1. No category

What’s News in Tax
Section 382: Take Notice
Monday, January 25, 2010
by Alla Kashlinskaya and
When the U.S. government bailed out troubled companies, the assistance
Rob Liquerman,
could have triggered tax loss limitation rules. This article provides an update
Washington National Tax
on IRS, Treasury, and congressional guidance issued with respect to, or
concurrently with, the government bailouts and explains how certain
Alla Kashlinskaya is a senior manager
guidance can have a broader application. 1
and Rob Liquerman is a principal with
WNT’s Corporate Group.
Section 382 High-Level Overview
A brief overview is helpful in understanding recent IRS and Treasury guidance on
section 382. In certain circumstances, Congress felt it was inequitable for new
shareholders of a corporation to benefit from losses incurred while the corporation
was owned by other shareholders. Section 382 seeks to prevent “loss trafficking”
by imposing a limitation on the use of a corporation’s net operating losses
(“NOLs”) 2 if the corporation experiences an ownership change. The section 382
limitation restricts utilization of pre-ownership-change NOLs against postownership-change taxable income.
Determining what triggers an ownership change is extremely rule-driven and
complex. 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.” Each of these section 382 terms has its own set of rules,
which are beyond the scope of this article.
1
2
This article has been updated to reflect the issuance of additional IRS guidance
since July 2009. For prior coverage, see an article by the same authors in the
July 10, 2009 issue of KPMG’s What’s News in Tax.
Section 382 and its companion, section 383, could also apply to limit other tax
attributes.
©2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Section 382: Take Notice
page 2
Section 382 Recent Developments
The IRS issued a series of section 382 notices in 2008, 2009, and 2010 that were
sparked by the economic and financial crisis. 3 This article discusses the notices (as
well as related legislative developments) in a mostly chronological order, tracking
the evolution of this guidance in the context of its historical background.
The underlying idea behind most of the bailout-related notices 4 appears to be that
an investment by the U.S. government does not result in NOL trafficking, the
practice section 382 is designed to prevent. Thus, Treasury clarified section 382
for situations when the U.S. government or one of its agencies becomes a
shareholder in a loss corporation. One of the mechanisms the notices use is to
except U.S. government investments from constituting testing dates. The
government’s purchase of stock in a loss corporation would normally trigger a
section 382 testing date. However, if there is no testing date, then there can be no
section 382 ownership change. If there is no section 382 ownership change, then
section 382 will not limit the utilization of pre-change losses.
The IRS also issued two other section 382 notices in late 2008. One notice
(described below, together with its statutory repeal) addressed the treatment of
losses on loans or bad debts by banks. The other notice, which has implications
beyond the government bailouts, addressed the treatment of capital contributions
in determining the amount of the section 382 limitation.
Notice 2008-76: Fannie Mae/Freddie Mac
At first, the IRS addressed a very small subset of loss corporations. Notice 200876, issued September 7, 2008, addresses certain acquisitions by the U.S.
government pursuant to the Housing and Economic Recovery Act of 2008 (the
“Housing Act”). The Housing Act allowed the U.S. government to invest in the
Federal National Mortgage Association (“Fannie Mae”), the Federal Home Loan
Mortgage Corporation (“Freddie Mac”), and the Federal Home Loan Bank system.
Notice 2008-76, sometimes referred to as the “Fannie Mae/Freddie Mac Notice,”
announced that the IRS and Treasury would issue regulations to address how
3
4
The notices rely either explicitly or implicitly on authority provided to Treasury
by section 382(m) to generally prescribe regulations to carry out the purposes
of section 382. In addition, the notices related to the Emergency Economic
Stabilization Act of 2008 (the “Emergency Act”) rely on the authority granted to
Treasury by section 101(c)(5) of the Emergency Act itself. The latest in the
string of notices (Notice 2010-2, released in December 2009) also cites to the
general regulatory authority contained in section 7805(a).
Except Notice 2008-83.
©2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Section 382: Take Notice
page 3
section 382 would apply to Housing Act acquisitions. The regulations would
preclude any date on or after the date on which the United States (or any agency or
instrumentality thereof) acquires either stock 5 or an option to acquire stock in the
loss corporation from being a section 382 “testing date.” The wording of the
notice indicates that after the government’s buy-ins, there would be no section 382
testing dates (even after the government is no longer a shareholder in these loss
corporations) unless and until there is further guidance.
The regulations would generally apply on or after September 7, 2008.
Notice 2008-84: More-Than-50-Percent Interest
The U.S. government did not stop its bailout assistance with the Housing Act. It
next moved on to investing in other loss corporations, furthering the need for more
section 382 guidance.
Notice 2008-84, issued September 26, 2008, addresses certain acquisitions by the
U.S. government that were not covered by Notice 2008-76. These acquisitions
resulted in the government’s becoming a direct or indirect owner of a more-than50-percent interest in a loss corporation. 6 Notice 2008-84 announced that Treasury
and the IRS would issue regulations defining the term “testing date” to exclude
any date as of the close of which the United States directly or indirectly owns a
more-than-50-percent interest in the loss corporation, notwithstanding any other
provision of the Code or the regulations. Thus, the loss corporation would only
have to start tracking its section 382 position on any date as of the close of which
the United States does not directly or indirectly own a more-than-50-percent
interest in the loss corporation. The regulations would generally apply for any tax
year ending on or after September 26, 2008.
Notice 2008-83: Banks
This next notice created significant controversy and was eventually legislatively
overturned, generally prospectively.
5
6
Stock for this purpose includes “plain vanilla preferred stock” described in
section 1504(a)(4).
For this purpose, a “more-than-50-percent interest” is (1) stock of the loss
corporation representing more than 50 percent of the total value of shares of all
classes of stock (excluding preferred stock described in section 1504(a)(4)) or
more than 50 percent of the total combined voting power of all classes of stock
entitled to vote, or (2) an option to acquire such stock.
©2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Section 382: Take Notice
page 4
The Notice
Notice 2008-83, issued October 1, 2008, provided guidance to banks on the
treatment of losses on loans or bad debts. Unlike the first two notices, this
guidance applied with or without government involvement triggering an
ownership change.
As background, in addition to limiting NOLs, section 382 can limit certain
deductions that were “built-in” at the time of the ownership change. Generally, if a
corporation is in a “net unrealized built-in loss position” at the time of the change
(i.e., the fair market value of its assets is less than the tax basis with certain other
adjustments), then such losses or deductions, when recognized within a certain
timeframe, could also be subject to the section 382 limitation. 7
Notice 2008-83 stated that for purposes of section 382(h), any deduction properly
allowed after an ownership change to a bank with respect to losses on loans or bad
debts (including any deduction for a reasonable addition to a reserve for bad debts)
would not be treated as a built-in loss or deduction that is attributable to periods
before the change date. Thus, although the banks would still need to include such
losses into the net unrealized built-in loss calculations, the losses triggered after an
ownership change would not constitute recognized built-in losses (and thus, would
not be subject to a section 382 limitation). The notice applied to corporations that
were banks (as defined in section 581) both immediately before and after the
ownership change date. The banks were allowed to rely on the treatment set forth
in the notice “unless and until there is additional guidance” (i.e., the notice
appeared to apply both prospectively and retrospectively).
The notice drew the ire of Congress. Senator Chuck Grassley, ranking minority
member of the Senate Finance Committee, requested an investigation into the
issuance of the notice. 8
Repeal of Notice 2008-83
The American Recovery and Reinvestment Act of 2009 (the “ARRA”) 9 repealed
Notice 2008-83, generally prospectively, reasoning that Treasury was not
authorized under section 382(m) to provide exemptions or special rules that are
restricted to particular industries or classes of taxpayer. However, ARRA left
7
8
9
I.R.C. § 382(h).
Letter from Senator Chuck Grassley to The Honorable Eric M. Thorson,
Inspector General, U.S. Department of Treasury (Nov. 14, 2008), available at
http://grassley.senate.gov/news/Article.cfm?customel_dataPageID_1502=1810
9#.
Pub. L. No. 111-5, § 1281 (2009).
©2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Section 382: Take Notice
page 5
Notice 2008-83 in effect for any ownership change occurring on or before January
16, 2009. In addition, the notice is in effect for changes occurring after January 16,
2009, if such changes occur (1) pursuant to a written binding contract entered into
on or before January 16, 2009, or (2) pursuant to a written agreement entered into
on or before that date and the agreement was described on or before that date in a
public announcement or in a filing with the SEC required by reason of the
ownership change.
Notice 2008-100: Capital Purchase Program
The next step the U.S. government took in addressing the financial crisis was the
Emergency Economic Stabilization Act of 2008 (the “Emergency Act”). 10 Notice
2008-100, issued October 15, 2008, discussed how section 382 would apply to
loss corporations whose instruments were acquired by Treasury under the
Emergency Act’s Capital Purchase Program (“CPP”). The CPP authorized
Treasury to acquire preferred stock and warrants from qualifying financial
institutions.
Notice 2008-100 was later amplified and superseded by Notice 2009-14, which
was in turn amplified and superseded by Notice 2009-38. Further, Notice 2009-38
was amplified and superseded by Notice 2010-2. Notice 2010-2 is discussed in
detail below. Accordingly, we will not discuss Notice 2008-100, Notice 2009-14,
or Notice 2009-38 in detail.
Notice 2009-14: Capital Purchase Program and Troubled
Asset Relief Program
Notice 2009-14, issued January 30, 2009, announced that Treasury and the IRS
would issue regulations implementing certain rules described in the notice. Notice
2009-14 covers five programs established under the Emergency Act (compared to
Notice 2008-100, which covered only the CPP in general):
•
CPP for publicly traded issuers (Public CPP)
•
CPP for private issuers (Private CPP)
•
CPP for S corporations (S Corp CPP)
•
Targeted Investment Program (TARP TIP)
•
Automotive Industry Financing Program (TARP Auto)
10
Pub. L. No. 110-343 (2008).
©2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Section 382: Take Notice
page 6
Notice 2009-14 amplified and superseded Notice 2008-100 in addressing issues
raised by the U.S. government’s investment pursuant to the Emergency Act.
However, as noted above, Notice 2009-14 was itself amplified and superseded by
Notice 2009-38, which in turn was amplified and superseded by Notice 2010-2.
Notice 2009-38: Treasury Acquisitions under Emergency Act
Programs
Following the issuance of Notice 2009-14, Treasury added several other programs
pursuant to its authority under the Emergency Act. This, plus the need for
additional guidance on existing Emergency Act programs, apparently led the IRS
to issue another section 382 notice. Notice 2009-38, issued April 13, 2009,
provides additional guidance regarding the application of section 382 to
corporations whose instruments are acquired by Treasury pursuant to the
Emergency Act.
Notice 2009-38 expands the number of programs covered by Notice 2009-14 from
five to eight. The three added programs are:
•
Asset Guarantee Program
•
Systemically Significant Failing Institutions Program
•
Capital Assistance Program for publicly traded issuers (TARP CAP)
Notice 2009-38 was amplified and superseded by Notice 2010-2.
Notice 2010-2: Treasury Acquisitions and Dispositions under
Emergency Act Programs
Notice 2010-2, released December 16, 2009, amplified and superseded Notice
2009-38. The primary goal of issuing one more notice appears to be to address the
treatment of the disposition of shares held by Treasury via a public offering.
Otherwise, most of the rules originally outlined in Notice 2009-38 stayed the
same.
The Notice
Notice 2010-2 applies to the same eight programs that were subject to Notice
2009-38. Taxpayers may rely on the rules described in Notice 2010-2 unless and
until additional guidance is issued. Thus, some protection is built into the notice in
case of future contrary guidance.
©2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Section 382: Take Notice
page 7
Notice 2010-2 provides seven rules—Rule A through Rule G 11—outlined below.
The general theme of the guidance appears to be to minimize the impact of the
government’s investment on the corporations’ section 382 positions.
Rule A. Characterization of Instruments (Other than Warrants) Issued to Treasury
Program
Treatment of instruments for all federal
income tax purposes
All programs except TARP
As debt if denominated as such, or as section
CAP
1504(a)(4) stock if denominated as preferred
stock whether held by Treasury or by
subsequent holders. (Section 1504(a)(4) stock is
generally not included in section 382 owner shift
calculations.)
Preferred stock will still count as stock for
purposes of section 382(e)(1) determination of
the section 382 limitation.
TARP CAP
Determined by applying general principles of
federal tax law.
Rule B. Characterization of Warrants Issued to Treasury
Program
Treatment of instruments for all federal
income tax purposes
All programs except Private
As an option (and not as stock) whether held by
CPP and S Corp CPP
Treasury or subsequent holders.
Shall not be deemed exercised under section
1.382-4(d)(2) while held by Treasury.
Private CPP
Ownership interest in the underlying stock,
which is treated as section 1504(a)(4) stock.
(Section 1504(a)(4) stock is generally not
included in section 382 owner shift
11
Rules A, B, C, most of Rule D, and Rules F and G closely follow rules in Notice
2009-38.
©2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Section 382: Take Notice
page 8
calculations.)
S Corp CPP
Ownership interest in the underlying
indebtedness.
Rule C. Value-for-Value Exchange
For all federal income tax purposes, any amount received by an issuer in exchange
for instruments issued to Treasury under the programs shall be treated as received,
in its entirety, as consideration for such instruments. This rule addresses concerns
regarding the treatment of any potential overpayment by Treasury.
Rule D. Section 382 Treatment of Stock Acquired by Treasury
This is one of the two core rules of Notice 2010-2. Stock issued to Treasury does
not increase Treasury’s ownership in the issuing corporation. However, Treasury’s
stock is considered outstanding for purposes of calculating ownership of other 5percent shareholders, except as described in the next sentence.
For purposes of measuring shifts in ownership by any 5-percent shareholder on
any testing date on or after the loss corporation redeems Treasury’s stock, the
redeemed stock is treated as if it had never been outstanding. 12
Rule E. Section 382 Treatment of Stock Sold by Treasury to Public
This is the second core rule of the notice, and it constitutes the main difference
between Notice 2009-38 and Notice 2010-2. If Treasury sells stock that was issued
to it pursuant to the Emergency Act programs, and the sale “creates” a public
group (“New Public Group”), the New Public Group’s ownership in the issuing
corporation shall not be considered to have increased solely as a result of such
sale. The New Public Group’s ownership can still be increased as a result of other
transactions, such as issuances of shares treated as issued to public groups or
redemptions of shares held by public groups. Shares held by the New Public
Group are considered outstanding for purposes of determining the percentage
owned by other 5-percent shareholders on any testing date, and section 382
otherwise applies to the New Public Group in the same manner as with respect to
any other public group.
12
This used to be Rule E in Notice 2009-38.
©2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Section 382: Take Notice
page 9
Rule F. Section 382(l)(1) Does Not Apply to Treasury’s Capital Contributions
Taxpayers are instructed to assume that Treasury’s principal purpose was not to
increase or avoid the section 382 limitation of the corporation. Query whether this
rule was necessary following the issuance of Notice 2008-78, which is discussed
below.
Rule G. Certain Exchanges
This rule applies to covered instruments. Covered instruments include instruments
received in future exchanges of new instruments for instruments originally issued
under the programs (including exchanges of the instruments received in such
exchanges).
Rule
Application to Covered Instruments
Rules A and B
Do not apply. Instead, general principles of
federal tax law determine the characterization of
all covered instruments.
Rules C, D, E, and F
Apply to covered instruments.
Notice 2010-2: Examples
The following examples created by the authors illustrate the application of Notice
2010-2.
Example 1. Upon formation, LossCo 1 had one class of common stock
(100 shares in total) and four shareholders: A owned 40 percent, B owned
35 percent, C owned 10 percent, and Treasury owned 15 percent.
(Treasury investments are generally made into existing corporations; this
and the following example start at formation for simplification purposes.)
A, B, and C are individuals. Treasury purchased shares pursuant to one of
the Emergency Act programs.
On Date 1, A sold all of its stock to B. The result was a 40 percent owner
shift. On Date 2, LossCo 1 redeemed stock held by Treasury, and C sold
©2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Section 382: Take Notice
page 10
one of its shares to a new shareholder. 13 All dates are within the same
testing period.
Formation
Date 1
Date 2
shares
percent
shares
percent
shares
percent
Shareholders
owned
owned
owned
owned
owned
owned
A
40
40%
0
0%
0
0%
B
35
35%
75
75%
75
88%
C
10
10%
10
10%
9
11%
Treasury
15
15%
15
15%
0
0%
New
shareholder
0
0%
0
0%
1
1%
Total
100
100%
100
100%
85
100%
Question: How should the lowest percentage ownership be calculated for B on
Date 2?
On Date 2, B owns 75 shares, or 88 percent of the outstanding shares. To calculate
B’s lowest ownership percentage, without Notice 2010-2, one would take B’s 35
shares owned on formation out of 100 shares outstanding then, resulting in a 35
percent lowest ownership percentage and a 53 percent owner shift for B on Date 3.
However, Notice 2010-2 appears to require that B’s lowest ownership percentage
be determined by taking B’s 35 shares owned on formation out of 85 shares
13
It appears that Date 2 may not constitute a section 382 testing date if the only
event that occurred was a redemption of Treasury shares (i.e., if C, a 5-percent
shareholder, did not also sell a share). Rule D provides that "for purposes of
measuring shifts in ownership by any 5-percent shareholder on any testing date
occurring on or after the date on which an issuing corporation redeems stock
held by Treasury …, the stock so redeemed shall be treated as if it had never
been outstanding.” The definition of the testing date is a date when you need to
measure whether an ownership change has occurred. A loss corporation is
required to determine whether an ownership change has occurred after any
owner shift. Treas. Reg. § 1.382-2(a)(4). An owner shift is "any change in the
ownership of the stock ... that affects the percentage of such stock owned by
any 5% shareholder." Treas. Reg. § 1.382-2T(e)(1).
©2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Section 382: Take Notice
page 11
(disregarding Treasury ownership pursuant to Rule D), resulting in a 41 percent
lowest ownership percentage and a 47 percent owner shift for B on Date 2. A
similar analysis would apply to C’s owner shift on Date 2.
Example 2. Upon formation, LossCo 2 had one class of common stock (100 shares
in total) and two shareholders: A (an individual) owned 85 percent, and Treasury
owned 15 percent. Treasury purchased shares pursuant to one of the Emergency
Act programs. On Date 1, Treasury sold 10 shares to a New Public Group, LossCo
2 redeemed five of Treasury’s shares, and A sold one of its shares to a new
shareholder. 14 Formation and Date 1 are within the same testing period.
Formation
Date 1
Shareholders
shares
owned
percent
owned
shares
owned
percent
owned
A
85
85%
84
88%
Treasury
15
15%
0
0%
New Public
Group
0
0%
10
11%
1
1%
95
100%
New
shareholder
Total
100
100%
Question: How should LossCo 2 compute shareholder increases in ownership for
purposes of determining whether an ownership change has occurred?
On Date 1, shareholder A owns 88 percent (84 shares out of 95). Absent a special
rule, A’s lowest percentage ownership would have been 85 percent (85 out of 100
at formation). However, pursuant to Rule D, A is treated as owning 89 percent (85
out of 95 shares) on formation. Thus, the owner shift with respect to A is zero.
On Date 1, New Public Group owns 11 percent (10 out of 95 shares). Absent a
special rule, New Public Group would have been considered going from zero to 11
percent on Date 1 contributing 11 percent to the cumulative owner shift. However,
14
Similar to note 10 supra, we do not address here whether the redemption of
shares held by Treasury or, in this case, the additional sale by Treasury to
public does or does not create a testing date.
©2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Section 382: Take Notice
page 12
pursuant to Rule E, New Public Group should not contribute to the shift in
ownership on Date 1 because its ownership is attributable solely to the sale of
shares by Treasury.
No special rules apply to the new shareholder. Thus, it is treated as increasing its
ownership from zero to one percent on Date 1 (contributing one percent to the
cumulative owner shift on Date 1).
Assistance from Foreign Governments
One issue that Treasury has not been willing to issue guidance on is whether it is
appropriate to extend relief similar to that in Notice 2010-2 to foreign banks or
other financial institutions receiving capital infusions from foreign governments. 15
Without such guidance, any investment by foreign governments, whether made in
the spirit of assisting troubled financial institutions or otherwise, appears to be
subject to the general rules of section 382.
New Section 382(n)
One item of bailout-related guidance was put into place not by the IRS in a notice,
but by Congress itself. ARRA (signed into law by President Obama on February
17, 2009) created new section 382(n), which removes the section 382 limitation in
certain very limited circumstances.
As a starting point, two requirements must be met. First, the ownership change
must occur under a restructuring plan required under a loan agreement or a
commitment for a line of credit entered into with Treasury under the Emergency
Act. Second, the restructuring plan must be intended to result in a rationalization
of the costs, capitalization, and capacity of the manufacturing workforce of, and
suppliers to, the taxpayer and its subsidiaries. Furthermore, section 382(n) does
not remove the section 382 loss limitation if, immediately after the ownership
change, any person (other than a voluntary employee benefit association) owns
stock possessing 50 percent or more of the total voting power or total value of the
stock of the loss corporation. 16 Section 382(n) applies to ownership changes after
February 17, 2009.
15
16
For a proposal by the Institute of International Bankers on the extension of the
application of Notice 2008-100, see Bankers List Transactions They Would Like
Covered Under Proposed Economic Stabilization Relief, 2008 TNT 233-5 (Dec.
3, 2008) and Banker’s Group Seeks Relief From NOL Limitations For Non-U.S.
Financial Institutions Under Recent Guidance, 2010 TNT 8-13 (Jan. 13, 2010) .
Certain related persons are treated as a single person for purposes of section
382(n).
©2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Section 382: Take Notice
page 13
Notice 2008-78: Section 382(l)(1) Capital Contributions
Although not directly related to the bailout of troubled corporations, Notice 200878 does appear to relate to the amelioration of several potentially punitive aspects
of section 382.
Notice 2008-78, issued September 26, 2008, addresses the treatment of capital
contributions pursuant to section 382(l)(1). This is a significant development in
the section 382 area that may not have received appropriate attention given the
focus on Notice 2008-83.
Background
Section 382(l)(1) generally decreases the value of the loss corporation on the
change date by any capital contributions received as part of a plan whose principal
purpose is to avoid or increase a section 382 limitation. 17 The perceived abuse
addressed by section 382(l)(1) is shareholders “stuffing” the loss corporation with
assets to increase the section 382 limitation. The somewhat draconian aspect of the
rule required that any capital contributions made during the two-year period
ending on the change date be treated as part of such plan “except as provided in
the regulations.” 18 Although Congress passed this provision as part of the Tax
Reform Act of 1986 (“TRA of 1986”), Treasury has not issued any regulations as
of the date of this article.
Absent regulations, taxpayers and the IRS have looked to the legislative history
for relief. The House report to the TRA of 1986 authorized Treasury to issue
regulations for a de minimis exception allowing “small contributions made in the
ordinary course of the loss corporation’s business (i.e., to fund operating
expenses).” 19
The conference report to TRA of 1986 went further:
The conferees intend that the regulations will generally except (i) capital
contributions received on the formation of a loss corporation (not
accompanied by the incorporation of assets with a net unrealized built-in
loss) where an ownership change occurs within two years of
incorporation, (ii) capital contributions received before the first year from
which there is an NOL or excess credit carryforward (or in which a net
unrealized built-in loss arose), and (iii) capital contributions made to
17
18
19
I.R.C. § 382(l)(1)(A).
I.R.C. § 382(l)(1)(B).
H. R. Rep. No. 99-426, at 269 (1985).
©2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Section 382: Take Notice
page 14
continue basic operations of the corporation’s business (e.g., to meet the
monthly payroll or fund other operating expenses of the loss
corporation). 20
Although no regulations have been issued, the IRS has issued private letter rulings
(“PLRs”) and a technical advice memorandum (“TAMs”) treating certain
contributions within the two-year window as not subject to section 382(l)(1),
relying explicitly or implicitly on the legislative history. 21
Notice 2008-78
Taxpayers finally received some certainty in this area, at least prospectively, with
the issuance of Notice 2008-78. The notice provides rules and safe harbors for
determining whether the value of a capital contribution within the two-year
presumption period in section 382(l)(1)(B) is excluded from the section 382
limitation.
The notice announces that Treasury and the IRS intend to issue regulations under
section 382(l)(1) and that, pending the issuance of further guidance, taxpayers may
generally rely on Notice 2008-78. Because the notice instructs taxpayers to rely on
it with respect to ownership changes that occur in any tax year ending on or after
September 26, 2008, the scope of section 382(l)(1) for prior periods remains
unclear.
First, the notice pronounces that, notwithstanding section 382(l)(1)(B), a capital
contribution shall not be presumed to be part of a plan whose principal purpose is
to avoid or increase a section 382 limitation (a “Plan”) solely as a result of having
been made during the two-year period ending on the change date. 22
Second, the notice does not allow a capital contribution to reduce the value of the
loss corporation unless the contribution is part of a Plan. A facts-andcircumstances test is used to determine whether a capital contribution was part of a
Plan. These two provisions are a turnaround from the historical application of
20
21
22
H. R. Conf. Rep. No. 99-841, at II-189 (1986).
See P.L.R. 200814004; P.L.R. 200730003; P.L.R. 9835027; P.L.R. 9706014;
P.L.R. 9630038; P.L.R. 9541019; P.L.R. 9508035; T.A.M. 9332004. PLRs and
TAMs are taxpayer-specific rulings furnished by the IRS National Office in
response to requests made by taxpayers and/or IRS officials. It is important to
note that, pursuant to 26 U.S.C. section 6110(k)(3), such items cannot be used
or cited as precedent.
Some of the terms and definitions in the notice are borrowed from section
1.355-7 with certain modifications. A related party is determined based on
section 267(b) with certain modifications.
©2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Section 382: Take Notice
page 15
section 382(l)(1). Prior to Notice 2008-78, taxpayers had to start with the
presumption that any capital contribution within the two-year period prior to the
change was made as part of a Plan. The notice now applies a general facts-andcircumstances test. However, a word of caution is warranted: It is important to
note the notice’s use of the word “solely.” The notice states that a capital
contribution will not be presumed to be part of a Plan solely because it is made
within two years of a change date. It does not say the timing of a capital
contribution is not one of the factors to be taken into account when considering the
facts and circumstances. In fact, IRS attorneys have unofficially noted on bar
panels (in which one of the authors participated) that the IRS is considering
circumstances when the timing of capital contributions may generally play a more
important role in making this determination. One potential factor they have noted
is the relationship of the capital contribution to the ownership change, such as
whether the capital contribution caused the ownership change. Another question
that arose on these panels that may be worthy of clarification in final regulations
relates to who must have the Plan.
Third, the notice allows taxpayers to use four safe harbors. Notably, according to
the notice, the fact that a contribution is not described in a safe harbor does not
constitute evidence of a Plan.
Notice 2008-78 Safe Harbors
Safe Harbor A:
•
A contribution is made by a person who is neither a controlling shareholder
(determined immediately before the contribution) nor a related party;
•
No more than 20 percent of the total value of the loss corporation’s
outstanding stock is issued in connection with the contribution;
•
There was no agreement, understanding, arrangement, or substantial
negotiations at the time of the contribution regarding a transaction that would
result in an ownership change, and
•
The ownership change occurs more than six months after the contribution.
Safe Harbor B:
•
The contribution is made:
- by a related party but no more than 10 percent of the total value of the loss
corporation’s stock is issued in connection with the contribution, or
©2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Section 382: Take Notice
page 16
- by an unrelated party;
•
There was no agreement, understanding, arrangement, or substantial
negotiations at the time of the contribution regarding a transaction that would
result in an ownership change; and
•
The ownership change occurs more than one year after the contribution.
Safe Harbor C:
The contribution is made in exchange for stock issued in connection with the
performance of services, or stock acquired by a retirement plan, under the terms
and conditions of section 1.355-7(d)(8) or (9), respectively.
Safe Harbor D:
•
The contribution is received on the formation of a loss corporation (not
accompanied by the incorporation of assets with a net unrealized built-in
loss); or
•
The contribution is received before the first year from which there is a
carryforward of a net operating loss, capital loss, excess credit, or excess
foreign taxes (or in which a net unrealized built-in loss arose).
Avoidance of Duplication with Section 382(l)(4)
In addition to providing guidance on application of section 382(l)(1), Notice 200878 also addresses the potential for double counting in situations when both section
382(l)(1) and section 382(l)(4) (dealing with substantial nonbusiness assets) could
apply. The notice prevents this duplicate reduction in value. Although tax
practitioners may have applied this rule (i.e., to prevent this duplicate reduction in
value) prior to the issuance of the notice, it is helpful to have clarifying guidance
on this subject.
Conclusion
Recent section 382 guidance has significantly changed the landscape in this area
of tax law. Taxpayers need to be mindful of these changes in their tax planning
and analysis.
©2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.
Section 382: Take Notice
page 17
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR
WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A
CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE
OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY
TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING
TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
The information contained herein is of a general nature and based on authorities that are subject to
change. Applicability of the information to specific situations should be determined through consultation
with your tax adviser.
This article represents the views of the author(s) only, and does not necessarily represent the views or
professional advice of KPMG LLP.
Unless otherwise indicated, references to section or sections in this article are to the Internal Revenue
Code of 1986 (the “Code”), as most recently amended, or to the U.S. Treasury Department regulations, as
most recently adopted or amended.
©2010 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.