Cancellation of debt a key element of most restructurings generally triggers taxable income. The German tax authorities had issued an administrative decree (the "Tax Restructuring Decree" - Sanierungserlass), however, declaring that, upon the satisfaction of certain requirements and conditioned on forfeiture of any loss carry forwards, the cancellation of debt income ("CODI") would not be taxed.

Section 382 limits a loss corporation’s ability to use its Net Operating Losses (NOLs) carryforwards following an "ownership change."¹ An ownership change is triggered if one or more "5-percent shareholders" of the loss corporation increase their ownership in the aggregate by more than 50 percentage points during a testing period. Following an ownership change, the "Section 382 limitation" generally reduces the ability to use NOLs to offset taxable income in any post-change year.²

On April 20, 2011, the IRS issued proposed regulations under Treas. Reg. §1.267(f)-1(c) (the Proposed Regulations), which will become effective after they are adopted as final regulations. The Proposed Regulations modify the current deferred loss rules to allow the acceleration of a deferred loss in certain circumstances that routinely arise in international restructurings of U.S. companies. Accordingly, corporations in a controlled group that are considering a sale to another member of the controlled group should evaluate the consequences under the Proposed Regulations.