Source: https://www.irs.gov/irb/2014-34_IRB/ar07.html
Timestamp: 2017-02-28 03:42:20
Document Index: 623939229

Matched Legal Cases: ['§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 1', '§ 601', '§ 1', 'art 1']

Internal Revenue Bulletin - August 18, 2014 - TD 9685
Internal Revenue Bulletin: 2014-34 August 18, 2014 TD 9685
This document contains temporary regulations under section 382 of the Internal Revenue Code (Code) that modify the effective
date provision of recently published regulations. These regulations affect corporations whose stock is or was acquired by
the Department of the Treasury (Treasury) pursuant to certain programs under the Emergency Economic Stabilization Act of 2008
(EESA). The text of these temporary regulations also serves as the text of the proposed regulations set forth in the notice
of proposed rulemaking on this subject in the Proposed Rules section in this issue of the Bulletin. This document also modifies the existing regulations to provide a cross-reference to this temporary regulation.
Section 382 of the Code provides that the taxable income of a loss corporation for a year following an ownership change may
be offset by pre-change losses only to the extent of the section 382 limitation for such year. An ownership change occurs
with respect to a corporation if it is a loss corporation on a testing date and, immediately after the close of the testing
date, the percentage of stock of the corporation owned by one or more 5-percent shareholders has increased by more than 50
percentage points over the lowest percentage of stock of such corporation owned by such shareholders at any time during the
Pursuant to section 382(g)(4)(A), shareholders who own less than five percent of a loss corporation are aggregated and treated
as a single 5-percent shareholder (a public group). In addition, new public groups may be created as a result of certain transactions
under the segregation rules in the section 382 regulations. Any new public group is tracked separately from, and in addition
to, the public group or groups that existed previously and is treated as a new 5-percent shareholder that increases its ownership
interest in the loss corporation.
One particular segregation rule, which was imposed by § 1.382–2T(j)(3)(i) of the Temporary Income Tax Regulations until it
was superseded, required segregation when an individual or entity that owned five percent or more of the loss corporation
transferred an interest in the loss corporation to public shareholders. After the sale, stock owned by a public group that
existed immediately before the sale was treated separately from the stock owned by the public group that acquired stock from
the seller. This separate public group was treated as a new 5-percent shareholder. However, this rule was rendered inoperative
by § 1.382–3(j)(13), part of a set of regulations published in TD 9638 [78 FR 62418] on October 22, 2013. Under the new regulation,
no new public group is created on the transfer of stock to the public shareholders; instead, the transferred stock is treated
as acquired proportionately by the public groups existing at the time of the transfer.
Notice 2010–2 (2010–2 IRB 251 (December 16, 2009)) (see § 1.601.601(d)(2)(ii)(B) of this chapter), provides guidance regarding
the application of section 382 of the Code and other provisions of law to corporations whose instruments are acquired and
disposed of by the Treasury pursuant to EESA. Notice 2010–2 relates to instruments acquired by Treasury pursuant to the following
EESA programs: (i) the Capital Purchase Program for publicly-traded issuers; (ii) the Capital Purchase Program for private
issuers; (iii) the Capital Purchase Program for S corporations; (iv) the Targeted Investment Program; (v) the Asset Guarantee
Program; (vi) the Systemically Significant Failing Institutions Program; (vii) the Automotive Industry Financing Program;
and (viii) the Capital Assistance Program for publicly-traded issuers. (These programs are collectively referred to as “Programs”
in that Notice and in this preamble.)
Under Section III(G) of Notice 2010–2, a “Covered Instrument” is an instrument that is acquired by Treasury in exchange for
an instrument that was issued to Treasury under the Programs, or is acquired by Treasury in exchange for another Covered Instrument.
For most purposes of that Notice, a Covered Instrument is treated as though it had been issued directly to Treasury under
Section III(E) of Notice 2010–2 provides the following rule to govern the sale by Treasury of stock of a corporation to public
Section 382 treatment of stock sold by Treasury to public shareholders. If Treasury sells stock that was issued to it pursuant to the Programs (either directly or upon the exercise of a warrant)
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 a sale. A New Public Group’s ownership shall be treated as
having increased to the extent the New Public Group increases its ownership pursuant to any transaction other than a sale
of stock by Treasury, including pursuant to a stock issuance described in section 1.382–3(j)(2) or a redemption (see § 1.382–2T(j)(2)(iii)(C)).
Such stock is considered outstanding for purposes of determining the percentage of stock owned by other 5-percent shareholders
on any testing date, and section 382 (and the regulations thereunder) shall otherwise apply to the New Public Group in the
same manner as with respect to other public groups.
This rule was created to prevent a loss corporation from experiencing an owner shift when Treasury sells stock to public shareholders.
By its terms, the rule relies on the assumption that the stock sale “creates a public group.” As explained earlier in this
preamble, § 1.382–2T(j)(3)(i), before it was superseded, required creation of a new public group when a 5-percent shareholder
sold stock in a loss corporation to public shareholders. However, under § 1.382–3(j)(13) as now in effect, such a transfer
does not create a new public group.
The IRS and Treasury are concerned that the elimination of the segregation rule described earlier in this preamble may have
unintentionally rendered inoperative the rule in Notice 2010–2 that protects a loss corporation from an owner shift when Treasury
sells stock that it held pursuant to the Programs to public shareholders. To prevent this result, the temporary regulation
modifies the effective date rule of TD 9638 to except from the changes to the segregation rules in that regulation the sale
by the Treasury Department to public shareholders of any “Program Instrument” (an instrument issued pursuant to a Program
or a Covered Instrument). As a result, a sale of stock by Treasury to the public will create a public group, and the rule
of Section III(E) of Notice 2010–2 will continue to apply as intended. This provision will only affect the sale of a Program
Instrument by the Treasury Department and will not affect the application of the segregation rule changes in TD 9638 to any
other transactions involving stock of the corporations that participated in the Programs.
These regulations are necessary to provide corporations with immediate guidance regarding the continuing effect of Notice
2010–2 in light of the change to the segregation rules provided by TD 9638. Because of the need for immediate guidance, the
IRS and the Treasury Department are issuing temporary regulations which are effective immediately.
It has also been determined that this temporary regulation is not a significant regulatory action as defined in Executive
Order 12866, as supplemented by Executive Order 13563. Therefore, a regulatory assessment is not required. For the application
of the Regulatory Flexibility Act (5 U.S.C. chapter 6), refer to the Special Analysis section of the preamble of the cross-referenced
notice of proposed rulemaking published in this issue of the Bulletin. Pursuant to section 7805(f) of the Code, these regulations have been submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on their impact on small business.
4, 1992. However, paragraphs (j)(11)(ii) and (j)(13) through (j)(15) of this section and Examples 5 through 13 of paragraph (j)(16) of this section apply to testing dates occurring on or after October 22, 2013, other than with respect
to the sale of a Program Instrument by the Treasury Department. For purposes of this paragraph (j)(17), a Program Instrument
is an instrument issued pursuant to a Program, as defined in Internal Revenue Service Notice 2010–2 (2010–2 IRB 251 (December
16, 2009)) (see § 601.601(a)(2)(ii)(B) of this chapter), or a Covered Instrument, as defined in that Notice. Taxpayers may
apply paragraphs (j)(11)(ii) and (j)(13) through (j)(15) of this section and Examples 5 through 13 of paragraph (j)(16) of this section in their entirety (other than with respect to a sale of a Program Instrument by the
Treasury Department) to all testing dates that are included in a testing period beginning before and ending on or after October
22, 2013. However, the provisions described in the preceding sentence may not be applied to any date on or before the date
of any ownership change that occurred before October 22, 2013, under the regulations in effect before October 22, 2013, and
they may not be applied as described in the preceding sentence if such application would result in an ownership change occurring
on a date before October 22, 2013, that did not occur under the regulations in effect before October 22, 2013. See § 1.382–3(j)(14)(ii)
and (iii), as contained in 26 CFR part 1 revised as of April 1, 1994 for the application of paragraph (j)(10) to stock issued
on the exercise of certain options exercised on or after November 4, 1992, and for an election to apply paragraphs (j)(1)
through (12) retroactively to certain issuances and deemed issuances of stock occurring in taxable years prior to November
(Filed by the Office of the Federal Register on July 30, 2014, 8:45 a.m., and published in the issue of the Federal Register
for July 31, 2014, 79 F.R. 44280)