The Section 382 anti-stuffing rule disregards capital contributions made to a loss corporation when the principal purpose of the contribution was to avoid or inflate the annual limitation on pre-change losses after an ownership change. In plain terms: if someone pumps money into the company shortly before it changes hands, that cash gets stripped out of the valuation used to calculate how many old losses the buyer can deduct each year.1Office of the Law Revision Counsel. 26 USC 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-in Losses Following Ownership Change The rule matters because value drives the limitation, and every dollar of disqualified contribution translates directly into a smaller annual cap for as long as the pre-change losses last.
Why Corporate Value Drives the Limitation
After an ownership change, a loss corporation can offset future income with pre-change net operating losses only up to an annual ceiling. The ceiling is the fair market value of the corporation’s stock immediately before the change, multiplied by the long-term tax-exempt rate the IRS publishes each month.1Office of the Law Revision Counsel. 26 USC 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-in Losses Following Ownership Change Preferred shares and certain other equity described in Section 1504(a)(4) count toward that stock value.
For April 2026, the long-term tax-exempt rate is 3.58%.2Internal Revenue Service. Rev Rul 2026-6 – Prescribed Rates for Federal Income Tax Purposes A corporation valued at $50 million on its change date would face an annual limitation of roughly $1.79 million. Only that much pre-change loss can absorb taxable income each year, and any unused portion carries forward to increase the next year’s cap.
A higher pre-change stock value produces a bigger annual limitation, so losses get used faster and the buyer recovers the tax benefit sooner. A lower value can strand losses that expire before the company earns enough to consume them. That arithmetic explains the incentive Congress was worried about. Without a policing rule, a target company could accept a last-minute cash infusion, walk into closing looking artificially large, and hand the buyer a much bigger annual deduction than the underlying business really supports.
What the Rule Disqualifies
Section 382(l)(1) targets any capital contribution received as part of a plan whose principal purpose is to avoid or increase the annual limitation. Contributions that fall into that category are stripped out of the corporation’s value for limitation purposes.1Office of the Law Revision Counsel. 26 USC 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-in Losses Following Ownership Change
The statute puts a thumb on the scale with timing. Any capital contribution made within the two years preceding the ownership change is presumed to be part of such a plan unless the taxpayer proves otherwise.1Office of the Law Revision Counsel. 26 USC 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-in Losses Following Ownership Change The IRS doesn’t have to produce a memo showing tax-avoidance intent. If the money arrived inside the 24-month window and the corporation can’t establish a legitimate business purpose, the contribution is disqualified.
“Capital contribution” reaches further than a wire transfer. Debt forgiveness qualifies. So does a contribution of property in exchange for stock. A parent that forgives a $15 million intercompany loan six months before selling the subsidiary triggers the same scrutiny as a cash injection. Every equity infusion inside the lookback needs to be identified, categorized, and either defended or subtracted from the valuation.
How the Value Adjustment Works
Once a contribution is disqualified, the corporation’s value for limitation purposes drops by the full dollar amount of that contribution. A company valued at $50 million that received a disqualified $10 million infusion eight months before the change has an adjusted value of $40 million. At the April 2026 rate of 3.58%, that shifts the annual limitation from roughly $1.79 million to about $1.43 million, a $360,000 reduction every year the pre-change losses remain available.2Internal Revenue Service. Rev Rul 2026-6 – Prescribed Rates for Federal Income Tax Purposes Compounded over the carryforward period, the gap can reach millions in foregone tax benefit.
The anti-stuffing adjustment happens before other Section 382 valuation modifications. Getting it wrong costs the taxpayer either way. Failing to exclude a disqualified contribution inflates the limitation and produces underpaid tax, interest, and penalties on audit. Excluding a contribution that actually qualifies for a safe harbor leaves usable tax benefit on the table.
Safe Harbors From the Two-Year Presumption
Not every contribution made inside the two-year window loses its value-boosting effect. IRS Notice 2008-78 sets out safe harbors that distinguish tax-motivated infusions from ordinary business funding, and the criteria differ based on who provided the capital.3Internal Revenue Service. Notice 2008-78 – Capital Contributions Under Section 382(l)(1)
Contributions From Unrelated Parties
A contribution from someone who is neither a controlling shareholder nor a related party escapes the presumption when three conditions are all met. The stock issued in connection with the contribution can’t exceed 20% of the corporation’s total outstanding stock value. No agreement or substantial negotiations about an ownership-change transaction can exist when the contribution is made. And the ownership change must occur more than six months after the contribution.3Internal Revenue Service. Notice 2008-78 – Capital Contributions Under Section 382(l)(1)
Contributions From Related Parties
Related parties face tighter thresholds. “Related party” pulls in anyone related to the loss corporation under the constructive ownership rules of Section 267(b), which reaches parent companies, commonly controlled entities, and certain coordinating groups. For these contributors, the stock issued can’t exceed 10% of total value, there can be no agreement or negotiations about an ownership change at the time of the contribution, and the ownership change must occur more than one year after the contribution.3Internal Revenue Service. Notice 2008-78 – Capital Contributions Under Section 382(l)(1)
A parent that has been funding a subsidiary’s operations consistently for years can point to that pattern as evidence a recent contribution was operational rather than tax-motivated. The safe harbors provide a cleaner defense than a facts-and-circumstances argument, though. Contributions outside every safe harbor aren’t automatically disqualified; the IRS will look at all the facts. But the burden sits on the taxpayer, and the absence of a safe harbor makes that burden heavier.
Documentation That Holds Up
Contemporaneous records separate a successful defense from an expensive audit adjustment. Board resolutions explaining why funds were needed, ledger entries showing where the capital went (covering payroll shortfalls, funding specific projects, keeping operations running), and business plans dated before the ownership change all carry weight. Contemporaneous is the operative word. A memo written during an audit to explain what the company intended two years earlier is far less persuasive than a business plan produced when the money arrived.
A Related Trap: The Nonbusiness Asset Reduction
Anti-stuffing isn’t the only provision that can shrink a loss corporation’s value under Section 382. Section 382(l)(4) reduces the value used in the limitation formula when at least one-third of the corporation’s total assets consist of nonbusiness assets, meaning assets held for investment rather than active business operations.1Office of the Law Revision Counsel. 26 USC 382 – Limitation on Net Operating Loss Carryforwards and Certain Built-in Losses Following Ownership Change
When the threshold is crossed, corporate value is reduced by the excess of nonbusiness assets’ fair market value over the nonbusiness asset share of indebtedness. A company sitting on a large pile of marketable securities or excess cash while running minimal business operations can’t use that portfolio to prop up its Section 382 limitation. The two rules can also work together. A cash contribution that technically clears the two-year presumption might still get caught here if it pushed investment assets past the one-third mark. Regulated investment companies, real estate investment trusts, and REMICs are excluded from this rule.
What Compliance Looks Like in Practice
A loss corporation must attach an information statement to its income tax return for any year in which an owner shift, equity structure shift, or similar transaction occurs. That statement identifies the dates of ownership shifts and any ownership changes, along with the tax attributes that make the company a loss corporation.4eCFR. 26 CFR 1.382-11 – Reporting Requirements The corporation must also keep records identifying every 5-percent shareholder and their ownership percentage for as long as those records remain relevant to any internal revenue law, which in practice means for as long as pre-change losses stay on the books.5eCFR. 26 CFR 1.382-2T – Definition of Ownership Change Under Section 382
For anti-stuffing purposes specifically, compliance means auditing every capital contribution inside the two-year lookback: bank records, shareholder agreements, intercompany loan documents, and board minutes. The work is tedious but indispensable. Companies that first identify disqualified contributions during an IRS exam typically end up with both a valuation adjustment and penalties on the resulting underpayment.