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The Tax Resource Group: Professional Tax Research Material, Resources, and Consulting

Category: Corporations
Subject: Survival of Tax Attributes
Title: Survival of Tax Attributes After Merger of Commonly Controlled Companies
IRC Sections: 381, 382
Filename: 1022.html
Date Produced: 2/98

Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet:

Two corporations are wholly owned by the same parties. Profit company (ProfitCo) has a fiscal year ending February 28. Loss company (LossCo) has a fiscal year ending May 31. LossCo has a substantial NOL carryover. The two companies will merge effective after close of business on February 28, 1998. ProfitCo will be the survivor of the merger. The merger will take the form of an A-type reorganization as defined by Section 368(a)(1)(A).

It is assumed--and this should be rigorously confirmed--that the stock ownership of these two companies has not changed at all during the five year period ending on the date of the proposed merger. It is further assumed that the transaction in question is a valid A- reorganization for federal tax purposes. Absence of a valid A-reorganization invalidates the conclusions set forth in this memo as regards the survivability of LossCo's NOL's.


1. Does the NOL of LossCo survive the merger?

2. If LossCo's NOL's survive, is there a limitationcaused solely by reason of the mergeron the utilization of the LossCo's NOL's both in the first post-merger year and subsequently?


1. Provided the merger is a valid A-type reorganization, the LossCo's NOL's survive the merger.

2. There is no limitation on the utilization of LossCo's NOL's as a result of the merger. The only limitations are the general NOL rules.

Note: Unless otherwise stated, this memorandum addresses federal income tax consequences only.


When two companies merge and one of the parties to the merger loses its corporate identity, the issue is whether various tax attributes of the distributing corporation the company that lost its corporate identity in the merger carry over to the acquiring (survivor) corporation. Section 381 controls the determination of which attributes carryover and specifies the types of transactions eligible for attribute carryovers in the first instance.

One of the carried-over attributes specified under Section 381 is the net operating loss. Section 381(c)(1). If the transaction in question is qualified under Section 381, then the net operating loss of distributing corporation (LossCo in this case) is carried over and is subject to utilization by the acquiring corporation (ProfitCo).

Section 381(a)(2) provides that various specified types of tax-free reorganizations, including the A-type reorganization under Section 368(a)(1)(A), allow attribute carryover from the distributing corporation to the acquiring corporation. Thus, it is clear that LossCo's NOL's survive the merger into ProfitCo provided that the merger is indeed a valid A-type reorganization.

Section 382 imposes significant limitations on the utilization of net operating losses after certain changes of corporate ownership. A merger is a transaction that can give rise to such a change. Under Section 382, the limitation-triggering mechanism is the magnitude of the change of ownership of the loss corporation, LossCo in this case.

In a simple sale of a loss corporation's stock, generally speaking it is necessary to compare the amount of stock held prior to the sale with the holdings of those same owners after the sale. If there has been a more-than-50-percentage-point decrease in ownership, then the limitations of Section 382 come into play.

In a merger situation in which a loss corporation merges into another corporation, the determination is more difficult. Here, one must compare the level of ownership of the loss corporation prior to the merger with the level of ownership of those same owners in the surviving, merged entity. Since the same parties own 100% of the stock of each company, there is no decrease in the ownership level of LossCo's shareholders: the LossCo shareholders owned 100% of LossCo's stock before the merger, and those same parties own 100% of the merged company's shares. Thus, there is no decrease in ownership whatsoever, and the limitations of Section 382 are inapplicable.

For a discussion of determining the controlling accounting methods for the survivor entity in a merger see Merger/Accounting Methods; Survival of method of accounting after merger; IRC 381.