Liabilities immediately before the ownership change should be taken into account at their adjusted issue price regardless of whether they were subsequently discharged in whole or in part during the recognition period (the five-year period beginning on the date of the ownership change) or thereafter.
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1 A qualified creditor is the beneficial owner, immediately before the ownership change, of qualified indebtedness (QI) of the loss corporation. Indebtedness is QI if it (i) has been owned by the same beneficial owner since the date that is 18 months before the date of the filing of the Title 11 or similar case or (ii) arose in the ordinary course of the trade or business of the loss corporation and has been owned, at all times, by the same beneficial owner. A loss corporation may treat indebtedness as always having been owned by the beneficial owner of the indebtedness immediately before the ownership change if such beneficial owner is not, immediately after the ownership change, either (i) a “five percent shareholder” or (ii) an entity through which a 5% shareholder owns an indirect ownership interest in the loss corporation.
2 The value of the loss corporation under Section 382(e), the amount that is multiplied by the long-term tax-exempt rate in order to derive the Section 382 limitation, is equal to the lesser of (i) the value of the stock of the loss corporation immediately after the ownership change or (ii) the value of the loss corporation’s prechange assets. For this purpose, the value of the stock issued in connection with the ownership change cannot exceed the cash and the value of any property (including indebtedness of the loss corporation) received by the loss corporation in consideration for the issuance of that stock.
3 If the net unrealized built-in gain (the net gain that would be recognized in a hypothetical sale of the corporation’s assets on the change date) is more than the lesser of (i) $10 million or (ii) 15% of the aggregate value of the loss corporation’s assets, the loss corporation can increase the Section 382 limitation if, and to the extent that, such gains are recognized in any year during the recognition period. Recognized built-in gains include the excess of the cost-recovery deductions that would have been allowable if a Section 338 election had been made with respect to the loss corporation, over the cost-recovery deductions actually allowable to such corporation.