Article by Daniel L. Simmons
Income tax policymakers have attempted to restrict the transfer of losses from one taxpayer to another ever since the initial enactment of net operating loss carryovers and carrybacks in 1918. Congress recently adopted tax neutrality as its goal for structuring a limitation on net operating loss carryovers. Section 382 of the Internal Revenue Code of 1986 (the Code) limits the recovery of net operating loss carryovers following an ownership change of more than fifty percent of the value of the stock of a loss corporation. The recovery is limited to an amount determined by multiplying the value of the loss corporation's stock by an interest rate based upon a tax-exempt rate of return for long-term federal obligations. The new section 383 of the Code imposes a similar limitation on certain tax credits and net capital loss carryovers. These limitations may not be the last word, however. Critical commentary suggests that the section 382 limitation is too restrictive because it denies too much value to the sellers of a loss corporation.
The first part of this Article briefly describes the operation of the section 382 limitation on net operating loss carryovers. The Article then examines the history of the net operating loss carryover and the proposals that led to enactment of section 382, identifying the policy choices involved in constructing the limitation. The new limitation is based on an unspoken policy that provides a fixed level of recoupment of prior losses to the owners of a loss corporation. The Article concludes that the federal long-term tax-exempt rate adopted by Congress is an appropriate compromise between the competing goals of achieving neutrality between a selling loss corporation and its purchasers, and avoiding an excessive diminution in the value of net operating loss carryovers that provide the loss corporation with some recoupment of net operating losses.
About the Author
Daniel L. Simmons. Professor of Law, University of California, Davis; A.B. 1968, J.D. 1971, University of California, Davis.
Citation
63 Tul. L. Rev. 1045 (1989)