The IRS has issued a second notice (Notice 2009-14) that expands on, clarifies, and supersedes the guidance issued in Notice 2008-100 on the application of IRC § 382 to loss corporations whose instruments Treasury acquires pursuant to the Troubled Asset Relief Program (TARP) under the Emergency Economic Stabilization Act of 2008, P.L. 110-343.
Notice 2009-14 provides rules in five areas:
- Treatment of indebtedness and preferred stock acquired by Treasury. Under the notice, any instrument issued to Treasury pursuant to TARP, whether owned by Treasury or subsequent holders, will be treated for federal income tax purposes as a debt instrument, if denominated as such, and as section 1504(a)(4) stock, if denominated as preferred stock.
- Treatment of warrants acquired by Treasury . The notice provides that any warrant to purchase stock acquired by Treasury pursuant to the Public CPP, TARP TIP, and TARP Auto programs (which are programs under TARP), whether owned by Treasury or subsequent holders, will be treated for all federal income tax purposes as an option (and not as stock) and will not be deemed exercised under Treas. Reg. § 1.382-4(d)(2) when held by Treasury. Any warrant to purchase stock acquired by Treasury pursuant to the Private CPP program (also part of TARP) will be treated for all federal income tax purposes as an ownership interest in the underlying stock. That stock will be treated as section 1504(a)(4) preferred stock. Any warrant acquired by Treasury pursuant to the TARP S Corp CPP program will be treated as an ownership interest in the underlying indebtedness for all federal income tax purposes.
- Section 382 treatment of stock acquired by Treasury . Under the notice, the ownership represented by any stock (other than preferred stock) acquired by Treasury pursuant to TARP (either directly or upon the exercise of a warrant), on any date on which it is held by Treasury, will not be considered, for purposes of section 382, to have caused Treasury’s ownership in the issuing corporation to have increased over its lowest percentage owned on any earlier date. Except as described below, such stock is considered outstanding for purposes of determining the percentage of stock owned by other 5% shareholders on a testing date.
- Section 382 treatment of redemptions of stock from Treasury . For purposes of measuring shifts in ownership by any 5% shareholder on any testing date occurring on or after the date on which the issuing corporation redeems stock held by Treasury that was acquired pursuant to TARP (either directly or upon the exercise of a warrant), the notice provides that the stock so redeemed will be treated as if it had never been outstanding.
- Section 382(l)(1) and capital contributions made by Treasury pursuant to TARP . For purposes of section 382(l)(1), the notice says that any capital contribution made by Treasury pursuant to TARP will not be considered to have been made as part of a plan which has a principal purpose of avoiding or increasing any section 382 limitation.
Taxpayers may rely on the guidance in Notice 2009-14 unless and until the IRS issues additional guidance. Any such further guidance will apply retroactively.
For more on the prior guidance issued under Notice 2008-100, see “ IRS Issues Guidance on Sec. 382 for Corporations in the Capital Purchase Program,” The Tax Adviser, Jan. 09, page 11.