Section 382 Statement Filing Requirements

A Section 382 statement is a disclosure filed with a company’s federal income tax return to report a significant change in ownership to the Internal Revenue Service (IRS). This filing is required when a company with accumulated net operating losses (NOLs) or other tax attributes experiences an “ownership change.” The purpose of the filing is linked to Section 382 of the Internal Revenue Code, which restricts a company’s ability to use past losses to offset future income after such a change. The statement provides the IRS with data to verify the corporation’s calculation of its annual limitation on using these pre-change tax benefits and serves as the official record of the event.

Determining if a Statement is Required

The requirement to file a Section 382 statement hinges on whether a corporation is a “loss corporation” and if it has undergone an “ownership change.” A loss corporation is any company possessing tax attributes like NOL carryforwards, certain unrealized built-in losses, or tax credit carryforwards. If a business has a history of losses that it can carry forward to reduce future tax bills, it meets the first part of this definition.

An ownership change is a technical event defined under the tax code. It occurs if the percentage of stock owned by one or more “5-percent shareholders” increases by more than 50 percentage points over the lowest percentage of stock owned by those shareholders during a defined “testing period.” A 5-percent shareholder is any individual or entity that directly or indirectly owns five percent or more of the corporation’s stock. The testing period is generally the three-year period ending on the day of any shift in ownership.

To identify an ownership change, a company must monitor its shareholder transactions. These events are broadly categorized as either an “owner shift” or an “equity structure shift.” An owner shift involves changes in the ownership of the corporation’s stock, such as a purchase of shares by a new or existing investor. An equity structure shift typically refers to a corporate reorganization, such as a merger or acquisition.

The rules require aggregating the increases for all 5-percent shareholders over the testing period to determine if a change has occurred. Consider a simple scenario where a loss corporation is owned equally by four unrelated individuals, each holding 25% of the stock. If an outside investor purchases all the shares from three of the original owners, that investor’s ownership has increased from 0% to 75%. This 75-percentage point increase exceeds the 50-point threshold, triggering an ownership change.

Information Required for the Section 382 Statement

Once a corporation determines that an ownership change has occurred, it must gather specific information to include in the required statement. Treasury Regulation § 1.382-11 outlines the necessary components of this disclosure, which serves as a detailed record for the IRS. This information substantiates the calculation of the annual limitation on the use of pre-change losses.

The statement must include:

• The exact date of the ownership change, which sets the dividing line between pre-change and post-change periods.
• The fair market value of the corporation’s stock immediately before the ownership change, a component in calculating the limitation.
• The applicable long-term tax-exempt rate, a figure published by the IRS that is multiplied by the corporation’s value to establish the base limitation.
• The calculated Section 382 limitation for the tax year of the change, representing the maximum amount of pre-change losses that can be used.
• A detailed schedule of the corporation’s pre-change losses, including NOLs, unrealized built-in losses, and credit carryforwards subject to the limitation.
• Identification of the 5-percent shareholders on the testing date and their ownership percentages immediately before and after the ownership change.

The statement may also need to include specific elections, such as an election to close the company’s books on the change date for allocating income and loss between the pre-change and post-change periods.

Preparing and Filing the Statement

After gathering all the necessary data, the corporation must prepare the Section 382 statement for filing. This is not a pre-printed IRS form. Instead, the corporation or its tax advisor must create the document from scratch, ensuring it contains all the required elements. The document should be clearly titled to ensure it is properly identified by the IRS.

The format of the statement should be logical and easy to follow. It typically begins by identifying the loss corporation by name and employer identification number (EIN). The supporting details regarding 5-percent shareholder ownership shifts should also be included to substantiate the ownership change conclusion.

The completed statement must be attached to the corporation’s annual income tax return, such as Form 1120, for the taxable year in which the ownership change occurred. This ensures that the disclosure is made concurrently with the tax return that will be the first to reflect the application of the limitation.

A corporation that has experienced an ownership change must continue to file the statement with its tax return for each subsequent year. This ongoing requirement persists for as long as the corporation is subject to the limitation, meaning it still has pre-change attributes that it is carrying forward. Each year, the statement would be updated to reflect the amount of the limitation used in the prior year.

Consequences of Non-Compliance

Failing to file the required Section 382 statement can lead to significant negative consequences for a loss corporation. The IRS is authorized to impose penalties for non-compliance, but the more substantial risk lies in the potential disallowance of valuable tax attributes.

The most severe consequence of not filing the statement is the potential for the IRS to treat the Section 382 limitation for that year as zero upon audit. If a corporation uses its pre-change NOLs to offset income but fails to file the mandatory statement, the IRS can disallow the entire amount of the claimed NOL deduction. This means the corporation could be assessed for additional tax, interest, and penalties.

Filing the statement is a mandatory step to preserve the right to use any portion of the corporation’s pre-change losses following an ownership change. The burden of proof is on the taxpayer to demonstrate that an ownership change occurred and to properly calculate and apply the resulting limitation.

Without the contemporaneous filing of the required statement, making this case to the IRS becomes substantially more difficult. The failure to file can convert a valuable asset—the ability to use past losses to reduce future taxes—into a liability.