subject losses and credits to an annual limitation on uti-
lization of zero. However, special rules apply to taxpayers who undergo an ownership change pursuant

fn 28 Reg. Section 1.1502-13(g)(3)(ii)(B)(2).

fn 29 IRC Section 382(a).

fn 30 IRC Section 382(g)(1).

fn 31 IRC Section 382(l)(1)(A), (B).

fn 32 See Rev. Rul. 2008-78.

fn 33 IRC Section 382(l)(4)(A).

fn 34 IRC Section 382(e)(2).

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