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In Search of the Holy Grail
Where, as is generally the case, stock of a bankrupt company changes hands upon emergence, the company may undergo an “ownership change” and the use of its net operating losses (NOLs) may be subject to limitation under Section 382 of the Internal Revenue Code (Code). This article discusses the loss limitation rules, in general, and one of the special rules under Section 382 of the Code that applies to bankrupt companies, specifically.
The impact of the loss limitation rules on a debtor company is critical for its advisers to understand because of the substantial value of its NOLs. In general, a debtor company's NOLs may represent its most valuable asset because of their potential to reduce cash taxes. Since application of the Section 382 loss limitation rules to a debtor company's NOLs may materially impact the value of its NOLs, it is important for advisers to search for the “Holy Grail,” ie, to determine whether the debtor company can qualify for the special Section 382 rule for bankrupt companies, Section 382(l)(5). If Section 382(l)(5) applies, there will be no limitation on the use of the debtor company's historical NOLs to reduce cash taxes on post-emergence income.
Loss Limitation — In General
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