IRS WILL ALLOW FLEXIBILITY IN ALLOCATING NOL CARRYOVERS LIMITED BY SECTION 382.

Notice 87-79

Section 621(a) of the Tax Reform Act of 1986 (the "Act") amended section 382 of the Internal Revenue Code to provide that, for any taxable year ending after the change date, the amount of a loss corporation's taxable income that may be offset by any prechange loss cannot exceed the section 382 limitation for such year. The change date is the date on which an ownership change occurs. In general, the section 382 limitation is the value of the old loss corporation multiplied by the long-term tax-exempt rate. The annual limitation is increased by certain items of built-in gain and by any unused section 382 limitation for any prior postchange years. Section 382, as amended, generally applies to ownership changes occurring after December 31, 1986. Section 621(f)(1) of the Act.

For the taxable year that includes the change date, section 382 requires an allocation of income and loss between the periods ending with and after such date. Section 382(b)(3)(A) provides that the section 382 limitation does not apply to the portion of the taxable income for a year that includes the change date to the extent the income is allocable to the period ending with the change date. Similarly, section 382(d)(1)(B) provides that a prechange loss includes a net operating loss of the old loss corporation for a year that includes the change date only to the extent the loss is allocable to the period ending with the change date. Except as provided in section 382(h)(5) and in regulations, the statute further requires that the taxable income (or net operating loss) for a year that includes the change date be allocated ratably to each day in the year.

No regulations have yet been issued under section 382(b)(3) or (d)(1). It has been determined, however, that regulations will be issued to provide taxpayers with an election, subject to certain conditions, to allocate income and loss between the periods ending with and after the change date on the basis of a closing of their books as of the change date, rather than on the basis of a ratable allocation of the year's taxable income or net operating loss. In appropriate circumstances, the regulations will permit income that is realized after the change date, but is properly attributable to the period ending with the change date to be allocated to the prechange period. For example, it is anticipated that the regulations would permit income from a discharge of indebtedness which is determined to be integrally related to a transaction resulting in an ownership change to be allocated to the prechange period. Until regulations are issued, taxpayers must continue to allocate income and loss under sections 382(b)(3) and 382(d)(1), respectively, on the basis of a ratable allocation over the entire taxable year unless a private letter ruling allowing a different method of allocation is obtained from the Service.

FOR FURTHER INFORMATION

For further information contact Keith E. Stanley of the Legislation and Regulations Division of the Office of Chief Counsel, Internal Revenue Service, on 202-566-3458 (not a toll-free number).