Corporate Reorganizations under §382(l)(5) and Bankruptcy Tax Attributes
- Graziano Stefanelli
- Aug 15
- 2 min read
Section 382 limits the use of net operating losses (NOLs) and certain built-in losses after an ownership change, but §382(l)(5) provides special relief for corporations emerging from bankruptcy under specific creditor-ownership conditions.
General §382 limitation.
After an ownership change—defined as more than a 50 percentage-point increase in ownership by 5-percent shareholders over a rolling three-year period—the annual NOL deduction is capped at the fair market value of the loss corporation multiplied by the long-term tax-exempt rate. This restriction also applies to recognized built-in losses and certain credit carryforwards.
§382(l)(5) bankruptcy exception.
If a corporation undergoes an ownership change pursuant to a bankruptcy reorganization and qualified creditors and shareholders own at least 50 percent of the stock post-reorganization, the §382 limitation does not apply to pre-change NOLs. In exchange, certain deductions are reduced and built-in losses after the change are not allowed.
Qualified creditors are those who held debt for at least 18 months before the filing or whose debt arose in the ordinary course of business.
Trade-off between §382(l)(5) and §382(l)(6).
If §382(l)(5) applies, there is no annual limitation on pre-change NOLs, but the NOLs are reduced by certain interest deductions in the three years before the ownership change, and another ownership change within two years disallows all remaining pre-change NOLs.
Under §382(l)(6), the limitation is based on the reorganized corporation’s equity value immediately after emergence, often yielding a higher cap than under normal §382 rules, but without the immediate disallowance risk.
Example — applying §382(l)(5).
Pre-change NOLs: $200 million
Interest deductions in prior three years: $30 million
Allowable NOL carryforward post-emergence: $170 million ($200m – $30m)
No annual limitation if qualified creditor-ownership test is met.
Journal entry — carrying forward NOLs post-bankruptcy.
Dr Deferred Tax Asset – NOLs $35 700 000
Cr Income Tax Benefit $35 700 000
(Assuming $170m allowable NOL × 21% corporate rate.)
Planning considerations in bankruptcy restructurings.
Model ownership scenarios: Ensure post-emergence ownership satisfies the 50 percent qualified creditor/shareholder test.
Weigh §382(l)(5) vs. §382(l)(6): Compare unrestricted use of reduced NOLs to annual-limited use of potentially larger NOL base.
Control post-emergence transactions: Avoid a second ownership change within two years under §382(l)(5).
Review built-in gains/losses: Identify assets with unrealized appreciation or loss before reorganization for post-emergence planning.
Coordinate with debt-for-equity swaps: Ensure swap terms align with qualified creditor definitions.
Strategic use of §382(l)(5) allows corporations emerging from bankruptcy to preserve valuable NOLs, provided ownership structure, interest deduction history, and post-reorganization transactions are carefully managed.
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