How did South Carolina Revenue Ruling 16-7 limit corporate net operating losses after an ownership change?

Plain-English summary

South Carolina Revenue Ruling 16-7 explained how an ownership change limited a corporation's use of South Carolina net operating loss carryforwards under IRC Section 382.

Under the 2016 rules described in the ruling, South Carolina generally adopted IRC Section 172 for calculating NOLs, including a 20-year carryforward, but did not adopt the federal NOL carryback provision. South Carolina losses were computed with state modifications and were allocated or apportioned in the year incurred.

After an ownership change, Section 382 imposed an annual ceiling on how much pre-change NOL could offset later taxable income. The federal limit generally equaled the loss corporation's value at the ownership change multiplied by the published federal long-term tax-exempt rate.

For South Carolina:

• a corporation doing all its business in South Carolina generally used the same limitation as the federal amount; and
• a multistate corporation generally multiplied the federal Section 382 limit by its South Carolina apportionment ratio for the ownership-change year.

The ruling's example used a $5 million corporation value, a 2.8% federal rate, and a 25% South Carolina apportionment ratio. That produced a $140,000 federal annual limit and a $35,000 South Carolina annual limit. Unused limited losses carried forward, subject to the carryforward period described in the ruling.

Built-in gains and losses

The ruling separately addressed assets whose fair market value differed from their tax basis on the ownership-change date.

Net unrealized built-in gain

If the corporation met the applicable net unrealized built-in gain threshold, qualifying recognized built-in gain during the five-year recognition period could increase the Section 382 limitation for the year the gain was recognized. The total increases could not exceed the net unrealized built-in gain calculated at the ownership change.

South Carolina calculated its own built-in gain using state modifications, allocation, and apportionment. The ruling provided simplified and detailed methods depending on whether the federal threshold was met and on the corporation's facts.

Net unrealized built-in loss

If the corporation met the applicable net unrealized built-in loss threshold, qualifying recognized built-in losses during the five-year recognition period were treated like pre-change NOLs and became subject to the South Carolina Section 382 limitation. The aggregate limited amount could not exceed the detailed South Carolina net unrealized built-in loss.

If the federal built-in-loss threshold was not met, the ruling said the South Carolina recognized built-in losses were not subject to the state Section 382 limitation. If the federal threshold was met, the corporation then calculated the separate South Carolina threshold and detailed state amount.

South Carolina consolidated groups

The ruling emphasized that a South Carolina consolidated or combined return was not calculated like a federal consolidated return. Each corporation separately computed, allocated, and apportioned its South Carolina income or loss; the members' separate results were then combined on one return.

Because of that structure:

• each member calculated its South Carolina Section 382 limitation separately;
• each member used its own value and its own South Carolina apportionment ratio for the ownership-change year;
• built-in gains and losses were calculated separately for each member; and
• South Carolina did not adopt the federal separate return limitation year, or SRLY, rules.

The ruling said adopted provisions including IRC Sections 269, 382, and 384 supplied safeguards against abusive NOL use. It superseded Technical Advice Memorandum #89-22, which had suggested a different SRLY treatment.

Common questions

Q: Does South Carolina simply use the federal Section 382 dollar limit?

A: Generally only for a corporation doing all its business in South Carolina. A multistate corporation generally apportioned the federal limit using its South Carolina apportionment ratio for the ownership-change year.

Q: Is the limitation applied once or annually?

A: It is an annual limit on the amount of post-change taxable income that pre-change NOLs can offset.

Q: Can built-in gain increase the limit?

A: Yes, if the threshold and recognition-period rules were met. The increase applied in the recognition year and was capped by the state built-in-gain amount.

Q: Are South Carolina consolidated-group limits calculated group-wide?

A: No. RR 16-7 required separate calculations for each member.

Q: Did South Carolina adopt federal SRLY rules?

A: No. The ruling expressly said it had not.

Citations and references

• S.C. Code Ann. Sections 12-6-580, 12-6-40, and 12-6-50 (corporate income, federal conformity, and exclusions)
• S.C. Code Ann. Section 12-6-5020 (South Carolina consolidated returns)
• IRC Sections 172 and 382 (NOL calculation and ownership-change limitations)
• IRC Sections 269 and 384 (other limitations identified by the ruling)
• IRC Section 382(h) (built-in gains and losses)
• Anonymous Taxpayer v. South Carolina Department of Revenue, 95-ALJ-17-0228 (SRLY discussion cited in the ruling)

Subject

Use of Net Operating Losses Following a Change in Ownership

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/RR16-7.pdf

Original ruling text

STATE OF SOUTH CAROLINA

DEPARTMENT OF REVENUE
300A Outlet Pointe Blvd., Columbia, South Carolina 29210
P.O. Box 12265, Columbia, South Carolina 29211

SC REVENUE RULING #16-7

SUBJECT:

Use of Net Operating Losses Following a Change in Ownership
(Income Tax)

EFFECTIVE DATE: Applies to all periods open under the statute
SUPERSEDES:

Technical Advice Memorandum #89-22

REFERENCES:

S. C. Code Ann. Section 12-6-580 (2014)
S. C. Code Ann. Section 12-6-40 (Supp. 2015)
S. C. Code Ann. Section 12-6-50 (2014)
S. C. Code Ann. Section 12-6-5020 (2014)

AUTHORITY:

S. C. Code Ann. Section 12-4-320 (2014)
S. C. Code Ann. Section 1-23-10(4) (2005)
SC Revenue Procedure #09-3

SCOPE:

The purpose of a Revenue Ruling is to provide guidance to the public. It is
an advisory opinion issued to apply principles of tax law to a set of facts
or general category of taxpayers. It is the Department’s position until
superseded or modified by a change in statute, regulation, court decision,
or another Departmental advisory opinion.

I. INTRODUCTION
This document provides an overview of South Carolina net operating losses (NOLs), the
application of Internal Revenue Code (IRC) Section 382 limitations on South Carolina NOL
carryforwards, and the application of IRC Section 382 limitations and other NOL use limitations
on South Carolina consolidated returns. 1

1

South Carolina’s consolidated income is not calculated in the same manner as federal consolidated income. See
further discussion in Overview of South Carolina Consolidated Returns and NOL Limitations for Consolidated
Members, Part VII.

1

II. OVERVIEW OF SOUTH CAROLINA NOL CALCULATION
Code Section 12-6-580 provides that a corporation’s South Carolina gross income and taxable
income are computed as determined under the IRC with certain modifications and subject to
allocation and apportionment. 2 Code Section 12-6-50 provides a list of IRC sections that are
specifically not adopted for South Carolina income tax purposes.
With the exception of IRC Section 172(b)(1), relating to NOL carrybacks, which South Carolina
does not adopt, 3 South Carolina adopts IRC Section 172 for the purpose of calculating NOLs,
including the 20 year carryforward period. As a result, a South Carolina NOL deduction is
computed in accordance with the IRC as adopted by South Carolina subject to the modifications
in Article 9, Chapter 6 of Title 12 of the South Carolina Code of Laws. Additionally, a taxpayer
that transacts or conducts business partly within and partly without South Carolina is subject to
allocation and apportionment under Article 17, Chapter 6 of Title 12. South Carolina NOLs are
apportioned in the year the loss is incurred.
III. SOUTH CAROLINA LIMITATION ON NOL CARRYFORWARDS
A. Overview of the Federal Section 382 Limitation on NOL Carryforwards 4
IRC Section 382 limits the use of NOL carryforwards of a loss corporation after a change in
ownership with respect to the loss corporation. 5 A change in ownership occurs when the
percentage of stock held by one or more 5% shareholders of the loss corporation increases by
more than 50 percentage points over the lowest stock ownership held by such shareholders on a
particular testing date within a prescribed period (usually a three-year period). 6 IRC Section 382
places an annual limit on the amount of income that can be offset by NOLs incurred before the
ownership change. Any pre-ownership change NOL carryforward that cannot be deducted in the
taxable year because of the IRC Section 382 limitation is carried forward to the following year.
The IRC Section 382 limitation is calculated by multiplying the loss corporation’s value at the
time of the ownership change by the published federal long-term tax-exempt rate. 7 The value of
the loss corporation is generally the fair market value of its stock at the time of the ownership
change. This calculation results in the amount of income of the loss corporation that can be offset
by a pre-ownership change NOL carryforward each year following the ownership change. 8

2

South Carolina generally adopts the IRC through the immediately preceding December 31st. Code Section 12-6-40.
Article 9, Chapter 6, Title 12 contains modifications and Article 17, Chapter 6, Title 12 contains allocation and
apportionment provisions.
3
Code Sections 12-6-50(6) and 12-6-1130(4).
4
This document provides a brief overview of IRC Section 382. It is not a comprehensive analysis of IRC Section
382.
5
IRC Section 382(k)(1) defines a “loss corporation” as a corporation entitled to use an NOL carryover or having an
NOL for the taxable year in which the ownership change occurs.
6
IRC Section 382(g).
7
The federal long-term tax-exempt rate for ownership changes is published monthly in an IRS Revenue Ruling.
8
The effect of built-in gains and built-in losses on the use of the NOL carryforward is discussed below.

2

B. South Carolina Section 382 Limitation on NOL Carryforwards
South Carolina adopts IRC Section 382.9 However, the South Carolina Section 382 limitation
amount will depend on whether the loss corporation conducts its entire business within South
Carolina, or conducts its business partly within and partly without South Carolina, during the
taxable year that the ownership change occurs. If, during the taxable year that the ownership
change occurs, the loss corporation has conducted its entire business within South Carolina, the
federal Section 382 limitation and the South Carolina Section 382 limitation generally will be the
same. 10
If, during the taxable year that the ownership change occurs, the loss corporation has apportioned
its South Carolina income/losses because it has conducted its business partly within and partly
without South Carolina, the South Carolina Section 382 limitation is calculated by apportioning
the federal Section 382 limitation using the South Carolina apportionment ratio for the taxable
year that the ownership change occurs.
For example, assume the following for Company A at the time of ownership change:
•
•
•
•
•

Company A’s value is $5,000,000;
The applicable federal long-term tax exempt rate is 2.80%; 11
Company A’s federal NOL carryforward is $1,000,000;
Company A’s previously apportioned South Carolina NOL carryforward is $350,000;
Company A’s South Carolina apportionment ratio for the year of the ownership change is
25%.

Company A’s federal Section 382 limitation is $140,000 ($5,000,000 x 2.8%). Accordingly,
Company A can use its pre-ownership change federal NOL carryforward to offset up to
$140,000 of its federal taxable income in each year following the ownership change. The South
Carolina Section 382 limitation is $35,000 ($5,000,000 x 2.8% x 25%). Accordingly, the
taxpayer can use its pre-ownership change South Carolina NOL carryforward to offset up to
$35,000 of its South Carolina taxable income in each year following the ownership change.
The Section 382 limitation is an annual limitation on the amount of taxable income that can be
offset by a pre-ownership change NOL carryforward (in the above example $35,000 for South
Carolina purposes). The Section 382 limitation amount remains the same each year, except in the
case of certain built-in gains discussed below. Any pre-ownership change South Carolina NOL
carryforward that cannot be deducted in the taxable year because of the South Carolina Section
382 limitation is carried forward to the following year. The South Carolina NOL remains subject
to the maximum 20 year carryforward period.

9

Code Section 12-6-40.
For members of a federal consolidated group see Part VII.
11
For this example the rate used was from IRS Revenue Ruling 2015-1, Table 3.
10

3

IV. INTRODUCTION TO BUILT-IN GAINS AND BUILT-IN LOSSES
IRC Section 382(h) requires that on the date of an ownership change, a loss corporation must
determine if there is a net unrealized built-in gain (NUBIG) or a net unrealized built-in loss
(NUBIL). The NUBIG or NUBIL is the difference between the fair market value of the loss
corporation’s assets (other than cash and certain cash equivalents) and the aggregate adjusted tax
basis of those assets. If a corporation’s NUBIG exceeds the federal threshold discussed below,
IRC Section 382(h) provides that the IRC Section 382 NOL limitation is increased by certain
recognized built-in gains in the year the gain is recognized. If a corporation’s NUBIL exceeds
the federal threshold, IRC Section 382(h) requires that the pre-ownership change NOL
carryforward be increased by certain recognized built-in losses.
Note that a loss corporation benefits from recognized built-in gains which allow it to increase its
Section 382 limitation and thereby use a greater amount of its pre-ownership change NOLs.
Recognized built-in losses, on the other hand, must be added to the pre-ownership change NOL
and those losses are subject to the Section 382 limitation. Accordingly, a loss corporation with
NUBIG benefits from meeting the threshold while a loss corporation with NUBIL benefits from
failing to meet the threshold.
V. BUILT-IN GAINS
A. Federal Tax Treatment – IRC Section 382(h)(1)(A)
At the time of ownership change, the loss corporation may have substantially appreciated assets
despite the existence of an NOL carryforward. Under IRC Section 382(h)(1)(A), if the loss
corporation has a “net unrealized built-in gain” (NUBIG) 12 – i.e., on the date of the ownership
change the fair market value of its assets (other than cash and certain cash equivalents) exceeds
their aggregate adjusted basis – the Section 382 limitation amount is increased by any
“recognized built-in gain” (RBIG) during the five-year period after the ownership change. 13 The
Section 382 limitation increase is only in the year that the built-in gain is recognized, and the
aggregate increase in the Section 382 limitation during the five-year period after the ownership
change cannot exceed the loss corporation’s NUBIG.
Federal NUBIG Threshold Requirement. For federal tax purposes, the Section 382 limitation
adjustment allowed under IRC Section 382(h) applies only if the loss corporation meets the
statutory NUBIG threshold requirement. The loss corporation’s NUBIG must exceed either (1)
15% of the fair market value of the loss corporation’s assets (other than cash and certain cash
equivalents) on the date of ownership change or (2) $10 million. 14 If the loss corporation’s
NUBIG does not exceed the statutory threshold, no Section 382 limitation adjustment is allowed.
12

IRC Section 382(h)(3)(A).
IRC Section 382(h)(1)(A)(i). The RBIG must be recognized during the statutory “recognition period.” Under
IRC Section 382(h)(7)(A), the recognition period is the five-year period beginning on ownership change date. For
example, if the change date is October 1, Year 1, the recognition period is the five-year period beginning on October
1, Year 1, and ending on September 30, Year 6. No Section 382 limitation adjustments are allowed for built-in gains
recognized after the recognition period.
14
IRC Section 382(h)(3)(B).
13

4

B. South Carolina Tax Treatment 15
For South Carolina income tax purposes, a loss corporation’s South Carolina NUBIG must meet
the South Carolina NUBIG threshold requirement in order to qualify for the South Carolina
Section 382 limitation adjustment. The analysis for determining the loss corporation’s South
Carolina NUBIG and South Carolina NUBIG threshold depends on whether the loss corporation
has met the federal NUBIG threshold requirement. 16

1. If Loss Corporation Has Met Federal NUBIG Threshold
   If the loss corporation has met the federal NUBIG threshold requirement on a separate company
   basis, then the loss corporation will be deemed to have met the South Carolina NUBIG threshold
   requirement. The loss corporation must then calculate its South Carolina NUBIG using one of
   two available methods:
   a. Simplified Method. Under the simplified method, the loss corporation’s South Carolina
   NUBIG is calculated by multiplying the loss corporation’s federal NUBIG amount,
   calculated on a separate company basis, by the South Carolina apportionment ratio for the
   year the ownership change occurs.
   b. Detailed Method. Under the detailed method, the loss corporation’s South Carolina
   NUBIG is calculated, on a separate company basis, using South Carolina income tax
   modifications and allocation and apportionment provisions. This method is explained in
   detail below.
2. If Loss Corporation Has Not Met Federal NUBIG Threshold
   South Carolina NUBIG Threshold Requirement. If the loss corporation has not met the federal
   NUBIG threshold requirement on a separate company basis, the loss corporation may still meet
   the South Carolina NUBIG threshold requirement if the loss corporation’s detailed South
   Carolina NUBIG (explained below) exceeds either (1) 15% of the fair market value of the loss
   corporation’s assets (other than cash and certain cash equivalents) multiplied by the loss
   corporation’s South Carolina apportionment ratio for the year that the ownership change occurs
   or (2) $10 million multiplied by the loss corporation’s South Carolina apportionment ratio for the
   year that the ownership change occurs.
   Detailed South Carolina NUBIG Calculation. The loss corporation’s detailed South Carolina
   NUBIG is calculated using South Carolina income tax modifications and allocation and
   apportionment provisions. For example, South Carolina’s modification provisions do not allow
   bonus depreciation under IRC Section 168(k). 17 As a result, a taxpayer must adjust the federal
   basis of the property for South Carolina purposes to reflect that bonus depreciation was not used.
   South Carolina’s allocation provisions provide the gain from the sale of real property located in

15

See Exhibit A for flow chart of built-in gains.
See Part VII for corporations filing federal consolidated returns.
17
Code Section 12-6-50(4).
16

5

South Carolina is allocated to South Carolina. 18 Therefore, any built-in gain must reflect this
allocation. After allocating any applicable built-in gain or loss, the remainder of the built-in gain
or loss will be apportioned to South Carolina using the apportionment ratio for the year that the
ownership change occurs.
EXAMPLE 19
Federal NUBIG Calculation
Asset
Land in SC
Land in VA
§ 168(k) Asset
Other Asset
Federal NUBIG

FMV
$100,000
$50,000
$100,000
$200,000

Adjusted Basis
$75,000
$30,000
$0
$40,000

Unrealized BIG
$25,000
$20,000
$100,000
$160,000
$305,000

Simplified South Carolina NUBIG Calculation
(Assume the SC apportionment factor is 25% for Year of Ownership Change)
Federal NUBIG
$305,000

SC Apportionment Ratio
25%

South Carolina NUBIG
$76,250

Detailed South Carolina NUBIG Calculation
(Assume the SC apportionment factor is 25% for Year of Ownership Change)
Asset
Land in SC
Land in VA
§ 168(k) Asset
Other Asset

FMV
$100,000
$50,000
$100,000
$200,000

Adjusted Basis
$75,000
$30,000
$50,000
$40,000

Unrealized BIG Allocated to SC
Unrealized BIG Apportioned to SC [(50,000+160,000) x 25%]
South Carolina NUBIG

18

Unrealized BIG
$25,000 – allocated to SC
$20,000 – allocated to VA
$50,000 – apportioned
$160,000 – apportioned
$25,000
$52,500
$77,500

Code Section 12-6-2220(4). The amount of gain which represents the return of amounts deducted as depreciation
is allocated to South Carolina to the extent of depreciation previously deducted in computing South Carolina taxable
income. Gain in excess of recaptured depreciation is allocated to the state where the real property is located whether
or not the real property was used in or connected with the taxpayer’s trade or business.
19
Numbers presented are in 1000s.

6

3. South Carolina RBIG
A loss corporation that meets the South Carolina NUBIG threshold requirement as provided
above can increase its South Carolina Section 382 limitation by any South Carolina RBIG
recognized during the five-year recognition period following the ownership change. The increase
is allowed only in the year that the built-in gain is recognized, and the aggregate increase in the
South Carolina Section 382 limitation cannot exceed the South Carolina NUBIG calculated at
the time of the ownership change.
The South Carolina RBIG is calculated in the same manner that the detailed South Carolina
NUBIG was calculated. In other words, the South Carolina RBIG is computed using South
Carolina modifications and is subject to allocation and apportionment using the apportionment
ratio for the tax year that the ownership change occurs. For example, if a loss corporation has a
South Carolina RBIG of $20,000 in Year 3 following the ownership change, then the loss
corporation’s South Carolina Section 382 limitation is increased by $20,000 for Year 3.
Note: The South Carolina RBIG is calculated under the detailed method regardless of whether
the loss corporation calculated its South Carolina NUBIG under the simplified method or the
detailed method.
VI. BUILT-IN LOSSES
A. Federal Tax Treatment – IRC Section 382(h)(1)(B)
IRC Section 382(h) also addresses the treatment of the loss corporation’s pre-ownership change
built-in losses. Under IRC Section 382(h)(1)(B), if the loss corporation has a “net unrealized
built-in loss” (NUBIL) 20 – i.e., on the date of the ownership change the aggregate adjusted basis
of the loss corporation’s assets (other than cash and certain cash equivalents) exceeds the assets’
fair market value – any “recognized built-in loss” (RBIL) 21 of the loss corporation during the
five-year period after the ownership change is subject to the Section 382 limitation in the same
manner as if it were a pre-ownership change NOL carryforward. 22 The total amount of RBIL
subject to the Section 382 limitation under this rule is limited to the loss corporation’s NUBIL at
the time of ownership change. 23
Federal NUBIL Threshold Requirement. As in the case of built-in gains, the Section 382
limitation on RBILs applies only if the loss corporation meets a statutory threshold requirement.
The loss corporation’s NUBIL must exceed either (1) 15% of the fair market value of the loss
corporation’s assets (other than cash and certain cash equivalents) on the date of ownership
change or (2) $10 million. 24 If the loss corporation’s NUBIL does not exceed the statutory
threshold, then the loss corporation’s federal RBILs are not subject to the Section 382 limitation.
20

IRC Section 382(h)(3)(A).
RBIL is any loss recognized during the five-year recognition period on the disposition of any asset that was held
by the loss corporation immediately before the ownership change. IRC Section 382(h)(2)(B).
22
IRC Section 382(h)(1)(B)(i).
23
IRC Section 382(h)(1)(B)(ii).
24
IRC Section 382(h)(3)(B).
21

7

B. South Carolina Tax Treatment 25
For South Carolina income tax purposes, the South Carolina Section 382 limitation on South
Carolina RBIL is triggered only if the loss corporation meets the South Carolina NUBIL
threshold. As in the case of built-in gains, the analysis for determining the loss corporation’s
South Carolina NUBIL and South Carolina NUBIL threshold depends on whether the loss
corporation has met the federal NUBIL threshold requirement.

1. If Loss Corporation Has Not Met Federal NUBIL Threshold
   If the loss corporation’s federal NUBIL does not exceed the federal statutory threshold – i.e.,
   none of the loss corporation’s federal RBILs is subject to the Section 382 limitation – then none
   of the loss corporation’s South Carolina RBILs is subject to the South Carolina Section 382
   limitation. Accordingly, the loss corporation does not need to calculate its detailed South
   Carolina NUBIL or NUBIL threshold.
2. If Loss Corporation Has Met Federal NUBIL Threshold
   South Carolina NUBIL Threshold. If the loss corporation’s federal NUBIL exceeds the federal
   statutory threshold – i.e., the loss corporation’s federal RBILs are subject to the Section 382
   limitation – the loss corporation must first calculate its South Carolina NUBIL threshold. The
   loss corporation’s South Carolina NUBIL threshold is the lesser of either (1) 15% of the fair
   market value of the loss corporation’s assets (other than cash and certain cash equivalents)
   multiplied by the loss corporation’s South Carolina apportionment ratio for the year that the
   ownership change occurs or (2) $10 million multiplied by the loss corporation’s South Carolina
   apportionment ratio for the year that the ownership change occurs.
   Detailed South Carolina NUBIL Calculation. After determining its South Carolina NUBIL
   threshold, the loss corporation must then calculate its South Carolina NUBIL using the detailed
   method. The loss corporation’s detailed South Carolina NUBIL is calculated in the same manner
   as the loss corporation’s detailed South Carolina NUBIG. That is, the loss corporation calculates
   its detailed South Carolina NUBIL using South Carolina income tax modification and allocation
   and apportionment provisions using the apportionment factor in the year of the ownership
   change. If the loss corporation’s detailed South Carolina NUBIL does not exceed the loss
   corporation’s South Carolina NUBIL threshold, then none of the loss corporation’s South
   Carolina RBILs is subject to the South Carolina Section 382 limitation. If the loss corporation’s
   detailed South Carolina NUBIL exceeds its South Carolina NUBIL threshold, then the loss
   corporation’s South Carolina RBILs become part of the prechange NOL and subject to the South
   Carolina Section 382 limitation.

25

See Exhibit B for flow chart of built-in losses.

8

EXAMPLE 26
Federal NUBIL Calculation
Asset
Land in SC
Land in VA
§ 168(k) Asset
Other Asset
Federal NUBIL

FMV
$100,000
$50,000
$50,000
$75,000

Adjusted Basis
$170,000
$130,000
$0
$100,000

Unrealized BIL
($70,000)
($80,000)
$50,000
($25,000)
($125,000)

Detailed South Carolina NUBIL Calculation
(Assume the SC apportionment factor is 25% for Year of Ownership Change)
Asset
Land in SC
Land in VA
§ 168(k) Asset
Other Asset

FMV
$100,000
$50,000
$50,000
$75,000

Adjusted Basis
$170,000
$130,000
$35,000
$100,000

Unrealized BIL Allocated to SC
Unrealized BIL Apportioned to SC [($15,000 - $25,000) x .25]
South Carolina NUBIL:

Unrealized BIL
($70,000) – allocated to SC
($80,000) – allocated to VA
$15,000 – apportioned
($25,000) – apportioned
($70,000)
($2,500)
($72,500)

3. South Carolina RBIL
   If the loss corporation’s detailed South Carolina NUBIL exceeds the loss corporation’s South
   Carolina NUBIL threshold, then the loss corporation’s South Carolina RBIL during the five-year
   recognition period following the ownership change is treated as a pre-ownership change South
   Carolina NOL carryforward subject to the South Carolina Section 382 limitation. The aggregate
   amount of the South Carolina RBIL subject to the South Carolina Section 382 limitation under
   this rule is limited to the loss corporation’s detailed South Carolina NUBIL at the time of
   ownership change. The South Carolina RBIL that is recognized during the five-year recognition
   period is subject to the South Carolina Section 382 limitation for all periods open under the
   carryforward.
   The South Carolina RBIL that is subject to the South Carolina Section 382 limitation is
   calculated in the same manner that the detailed South Carolina NUBIL was calculated. In other
   words, the South Carolina RBIL is computed using South Carolina modifications and is subject
   to allocation and apportionment using the apportionment ratio for the tax year of the ownership
   change.

26

These numbers are in 1000s.

9

VII. OVERVIEW OF SOUTH CAROLINA CONSOLIDATED RETURNS AND NOL
LIMITATIONS FOR CONSOLIDATED MEMBERS
A. Overview of South Carolina Consolidated Returns
A South Carolina “consolidated” return (also called a “combined return”) is permitted for entities
doing business in South Carolina that share at least 80% ownership of the total combined voting
power of all classes of stock. 27 A corporation doing business entirely within South Carolina may
consolidate with a corporation doing a multistate business and two or more corporations doing a
multistate business may file a consolidated return. 28 A South Carolina consolidated return is not
prepared in the same manner as a federal consolidated return. South Carolina has not adopted
the federal consolidation rules in IRC Sections 1501 through 1505 29 (or the regulations
thereunder). South Carolina taxable income or loss is computed separately for each corporation.
Income is allocated separately for each corporation, and income is apportioned separately for
each corporation. 30 There are no elimination adjustments for intercompany transactions such as
those required for federal consolidated returns. The separately computed South Carolina income
or loss for each participating member of the group is added together to arrive at the South
Carolina income or loss for the consolidated group and reported on a single return for the
consolidated group. 31
B. Calculation of South Carolina Section 382 Limitations for Consolidated Members
For federal income tax purposes, the IRC Section 382 limitation is computed on a consolidated
basis. However, because South Carolina does not have a federal type consolidated return, the
South Carolina Section 382 limitation must be computed separately for each member of the
South Carolina consolidated group. In order to calculate a member’s South Carolina Section 382
limitation, the member must first compute its separate value at the time of ownership change.
Then the member’s value must be apportioned using the South Carolina apportionment ratio for
that member for the year of the ownership change.
C. Built-In Gains and Losses on South Carolina Consolidated Returns
For South Carolina purposes both net unrealized built-in gains/losses and recognized built-in
gains/losses must be calculated separately for each member in the South Carolina consolidated
group in the same manner as discussed in Parts V and VI above.

27

Code Section 12-6-5020(A).
Code Section 12-6-5020(C).
29
Code Section 12-6-50(15).
30
Code Section 12-6-5020(D).
31
Code Section 12-6-5020(D).
28

10

D. Separate Return Limitation Years (SRLY)
For federal income tax purposes, the SRLY rules apply to the use of NOLs in a consolidated
group. If a corporation with NOL carryforwards becomes a member of a consolidated group, the
SRLY rules limit the amount of the consolidated group’s taxable income that may be offset by
NOL carryforwards that the acquired corporation brings into the consolidated group. In general,
the SRLY rules limit the consolidated group’s use of separate return limitation year losses to the
amount of income generated by the acquired corporation after it becomes a member of the
group. 32 South Carolina has not adopted the SRLY rules. 33 The provisions of IRC Section 382,
along with other IRC sections adopted by South Carolina (e.g., IRC Sections 269 and 384),
provide the safeguards to prevent the abusive use of NOLs in South Carolina.
SOUTH CAROLINA DEPARTMENT OF REVENUE

s/Rick Reames III
Rick Reames III, Director
July 6
, 2016
Columbia, South Carolina

32

For federal purposes, generally SRLY NOL limitations will not apply to corporations joining a consolidated group
within six months before or after an IRC Section 382 ownership change. In that case only the IRC Section 382 rules
will apply. IRC Reg. 1.1502-21(g).
33
In 1989, the Department issued Technical Advice Memorandum (TAM) #89-22 which at least suggests that South
Carolina follows the SRLY rules even though South Carolina does not adopt the consolidated return provisions of
the IRC or IRC regulations. Code Section 12-6-50(15). In 1995, Anonymous Taxpayer v. South Carolina
Department of Revenue, 95-ALJ-17-0228, was heard by the South Carolina Administrative Law Court (ALC). The
Department argued and the ALC agreed that the SRLY rules did not apply in South Carolina since those provisions
of the IRC were not adopted by South Carolina.

11

EXHIBIT A

BUILT-IN GAINS

Has Loss Corp met federal NUBIG threshold?
(Does Loss Corp’s federal NUBIG exceed either 15% of
FMV or $10 million at the time of ownership change?)

YES

NO

Loss Corp deemed to have met SC NUBIG
threshold – eligible for SC § 382 limit
adjustment.

Calculate Loss Corp’s Detailed
SC NUBIG
(Subject to SC modifications,
allocation and apportionment)

Calculate Loss Corp’s SC NUBIG using
Simplified or Detailed method.

A
Simplified SC
NUBIG
Loss Corp’s
federal NUBIG x
apportionment
ratio for year of
ownership change

B
Detailed SC
NUBIG
OR

Does Loss Corp’s Detailed SC NUBIG
exceed either 15% of FMV or $10
Million x SC apportionment ratio in year
of ownership change?

(Subject to SC
modifications,
allocation and
apportionment)

YES

NO

SC NUBIG threshold met
Increase Loss Corp’s SC § 382
limit by any SC RBIG
recognized during 5 year
recognition period up to SC
NUBIG
Increase is only for year that SC
RBIG is recognized

Increase Loss Corp’s SC § 382
limit by any SC RBIG
recognized during 5 year
recognition period up to SC
NUBIG
Increase is only for year that
SC RBIG is recognized

12

SC NUBIG
threshold not met
No SC § 382
limit adjustment

EXHIBIT B
BUILT-IN LOSSES
Has Loss Corp met federal NUBIL threshold?
(Does Loss Corp’s federal NUBIL exceed either 15% of
FMV or $10 million at the time of ownership change?)

YES

NO

Calculate Loss Corp’s Detailed SC
NUBIL

None of Loss Corp’s
SC RBILs are subject
to SC § 382 limit

(Subject to SC modifications,
allocation and apportionment)

Does Loss Corp’s Detailed SC NUBIL
exceed either 15% of FMV or $10
million x SC apportionment ratio in year
of ownership change?

YES

NO

SC NUBIL threshold met

SC NUBIL threshold not met

RBILs recognized by Loss
Corp during 5 year
recognition period are subject
to SC § 382 limit

None of Loss Corp’s RBILs are
subject to SC § 382 limit

13