Further discussion on I.R.C. § 382
Should limitations be apportioned for state income tax purposes?
Of the states that have conformed to I.R.C. §382, some have required that the limitation imposed on taxpayer losses following an ownership change be apportioned in determining the amount of state net operating losses that can be used in a given tax year.
Analyzing state conformity to I.R.C. §382
As a general rule, many states appear to conform to the provisions of Internal Revenue Code Section (“I.R.C. §”)¹ which limits the use of net operating loss carryforwards (“NOLs”) and certain built-in losses following an ownership change.² States’ application of I.R.C. §382 can have a significant impact on the calculation of deferred assets and future cash tax liabilities. Furthermore, the calculation of state tax attributes, including NOLs, is a key component in any merger and acquisition tax due diligence.
Many states conform to I.R.C. §382 by either directly referencing the section through statute or regulation (commonly referred to as “specific conformity”) or by incorporating the I.R.C. generally through a specific date or using federal taxable income as the starting point for the state income tax computation (commonly referred to as “general conformity”). A minority of states do not conform to I.R.C. §382; therefore, state NOLs may not be limited in the same manner as the limitation of federal NOLs after an I.R.C. §382 ownership change. However, taxpayers should continue to be aware of specific state limitations that may operate in lieu of I.R.C. §382.³
In this article, authors Brian Sullivan and Meredith Morgan of Deloitte Tax LLP, ask the question of whether the I.R.C. §382 limitation should be apportioned in states that apply NOLs to post-apportioned taxable income, and if that limitation is apportioned, what is the appropriate apportionment factor (or factors) to use? This article addresses:
- How states have differed in their approach to the issue of apportioning I.R.C. §382 limitations
- How apportioned limitations may differ among those states, and
- How the regulatory or administrative guidance provided by some states may not be precedential
by Brian Sullivan and Meredith Morgan of Deloitte Tax LLP, originally published in Bloomberg BNA "Tax Management Weekly State Tax Report" in July 2013
¹ Unless otherwise specified, all “I.R.C. §” references are to the Internal Revenue Code of 1986 (the “Code” and all “Treas. Reg.” references are to the Treasury regulations promulgated thereunder, both as amended through the date of this article.
² An ownership change occurs whenever a corporation’s five percent shareholders have increased their aggregate ownership interest with the stock of the corporation by more than 50 percentage points within a rolling three-year period. See I.R.C. §382(g).
³ The analysis of which states adopt I.R.C. §382 and which do not is outside the scope of this article.