Tired of spin? The Flyover delivers fast, fact-focused news across politics, business, sports, and more — free every morning. No agenda. No paywall. Join 2.3 million readers who trust us to start their day right.

Start Reading for Free

Welcome to the very first issue of The Deal Tax — a weekly newsletter where we take one tax topic and break it down two ways. First comes Plain English: short, jargon-free, and written for anyone who works in finance or business but didn't specialize in tax. Then comes The Deep End: the full technical analysis, written for tax practitioners who want something they can actually use at work or for self-study. Same topic, two depths — pick whichever fits, or read both. We're glad you're here. Let's get into it.

Imagine you're buying a company (more specifically, a Corporation) that has lost a lot of money over the years. Sounds bad, right? Actually, those losses — called Net Operating Losses, or NOLs — can be incredibly valuable. They can offset future profits and reduce your tax bill by millions of dollars.

So naturally, at some point, people started buying struggling companies just to get their hands on those losses. Not because they wanted the business. Just for the tax savings.

Congress noticed. And in 1986, they put a stop to it with something called Section 382.

So what does Section 382 actually do?

It puts a cap — called the "382 limitation" — on how much of those acquired losses you can use each year. The cap is calculated by multiplying the company's value at the time of acquisition by a government interest rate published monthly. Simple formula, complicated consequences.

Here's why it matters: imagine you buy a company worth $40 million that has $100 million in losses. The monthly rate is 4%. Your annual cap is $1.6 million. At that pace, it would take over 60 years to use all those losses. In practice, most of those $100 million in losses just disappear or simply have no net present value. Poof.

When does the cap kick in?

It triggers whenever there's an "ownership change" — which sounds straightforward but isn't. Generally, it happens when a group of large shareholders increases their combined ownership by more than 50 percentage points over a three-year window. This can be triggered by a straight acquisition, but also by funding rounds, convertible notes, or even options being issued.

Why should you care even if you're not buying a distressed company?

Because NOLs affect deal pricing. If a target company has valuable losses that Section 382 will wipe out or severely limit, that changes what the company is actually worth. Smart buyers — and their advisors — model this out before signing anything.

Section 382 is one of those rules that lives quietly in the background of almost every M&A deal — until it doesn't, and then it's a very expensive surprise.

Next in The Deep End, if you haven’t fall asleep yet, we go under the hood on ownership change calculations, built-in gains, and the bankruptcy exception that can save everything.

Section 382 is not a due diligence checkbox. It is a deal-economics variable — one that can render an acquired NOL pool economically worthless, reprice a transaction, or in extreme cases make a deal inadvisable altogether. This edition covers the four areas that matter most in practice: the ownership change trigger, the limitation computation, the NUBIG/NUBIL regime, and the §382(l)(5) bankruptcy exception.

I. The Ownership Change — More Complex Than It Looks

An ownership change occurs when one or more 5-percent shareholders increase their aggregate ownership by more than 50 percentage points over the applicable testing period — generally the three-year period ending on the testing date. §382(g)(1).

Three areas routinely trip up practitioners:

Option attribution. Under §382(l)(3)(A) and Reg. §1.382-4, options — including warrants, convertible debt, puts, and calls — are treated as exercised if doing so would result in an ownership change, or if a principal purpose of the issuance was to avoid one. In venture-backed and distressed company acquisitions, large convertible notes are a persistent trap: deemed exercise can push aggregate 5% shareholder ownership over the threshold before the formal acquisition closes, triggering an ownership change and invalidating years of NOL accumulation.

Public group mechanics. Shareholders owning less than 5% are aggregated into a single public group treated as one 5% shareholder. When a 5% shareholder sells into the public float, their prior ownership transfers into the public group — potentially creating a new public group that must be tracked separately under the elaborate rules of Reg. §1.382-2T.

Rolling testing period. The testing period begins on the later of the first day of the first taxable year from which a loss carryforward arises, or the day after the most recent prior ownership change. This creates a continuous tracking obligation — not just a closing-date snapshot.

II. Computing the §382 Limitation

The basic formula is deceptively simple:

The LTER is published monthly by the IRS — the highest of the adjusted federal long-term rates for the three-month period ending with the calendar month of the ownership change.

Two mechanics that materially affect the limitation in practice:

The anti-stuffing rule — §382(l)(1). Capital contributions made within the two-year period before the ownership change are excluded from equity value for §382 limitation purposes, unless made in the ordinary course of business. The ordinary course exception is narrow. Pre-closing capital infusions designed to inflate the §382 limitation will be stripped out.

Unused limitation carryover — §382(b)(2). If the §382 limitation exceeds pre-change losses actually used in a given year — because the loss corporation lacks sufficient taxable income — the unused limitation carries forward and increases next year's cap. The limitation accumulates; it does not expire annually.

TCJA modeling nuance. Post-2017 NOLs carry forward indefinitely but are capped at 80% of taxable income in any given year — meaning that even within the §382 limitation, post-2017 NOLs cannot fully offset current income. Transactions involving targets with both pre-2018 and post-2017 NOLs require careful vintage-by-vintage stacking analysis.

III. NUBIG/NUBIL — Where the Largest Opportunities and Risks Live

At the time of an ownership change, the loss corporation's assets may have a net unrealized built-in gain (NUBIG) or net unrealized built-in loss (NUBIL) — the difference between aggregate FMV and aggregate adjusted tax basis, net of liabilities.

The threshold test. NUBIG/NUBIL rules only apply if the net amount exceeds the lesser of $10 million or 15% of asset FMV (excluding cash). Below this threshold, no RBIG or RBIL adjustments apply. §382(h)(3)(B).

NUBIG upside — RBIG. If the loss corporation has a NUBIG, Recognized Built-In Gains (RBIG) recognized during the five-year recognition period increase the §382 limitation for the year of recognition. This is a powerful enhancement: pre-change losses can offset gains that were economically accrued before the ownership change. In intangible-rich targets, §197 amortization recognized post-closing can constitute RBIG under the 338 safe harbor methodology — a benefit that significantly increases the present value of the §382 limitation.

NUBIL downside — RBIL. If the loss corporation has a NUBIL, Recognized Built-In Losses (RBIL) during the recognition period are treated as pre-change losses and are subject to the §382 limitation — even though they appear to be post-change losses. This is a significant risk in asset-intensive or distressed businesses.

The two safe harbors — Notice 2003-65. In the absence of final regulations, taxpayers rely on two methodologies: the 338 approach (hypothetical §338 election, favorable for goodwill-heavy targets due to §197 amortization treatment as RBIG) and the §1374 appraisal approach (asset-by-asset appraisal, more precise but more fact-intensive). The 2019 Proposed Regulations would eliminate the 338 approach for most purposes and cap RBIG from §197 amortization — a change that would materially reduce NOL value in intangible-rich acquisitions. As of early 2026, these regulations remain unfinalized. Watch this space closely.

IV. The §382(l)(5) Exception — The Bankruptcy Planning Opportunity

In a Title 11 bankruptcy reorganization, if pre-change shareholders and qualified creditors own at least 50% of the reorganized debtor's stock immediately after the ownership change, the §382 limitation does not apply at all. This is a complete exemption — the loss corporation emerges with its pre-change NOLs fully intact.

Three deal-critical points:

Qualified creditor definition. A creditor qualifies if its claim has been held continuously for at least 18 months before the bankruptcy filing, or arose in the ordinary course of business and has been held since. Secondary market debt purchasers who bought in the run-up to bankruptcy frequently fail this test — a fact that distressed investors must track at the time of purchase, not at closing.

The NOL haircut. The price of the §382(l)(5) exemption is a reduction of pre-change NOLs by interest deductions paid or accrued within the three-year period before the ownership change to persons who become shareholders post-reorganization. The deductions and the resulting losses cannot both be kept.

The second ownership change trap. If the reorganized debtor undergoes a second ownership change within two years of the §382(l)(5) election, the §382 limitation for that second change is zero — a complete elimination of remaining NOL value. Post-emergence equity trading restrictions (a §382 Rights Plan) are not optional in this context; they are essential.

§382(l)(5) vs. §382(l)(6). Rather than electing §382(l)(5), a loss corporation can elect §382(l)(6), which computes the limitation using post-reorganization equity value. Since reorganized debtors often emerge with a higher equity value reflecting their restructured balance sheet, §382(l)(6) can produce a higher annual limitation. The decision turns on the magnitude of the interest deduction haircut, projected post-emergence taxable income, the LTER, and the risk of a second ownership change.

Key Takeaways for Deal Modeling