The preamble to the final regulations [PDF 264 KB] report that these regulations generally follow the approach of regulations proposed in November 2011, but with some revisions.
The final regulations will be published in the Federal Register on October 22, 2013.
Section 382 seeks to prevent “loss trafficking” by imposing a limitation on the use of a corporation’s net operating losses (NOLs), as well as certain other tax attributes, if the corporation experiences an ownership change. The section 382 limitation restricts use of such pre-change attributes against post-change taxable income.
What triggers an ownership change? In general, an ownership change occurs when on a particular “testing date,” the percentage stock ownership (by value) of one or more “5-percent shareholders” has increased by more than 50 percentage points over the lowest percentage stock ownership (by value) held by those shareholders at any time during the “testing period.”
Under section 382, the term “5-percent shareholder” can mean an individual that owns, at any time during the testing period, a direct or constructive ownership of 5% or more of the corporation. It also may be certain public groups, including: (1) a grouping of shareholders that indirectly own stock in a loss corporation through their ownership of an entity which in turn directly or indirectly own stock in a loss corporation; and (2) public groups created because of certain defined segregation events.
The November 2011 proposed regulations reflected a policy approach for the treatment of “Small Shareholders” as set forth by the IRS in Notice 2010-49. That approach—referred to as the “Purposive Approach”—reflects the view that it is unnecessary to take into account all readily identifiable acquisitions of stock by Small Shareholders because such shareholders are generally not in a position to acquire loss corporation stock in order to contribute income-producing assets or divert income-producing opportunities. This approach typically results in fewer ownership changes because these situations are not abusive.
The proposed regulations also included provisions that except from the segregation rules:
- Certain secondary transfers
- Certain redemptions
- Transactions involving first-tier entities or higher-tier entities (5-Percent Entities) in certain circumstances
Read KPMG’s initial description of the proposed regulations in TaxNewsFlash-United States [PDF 36 KB]: Proposed regulations on treatment of small shareholders for section 382 purposes
Secondary transfer segregation rule - The final version of the secondary transfer exception confirms that the segregation rules will not apply to the transfer of a direct interest in the loss corporation by a first tier entity or an individual that owns 5% or more of the loss corporation to public shareholders. The segregation rules also will generally not apply if an ownership interest in an entity that owns 5% or more of the loss corporation is transferred to an owner who is not a 5-percent shareholder of the loss corporation. The final regulations clarified that the secondary transfer exception applies to secondary transfers of stock of a loss corporation or “5-Percent Entity” only if the transferor indirectly owns 5% of the loss corporation. If the transferor does not indirectly own 5% or more of the loss corporation the transfer would generally be disregarded.
In addition, the IRS will not challenge application of certain aspects of the secondary transfer segregation rule as set forth in the proposed regulations occurring on dates before October 22, 2013.
Small redemption exception - The final regulations exempt from the segregation rules (on an annual basis) redemptions of either 10% of the total value of the loss corporation's stock at the beginning of the tax year, or 10% of the number of shares of the redeemed class outstanding at the beginning of the tax year.
Application of small issuance, small redemption exceptions to 5-Percent Entities - The final regulations extend the small issuance and small redemption exceptions to 5-Percent Entities. The 10% limitation of the small redemption exception and the small issuance exception with respect to 5-Percent Entities are measured by reference to the stock of the entity engaging in the redemption or issuance.
General exception to segregation rules for 5-Percent Entities - The proposed regulations generally exempted from the segregation rules transactions involving stock of a 5-Percent Entity if (1) such entity owns 10% or less (by value) of all the outstanding stock of the loss corporation, and (2) the 5-Percent Entity's direct or indirect investment in the loss corporation does not exceed 25% of the entity's gross assets. The final regulations adopt the 10% test but replace the 25% test with an anti-avoidance rule. Treasury adopted this rule due to comments that it could difficult to obtain the information that was necessary for the 25% test. The retention of the 10% test coupled with the anti-avoidance would adequately protect the government’s interests with less administrative burden.
Effective dates - The final regulations generally do not permit taxpayers to apply the final regulations to a testing date before October 22, 2013 (the publication date of the final regulations in the Federal Register) if application of the final regulations would result in an ownership change that did not occur (or would reverse an ownership change that did occur) on a date before October 22, 2013, under the regulations then in effect.
The final regulations generally allow taxpayers to apply provisions of the final regulations in their entirety to all testing dates that are included in a testing period beginning before and ending on or after October 22, 2013, subject to certain limitations.
Coordinated acquisition rule - The final regulations effectively reserve treatment of the coordinated acquisition rule for possible future guidance.