Modeling Tax Attribute Preservation

Workflow

1. Map the ownership change test

   • Identify all 5%+ shareholders under the constructive ownership and aggregation rules of Treas. Reg. §1.382-2T
   • Build a rolling 3-year testing-period schedule tracking each 5%+ shareholder's lowest and current percentage
   • Sum percentage-point increases; flag if aggregate exceeds or approaches the 50-point threshold

2. Calculate the §382 annual limitation

   • Multiply the loss corporation's equity value immediately before the ownership change by the applicable long-term tax-exempt rate
   • Adjust for any recognized built-in gains during the 5-year recognition period (increases the limitation) or built-in losses (subject to the limitation)
   • Apply the continuity-of-business-enterprise (COBE) requirement — if not met for 2 years post-change, limitation drops to zero [VERIFY COBE fact pattern]

3. Model the bankruptcy exceptions

   • §382(l)(5): If the loss corporation is in a Title 11 case and historic shareholders/qualified creditors own ≥50% post-change, no annual limitation applies — but NOLs are reduced by interest deductions on converted debt for the 3 prior tax years, and a second ownership change within 2 years zeroes remaining NOLs
   • §382(l)(6): Standard limitation applies but equity value is measured post-restructuring (typically higher), which may yield a larger annual cap
   • Compare net present value of usable NOLs under each path over the carryforward horizon

4. Build the NOL utilization forecast

   • Layer the §382 cap over projected taxable income by year
   • Apply vintage-year expiration dates — oldest NOLs used first (FIFO)
   • Incorporate state-level §382-equivalent limitations where applicable [VERIFY state conformity — e.g., California limits NOL usage independently]
   • Discount the tax savings at an appropriate after-tax rate to derive the net present value of preserved attributes

5. Run scenario and sensitivity analysis

   • Vary equity value ±10–20% to show limitation sensitivity
   • Model alternative transaction structures (partial conversion, staged closings) to test whether ownership change can be avoided
   • Test threshold management strategies: transfer restrictions, poison pills, §382 rights plans, or shareholder caps
   • Compare outcomes with and without NUBIG/NUBIL adjustments

6. Compile deliverable

   • Summary table: NOL balance, annual §382 cap, usable NOLs by year, NPV of tax savings
   • Scenario comparison matrix (l)(5) vs. (l)(6) vs. no ownership change
   • Key assumptions log with [VERIFY] flags for all rate, valuation, and jurisdictional inputs

Output

• §382 Limitation Model (Excel-ready table or structured output): annual cap, cumulative usage, expiration waste, and NPV of tax shield under base and alternative cases
• Ownership Change Testing Schedule: 3-year rolling shareholder log showing whether the 50-point threshold is breached
• Scenario Comparison Summary: Side-by-side of (l)(5), (l)(6), and non-change structures with NPV differential
• Assumption and Risk Register: All inputs, sources, and [VERIFY] items requiring confirmation

Quality Checks

• Confirm that the long-term tax-exempt rate used matches the IRS-published rate for the correct month [VERIFY]
• Validate that constructive ownership attribution (family, entity, option) rules are applied consistently across the shareholder schedule
• Ensure NOL vintage ordering follows FIFO and that expiration dates align with the applicable carryforward period (20-year pre-2018, indefinite post-TCJA with 80% taxable income cap) [VERIFY which NOL vintage rules apply to each tranche]
• Cross-check that NUBIG/NUBIL classification uses the correct measurement method and that recognition-period items are properly included or excluded
• Verify that the model handles a second ownership change correctly — §382 cap is the lesser of the new and old limitations
• Flag any state where §382 conformity is partial or nonexistent so state-level modeling is adjusted accordingly