On Oct. 22, the IRS released long-awaited final regulations on owner shifts and ownership changes under Sec. 382. The rules, contained in T.D. 9638, retain a taxpayer-friendly exception for small shareholders and provide a new anti-abuse rule.
Sec. 382 limits a corporation’s use of net operating loss (NOL) carryovers and certain other attributes after the corporation has a change in ownership. The rules are designed to prevent trafficking in NOLs and other loss attributes. An ownership change is measured by the increase in percentage of stock that is owned by one or more 5% shareholders during a (usually three-year) test period. Individual shareholders who own less than 5% of the corporation are aggregated and treated as a single 5% shareholder (called a public group).
The public group concept also applies to situations in which a loss corporation is owned by one or more entities. If an entity directly or indirectly owns 5% or more of the loss corporation, that entity (called a 5% entity) has its own public group if its owners—who are not 5% shareholders—own, in the aggregate, 5% or more of the loss corporation.
Under current segregation rules, less-than-5% shareholders can be grouped together and treated as a single 5% shareholder. The final regulations modify several of these rules to provide easier administration and avoid unfair results. The final regulations provide:
- A secondary transfer exception that helps avoid unintentional ownership changes that might arise in the ordinary course of stock trading;
- A small redemption exception that provides relief from small redemptions of stock during a tax year; and
- A general exception to the segregation rules for 5% entities.
The final regulations extend the small redemption exception to exempt redemptions of the stock of 5% entities from the segregation rules. They also provide that the stock of the 5% entity engaging in the redemption is the appropriate baseline for computing the 10% limitation for the small redemption exception in such cases and that the 10% limitation of the small issuance exception in the current regulations is calculated by reference to the same baseline used for the small redemption exception.
For a detailed discussion of the issues in this area, see “Sec. 382 Final Regulations for Small Shareholders,” by Greg Alan Fairbanks, J.D., in the February 2014 issue of The Tax Adviser.
Alistair M. Nevius, editor-in-chief
The Tax Adviser
Also look for articles on the following topics in the February 2014 issue of The Tax Adviser:
- A discussion of the partnership capital account revaluations.
- An analysis of determining the taxability of S corporation distributions.
- A look at recent developments affecting partners and partnerships.