Practical considerations for NUBIL positions under Sec. 382

Editor: Jeffrey N. Bilsky, CPA

Sec. 382 limits the use of valuable tax attributes such as net operating losses (NOLs) and built–in losses following an ownership change. As explained in the preamble to 2019 proposed regulations (REG–125710–18, withdrawn on July 2, 2025, 90 Fed. Reg. 28946), inherent in the policy purpose of Sec. 382 is the goal of preventing a loss corporation from obtaining a greater benefit from its losses attributable to the period before the ownership change than it would have obtained had the change not occurred (the neutrality principle).

In today’s volatile markets, the interplay among net unrealized built–in losses (NUBILs), recognized built–in losses (RBILs), and the Sec. 382 limitation is increasingly relevant. Market shocks and sudden valuation changes from speculative investment cycles have made NUBIL and RBIL calculations both technically complex and strategically significant for entire industries. Furthermore, the best tax outcome may conflict with business needs, as optimal tax planning can require holding nonperforming assets longer than is commercially desirable.

This item explores practical strategies for managing NUBILs and RBILs following an ownership change, focusing on the safe–harbor methods described in Notice 2003–65, circumstances when those safe–harbor methods may not be optimal, and key ambiguities that can materially affect a loss company’s NUBIL profile.

Sec. 382 and built-in gain/loss: The basics

Sec. 382 limits the ability of a loss corporation to utilize tax attributes, such as NOLs and built–in losses, following an ownership change. An ownership change occurs when the aggregate increase in the loss corporation’s stock owned by “5–percent shareholders” (any individual, first–tier entity, higher–tier entity, or a public group that owns at least 5% of the loss corporation’s stock) increases by more than 50 percentage points within a rolling three–year testing period. Thereafter, a loss corporation may use pre–change losses to the extent of the product of the corporation’s fair market value (FMV) immediately before the ownership change multiplied by the long–term tax–exempt rate as defined in Sec. 382(f) (base 382 limitation).

Sec. 382(h) provides additional rules addressing the treatment of unrecognized tax gains and losses existing at the time of the ownership change and recognized within the 60–month (five–year) period following the ownership change. If a loss corporation has a net unrealized built–in gain (NUBIG), the base 382 limitation is increased by the amount of NUBIG that is recognized (RBIG) during the five–year recognition period, but not in excess of the NUBIG. If the loss corporation has a NUBIL, the NUBIL that is recognized during the five–year recognition period is also subject to the base Sec. 382 limitation as if the RBIL were a pre–change recognized loss, but only up to the amount of the NUBIL. Through this practical compromise, Sec. 382(h) aims to uphold the neutrality principle by ensuring material unrealized built–in items at the time of the ownership change are treated as if they had been recognized prior to the change.

In Notice 2003–65, the IRS provides two safe–harbor methods taxpayers can use to calculate NUBIG and NUBIL in identifying items of RBIG and RBIL (the 1374 approach and the 338 approach). Under both, NUBIG and NUBIL are determined as the net amount of gain or loss that would be recognized in a hypothetical sale to a third party of all the corporation’s assets immediately before the ownership change. The 1374 approach employs the accrual method, meaning only items that have accrued prior to the change date may be treated as RBIG or RBIL. The 338 approach employs an economic model based on a hypothetical purchase. Under the 338 approach, the loss corporation compares its actual items of income, deduction, gain, or loss with those items that would have resulted had there been a purchase of all of the loss corporation’s assets on the change date.

In a NUBIL fact pattern, it is generally more favorable for the taxpayer to use the 1374 approach due to the treatment of contingent liabilities. NUBIG and NUBIL are calculated in the same manner under both approaches, so contingent consideration is taken into account in the same way in calculating NUBIG/NUBIL. Under the accrual method of the 1374 approach, the liabilities that are contingent on the change date will not be treated as RBIL even if they become fixed and are paid during the recognition period if the all–events test has not been met as of the ownership change. On the other hand, the 338 approach requires a taxpayer to determine the estimated amount of the contingent liability as of the date of the ownership change. The value of the contingent liability considered assumed in a hypothetical purchase, to the extent it is deductible during the recognition period, is treated as an RBIL. Thus, using the 1374 approach reduces the overall NUBIL without requiring a future RBIL offset.

Industry patterns: Market-driven NUBIL — strategic timing

Market shocks and investment bubbles (e.g., the 2022 collapse of the cryptocurrency exchange FTX, the subprime mortgage crisis, oil price collapses) can push entire industries into NUBIL positions. Generally, NUBIL is determined by four key inputs: the FMV of the corporation’s stock, the tax basis of its assets, the deductible liabilities, and the total liabilities.

New and speculative industries (e.g., technology companies, particularly those focused on artificial intelligence and other emerging technology sectors), where investor enthusiasm and media attention often drive valuations far beyond underlying fundamentals, are especially vulnerable. These industries with speculative valuations can attract large amounts of capital based on expected future profits that quickly retract throughout an industry, based on changing market sentiment. Sudden industrywide retractions can rapidly push corporations into NUBIL positions and present an ongoing risk of entering and exiting NUBIL status.

To mitigate fluctuating NUBIL risk, taxpayers may consider both offensive and defensive strategies. One approach is to proactively trigger an ownership change during favorable market conditions, “resetting” the cumulative shift and securing a higher base limitation and NUBIG. Conversely, it is equally important to defend against triggering an avoidable ownership change when a NUBIL position exists. Corporations in highly speculative markets may institute protections such as share restrictions or “poison pills” to maintain control over the emergence of new 5% shareholders. The regulations and guidance underlying Sec. 382 also permit several methodologies — actual knowledge (Temp. Regs. Sec. 1.382–2T(k)(2)), the hold–constant principle (Notice 2010–50), and the full–value methodology (id.) — that can result in different cumulative shift percentages. With the guidance of their advisers, taxpayers can leverage these methodologies to optimize the timing of an ownership change and proactively mitigate NUBIL issues. Continuous monitoring and scenario analysis can be essential to managing risk for corporations in this type of speculative environment.

Third-party valuations

As mentioned above, Notice 2003–65 provides safe–harbor methods for calculating NUBIG/NUBIL, mechanically referencing total equity value and liabilities to determine asset value. In situations where the equity value does not accurately reflect asset value (e.g., bargain purchases) or where the liabilities are discounted (e.g., life insurance reserves), this mechanical calculation can understate asset value, resulting in a NUBIL position. In such situations, it may be prudent to obtain a third–party valuation when the company believes its assets are worth more than indicated by the safe–harbor mechanics. Sec. 382(h)(3)(A)(i)(I) refers simply to the assets’ FMV, and while equity value plus liabilities is often used as a proxy, this may not always be accurate. The safe–harbor mechanics are not a requirement, and a company may use generally accepted valuation principles to determine the assets’ FMV, which may allow a corporation to avoid a NUBIL.

Another consideration for the taxpayer is Sec. 382(h)(8). If 80% or more in value of a corporation’s stock is acquired in a single transaction (or series of related transactions over 12 months), the assets’ FMV for purposes of determining NUBIL cannot exceed the grossed–up equity value adjusted for indebtedness of the corporation and other relevant items. For NUBIL fact patterns, Sec. 382(h)(8) provides a ceiling for asset value, but it does not apply for NUBIG fact patterns. Arguably, if a well–supported third–party valuation indicates a NUBIG, even if the safe harbors would otherwise indicate a NUBIL, a taxpayer may rely on that valuation because Sec. 382(h)(8), which only applies for purposes of determining NUBILs, will not apply in that case.

Asymmetry and timing issues in NUBIL/RBIL application

Due to practicality and the limited availability of valuations, tax practitioners often identify potential RBIG using an aggregate asset–class approach (attributing value to Class I assets, then Class II assets, with residual value to goodwill) (see Regs. Sec. 1.338–6(b) and Instructions for Form 8594, Asset Acquisition Statement Under Section 1060) rather than asset–by–asset calculations. Asset–by–asset calculations can be time–consuming and expensive, and where the conclusions would not be materially different, a simplified RBIG approach may be appropriate. While NUBIL is determined in the aggregate, RBIL is tracked per asset, and there generally is no netting benefit from items of RBIG during the recognition period. Within the safe harbors of Notice 2003–65, the value of the total assets for NUBIL is mechanically calculated in aggregate; however, RBIL relies on the value of the specific loss assets at the time of an ownership change. This creates an asymmetry between overall NUBIL and potential RBIL allocable to loss assets, and the potential RBIL may materially exceed total NUBIL. Given the asymmetry, an aggregate asset–class approach may be inappropriate, and, in certain situations, this asymmetry may need to be clarified by third–party valuations.

If a corporation is in an overall NUBIL position, it is important to identify the specific assets driving the NUBIL. Generally, when possible, it is advisable to defer recognizing losses until the recognition period passes; however, this tax strategy may conflict with the company’s business needs. For example, following the 2008 financial crisis, many banks faced unavoidable ownership changes and experienced a rise in unrecognized losses associated with other real estate owned (OREO) assets and nonperforming loans. The crisis forced NUBIL banks to weigh the cost benefit of rebalancing assets for business purposes against retaining those assets to preserve tax losses from restrictive Sec. 382 limitations.

The 2008 financial crisis resulted in some banks’ triggering significant income, often cancellation–of–debt income (CODI), in the pre–change period. With income allocable to the pre–change period in the year of change and a large balance of loss assets, some banks were able to align the business objective of disposing of loss assets quickly with their tax planning goals. While items of RBIL cannot be carried back, RBIL recognized within the current year can be applied against current–year pre–change income, yielding a tax benefit. In these cases, promptly recognizing RBIL provided a tax benefit. This confluence of facts during the 2008 financial crisis highlights a scenario that could recur in other industries, specifically, market shocks leading to industrywide ownership changes and widespread NUBIL positions.

If a taxpayer understands which assets have RBIL, disposing of those assets in the same tax year as an ownership change can be potentially beneficial. Generally, current–year losses are available to offset current–year income. If there is a significant amount of current–year pre–change income (such as CODI) in the same year as an ownership change, then disposing of built–in loss assets quickly to offset current–year income may improve the corporation’s position.

Key ambiguities and open issues

Several areas in the NUBIL/RBIL space lack IRS guidance. Technology companies and other volatile industries often have significant Sec. 174 (or now, Sec. 174A) costs, but there is no specific guidance on whether these costs should be included in NUBIG/NUBIL and RBIG/RBIL calculations. Ambiguity also exists regarding the treatment of excluded CODI generated simultaneously with an ownership change; beyond Private Letter Ruling 201051019 and the withdrawn 2019 proposed regulations, there is little insight on this issue. Since total debt is a key component in the safe–harbor calculations for NUBIG/NUBIL, the inclusion or exclusion of these liabilities can determine whether a taxpayer has a NUBIG or NUBIL position. While inclusion of forgiven liabilities could be seen as contrary to the neutrality principle, Private Letter Ruling 201051019 notes that inclusion of the liabilities giving rise to CODI is permitted. For certain taxpayers, resolving these ambiguities may be critical.

Preserving value and agility

As the economic landscape continues to evolve, Sec. 382 remains a critical consideration for any company with significant tax attributes. The interplay among NUBIL, RBIL, and the Sec. 382 limitation is fraught with technical complexity and strategic risk.

Thoughtful Sec. 382 planning is not just about compliance; it is about preserving value and enabling business agility. Real–time monitoring, scenario analysis, and a willingness to look beyond the safe harbors can make the difference between protecting and losing valuable tax assets. At the same time, practitioners must remain vigilant to ambiguities, such as the treatment of Sec. 174/174A expenditures and CODI, which can tip the balance in close cases.

Editor

Jeffrey N. Bilsky, CPA, is managing principal, Washington National Tax, with BDO USA, P.C. in Atlanta.

For additional information about these items, contact Bilsky at jbilsky@bdo.com.

Contributors are members of or associated with BDO USA, P.C.