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to a bankruptcy court-approved plan of reorganization under Section 382(l)(5) or Section 382(l)(6) (the
L5 exception and L6 exception, respectively), which are discussed in more detail here.

Net Unrealized Built-in Gains and Losses

In determining whether the debtor is subject to limitation on use of its BILs after its ownership change,
or conversely whether it may increase its 382 limitation each year by the amount of recognized built-in
gains (RBIGs), the debtor must determine whether it has a net unrealized built-in loss (NUBIL) or net
unrealized built-in gain (NUBIG) at the time of the change. fn 35

Determining whether the corporation has a NUBIL or NUBIG generally requires the determination of
the amount by which the fair market value of the debtor’s assets immediately before the ownership
change exceeds or is less than those assets’ aggregate adjusted tax basis. This differential amount must
then be properly adjusted for built-in income or deduction items that are properly taken into account dur-
ing the five-year period beginning on the change date (the recognition period) but are attributable to pe-
riods before the change date. Such income items are treated as RBIGs; items of loss are treated as
RBILs.

Bankruptcy Exceptions to Section 382

Under the L6 exception, after a change in ownership pursuant to a bankruptcy court-approved plan
(which is not applying the L5 exception, whether because the qualifications have not been met or the
debtor elects out of its application), the debtor’s use of its NOLs and BILs, if applicable, is generally
subject to the limitation imposed by Section 382(a), but with some differences.

Under the L6 exception, the corporation’s value includes any increase in value resulting from the elimi-
nation of debt in the restructuring. The regulations carry out this valuation rule by proving that the cor-
poration’s value under the L6 exception is the lesser of (a) the value of the corporation’s stock immedi-
ately after the ownership change or (b) the value of the corporation’s assets before the change. fn 36

The L5 exception provides that there is no limit under Section 382(a) if the ownership change occurs in
a Title 11 or similar case and certain other requirements are met. fn 37 Specifically, these requirements
are that

 the corporation be under the jurisdiction of a court in a Title 11 or similar case and

 the pre-change shareholders and qualified creditors own at least 50% of the stock of the loss cor-
poration immediately after the ownership change.

For purposes of the L5 exception, qualified creditors are generally creditors who were owed their debts
for at least 18 months before the filing of the Title 11 case or whose debts arose in the ordinary course of

fn 35 IRC Section 382(h)(1)(A)(i), (B)(i).

fn 36 Reg. Section 1.382-9(j).

fn 37 However, limitations may still be imposed for alternative minimum tax (AMT) purposes. See IRC Section 56(g)(4)(G).

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