Key Takeaway

On August 14, 2026, the Internal Revenue Service (“IRS”) released PLR 202633005 (the “Ruling”), in which it ruled favorably on several issues affecting a corporation’s ability to qualify for the bankruptcy exception under section 382(l)(5), helping preserve the future value of net operating losses (“NOLs”) following its Chapter 11 bankruptcy reorganization. The ruling reinforces that tax planning can materially influence economic outcomes in a bankruptcy or out-of-court restructuring by enhancing post-emergence liquidity, enterprise value, and stakeholder recoveries.

Relevant Factual Background

The taxpayer was the parent of a consolidated group of corporations that entered Chapter 11 bankruptcy. As part of a court-approved plan of reorganization, existing common shareholders were eliminated, and the company’s creditors became the new owners of the reorganized business (the “Ownership Change”). The taxpayer asked the IRS to rule on several issues related to the preservation of its tax losses despite the Ownership Change.  

The Basics of Section 382 and Section 382(l)(5)

Section 382 generally limits a company’s ability to use NOLs following an ownership change, which typically occurs when more than 50 percent of a corporation’s stock changes hands among significant shareholders over a specified testing period. However, section 382(l)(5) provides a special exception for a company emerging from Chapter 11 bankruptcy to avoid the general limitation if certain requirements are met. As a result, qualifying companies may preserve substantially more of their tax losses for future use under the section 382(l)(5) bankruptcy exception.

To qualify under section 382(l)(5), the corporation must be “under the jurisdiction of the court in a title 11 or similar case.”[1] Additionally, the old shareholders and creditors of the corporation must own at least 50 percent of the stock (by vote and value) of the reorganized corporation as a result of being shareholders or creditors immediately before the ownership change (the “50 percent requirement”).[2] Stock issued to creditors is only taken into account for purposes of the 50 percent requirement if it is issued to a creditor in exchange for debt that was held by the creditor for at least 18 months before the bankruptcy filing or was issued within 18 months before the bankruptcy and such debt arose in the ordinary course of the taxpayer’s trade or business.[3] Whether the corporation qualified for the section 382(l)(5) exception on a consolidated-group basis and whether stock was issued to qualifying creditors were central issues in the Ruling.

Key IRS Determinations in the Ruling

The IRS ruled favorably on three issues affecting the company’s ability to qualify for the section 382(l)(5) bankruptcy exception following its Ownership Change, which ultimately supported the taxpayer’s ability to preserve its tax attributes (including NOLs) post-emergence:

  1. Consolidated Group Treated as a Single Entity The IRS agreed that the affiliated consolidated group could be treated as a single entity for purposes of the section 382(l)(5) bankruptcy exception. This treatment allowed the group to evaluate its qualification for the exception on a consolidated basis and based on whether the shareholders and qualified creditors of any consolidated group member received stock in the reorganized corporation for purposes of satisfying the 50 percent requirement.[4]
  2. Pre-Bankruptcy Financing Qualified as Ordinary-Course Debt The IRS also concluded that a portion of debt issued within 18 months prior to the bankruptcy filing constituted qualified indebtedness under the ordinary-course exception in section 382(l)(5)(E)(ii). The qualifying portion of this debt was based on the amount of the debt proceeds that could be traced to contributions to a subsidiary operating a business in a regulated industry for purposes of pursuing certain business objectives (i.e., Purpose M). Similar to the ruling above, this expanded the number of qualifying creditors that could receive stock of the reorganized corporation for purposes of satisfying the 50 percent requirement.  
  3. Active Business Requirement Was Satisfied The IRS also found that the company continued to conduct a meaningful active trade or business during and after the restructuring process even though contextual clues in the Ruling tend to suggest this may not have been the consolidated group’s core business at the time of the filing. Nonetheless, the corporation’s ongoing operations, employees, and revenue-generating activities related to Business A supported compliance with the relevant anti-abuse provisions and preservation of the bankruptcy exception.

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The IRS’s favorable conclusions regarding recently issued debt and the active business requirement are particularly noteworthy because both issues often receive heightened scrutiny in bankruptcy-related section 382 analyses.

Why This Matters

Although PLRs apply only to the specific taxpayer to which they are issued and cannot be cited as precedent, they often provide valuable insight into the IRS’s thinking on complex issues. This ruling highlights several practical considerations for companies navigating financial distress:

  • Restructuring decisions can affect tax outcomes. Financing arrangements, ownership transitions, and the bankruptcy or debt workout plan designs may influence whether valuable tax attributes survive emergence. Tax planning should be integrated into restructuring discussions early in the process, alongside legal, operational, and other business considerations.
  • Tax attributes can significantly affect enterprise value. NOLs and other tax attributes may represent meaningful future cash flow benefits that influence negotiations among creditors, equity holders, and investors. The value of those tax attributes can be maximized with careful tax planning.
  • Business continuity matters. Maintaining a meaningful operating business during restructuring may support favorable tax treatment under applicable rules.
  • Post-emergence governance and ownership deserve attention. Companies that preserve tax attributes should consider protective measures to avoid future ownership changes that could impair those benefits.

It is also worth noting that the Ruling does not address many other bankruptcy-related tax considerations. For example, debt forgiven in a Chapter 11 restructuring may result in cancellation of debt income that, while often excluded from taxable income in bankruptcy, can reduce NOLs and other tax attributes under separate tax rules.

Conclusion

While the Ruling is limited to its specific facts, it illustrates that significant tax assets may survive a Chapter 11 restructuring when companies carefully manage creditor ownership, financing activities, and operational continuity. For companies facing financial distress, integrating tax considerations into restructuring planning can help protect enterprise value and improve post-emergence performance.

How We Help

WilliamsMarston advises clients on the tax aspects of complex restructurings, debt workouts, and bankruptcy transactions, including modeling the impact of restructuring alternatives on NOLs and other tax attributes and evaluating section 382 considerations. If you are assessing restructuring alternatives, we would welcome the opportunity to help navigate complex tax issues and identify opportunities to maximize after-tax value.  

[1] Section 382(l)(5)(A)(i).

[2] Section 382(l)(5)(A)(ii).

[3] Section 382(l)(5)(E).

[4] The IRS reached similar conclusions in PLR 201435003 (May 21, 2014) and PLR 201328027 (April 11, 2013).