Issue link: https://mbozikis.ufcontent.com/i/1422521
184 the so-called long-term tax-exempt bond rate applicable to the period in which the Ownership Change occurs. 104 This limitation may be reduced to zero if the loss corporation does not continue to conduct its business for two years, or it may be increased by certain "built-in gains" in the underlying assets of the corporation. Special rules, however, mitigate this limitation in bankruptcy. Specifically, Section 382(l)(5) of the Internal Revenue Code (the so-called "Bankruptcy Exception") provides that a reorganized corporation may retain the use of its NOLs (subject to certain limitations 105 ) notwithstanding an Ownership Change where (i) the corporation was under the jurisdiction of a court immediately before the Ownership Change (such that an out-of-court restructuring would not qualify) and (ii) following the Ownership Change, at least 50% of the corporation's stock was owned by its existing shareholders, creditors that held debt of the corporation for at least eighteen months prior to the bankruptcy filing or ordinary business creditors that held their debt at all times. For purposes of this test, special rules apply to treat certain creditors as always holding their debt if they (and related persons) own less than 5% of the corporation's stock immediately after the Ownership Change. If there is a second Ownership Change within two years after the Ownership Change to which the Bankruptcy Exception applies, however, the Bankruptcy Exception will cease to apply, and the Section 382 limitation with respect to and following the second Ownership Change will be zero. The requirements for the Bankruptcy Exception can be difficult to satisfy, particularly in a case where there has been a great deal of trading of the corporation's debt or where an acquiring entity seeks to obtain more than 50% of the corporation's stock, either during or after the bankruptcy proceeding. 104 The long-term tax-exempt bond rate applicable to Ownership Changes occurring in September 2021 is 1.57%. 105 Corporations qualifying for the Bankruptcy Exception must reduce the amount of their pre-Ownership Change NOLs generally by the amount of interest that was paid or accrued in the three tax years preceding the Ownership Change (this is commonly referred to as an "interest haircut") on any debt converted to equity pursuant to the bankruptcy.