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IRS Unveils Major Proposed Changes to Section 382 Rules

On June 11, the IRS released Notice 2010-49. The notice is proposing significant changes in the rules governing when a corporation has an ownership change pursuant to Section 382. If adopted, these new regulations will result in fewer companies being forced to limit the use of their net operating loss carry forwards (NOLs).

Under Section 382, if the ownership of a corporation’s stock has changed by more than 50%, a complicated set of rules comes into play that limits the ability of the company to use any NOLs from years before the ownership change against income in subsequent years. The purpose of these rules is to prevent an acquisition of loss-corporation stock followed by the contribution of income-producing assets or the diversion of income from the acquiring company to the loss corporation for tax-avoidance purposes. Before these rules, one profitable corporation could acquire another loss corporation solely for the purpose of utilizing all of the NOLs against their future earnings.

The existing rules to determine whether or not an ownership change has occurred are onerous at best. One provision is that companies are required to aggregate small shareholders into Public Groups and measure the increase in stock ownership as if the new Public Group was one shareholder. Companies must track stock ownership and set up a new Public Group every time there is an ownership-change event, such as an IPO or reorganization. The requirement to set up these new groups can result in an increased number of new shareholders under the rules and hence can trigger a greater-than-50% ownership change.  

In the Notice released in June, the IRS is proposing to change these aggregation rules to no longer require companies to set up new Public Groups when there is an ownership-change event. The reasoning is that small shareholders do not have an opportunity to utilize the existing NOLs for tax-avoidance purposes and accordingly, it should be unnecessary to take into account all acquisitions of stock by small shareholders.

These proposed changes are a welcome relief for publicly traded companies. The IRS has asked for comments to be presented in September and hopefully we will see these new rules issued in early 2011.

For further information please contact Nora Stapleton at 312-980-2933 or your Blackman Kallick representative.

 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.