[Federal Register Volume 78, Number 204 (Tuesday, October 22, 2013)]
[Rules and Regulations]
[Pages 62418-62426]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-24538]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9638]
RIN 1545-BK03
Application of the Segregation Rules to Small Shareholders
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations.
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SUMMARY: This document contains final regulations under section 382 of
the Internal Revenue Code (Code). These regulations provide guidance
regarding the application of the segregation rules to public groups of
shareholders in determining owner shifts and ownership changes under
section 382 of the Code. These regulations affect corporations.
DATES: Effective date: These regulations are effective on October 22,
2013.
Applicability date: For dates of applicability, see Sec. 1.382-
3(j)(17).
FOR FURTHER INFORMATION CONTACT: Stephen R. Cleary, (202) 622-7750, or
Marie C. Milnes-Vasquez, (202) 622-7530 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Background
Section 382 imposes a limitation on a corporation's use of net
operating loss carryovers and certain other attributes following a
change in ownership of the corporation (loss corporation). A loss
corporation has an ownership change if the percentage of stock of a
loss corporation that is owned by one or more 5-percent shareholders
has increased by more than 50 percentage points over the lowest
percentage of stock of the loss corporation owned by such shareholders
at any time during the testing period (generally, a three-year period).
Pursuant to section 382(g)(4)(A), individual shareholders who own less
than five percent of a loss corporation are aggregated and treated as a
single 5-percent shareholder (a public group).
The regulations extend the public group concept to situations in
which a loss corporation is owned by one or more entities, as defined
in Sec. 1.382-3(a) (generally, partnerships, corporations, estates,
and trusts). If an entity directly or indirectly owns five percent or
more of the loss corporation, that entity has its own public group if
its owners who are not 5-percent shareholders own, in the aggregate,
five percent or more of the loss corporation. An entity that owns a
five-percent or more direct interest in a loss corporation at any time
during a testing period is a ``first tier entity,'' and a ``higher-tier
entity'' is any entity owning a five-percent or more direct interest in
a first tier entity or any other higher tier entity at any time during
a testing period. (Such entities are referred to as 5-Percent Entities
in this preamble.)
The application of the segregation rules results in the creation of
a new public group in addition to the one (or more) that existed
previously. That new group is treated as a new 5-percent shareholder
that increases its ownership interest in the loss corporation.
The segregation rules apply to transfers of loss corporation stock
by an individual 5-percent shareholder to public shareholders and a 5-
Percent Entity's transfer of loss corporation stock to public
shareholders. In addition, the current segregation rules, subject to
the cash issuance and small issuance exceptions (described in this
preamble), treat issuances of stock under section 1032, redemptions,
and redemption-like transactions as segregation events.
[[Page 62419]]
Generally, the small issuance exception exempts the total amount of
stock issued during a taxable year to the extent it does not exceed 10
percent of the total value of the corporation's outstanding stock at
the beginning of the taxable year or 10 percent of the class of stock
issued and outstanding at the beginning of the taxable year (the 10-
percent limitation). However, the small issuance exception does not
apply to any issuance of stock that, by itself, exceeds the 10-percent
limitation. If stock is issued solely for cash, the cash issuance
exception exempts a percentage of the total stock issued equal to 50
percent of the aggregate percentage ownership interest of the public
groups of the corporation immediately before the issuance. If the small
issuance exception excludes only a portion of a stock issuance, the
cash issuance exception may apply to the portion not excluded under the
small issuance exception.
Notice 2010-49, 2010-27 IRB. 10, invited public comment relating to
possible modifications to the regulations under section 382 regarding
the treatment of shareholders who are not 5-percent shareholders (Small
Shareholders). See Sec. 601.601(d)(2)(ii)(b). On November 23, 2011,
the IRS and the Treasury Department published a notice of proposed
rulemaking in the Federal Register (REG-149625-10, 2012-2 IRB 279;76 FR
72362-01) containing proposed regulations (proposed regulations) that,
if finalized, would provide relief in certain cases from the
segregation rules of the current regulations under section 382.
Summary of Proposed Regulations
The proposed regulations provide exceptions, in addition to those
in the current regulations, that would exempt from the segregation
rules certain transactions involving the stock of loss corporations and
5-Percent Entities. The preamble to the proposed regulations explains
that these additional exceptions are intended to reduce tax
administration and compliance burdens with respect to transactions that
do not bear indicia of loss trafficking, and thus do not implicate the
policies underlying section 382.
A. Secondary Transfer Exception
The proposed regulations generally would render the segregation
rules inoperative with respect to transfers of loss corporation stock
to Small Shareholders by 5-Percent Entities or individuals who are 5-
percent shareholders. In these cases, the stock transferred will be
treated as being acquired proportionately by the public groups existing
at the time of the transfer. This rule also applies to transfers of
ownership interests in 5-Percent Entities to public owners and to 5-
percent owners who are not 5-percent shareholders.
B. Small Redemption Exception
The proposed regulations provide an exception that would exempt
small redemptions of the stock of a loss corporation from the
segregation rules (small redemption exception) that is based upon the
10-percent limitation of the small issuance exception in the current
regulations. The small redemption exception would annually exempt from
the segregation rules, at the loss corporation's option, either
redemptions of loss corporation stock equal to 10 percent of the total
value of the loss corporation's stock at the beginning of the taxable
year, or redemptions of loss corporation stock of up to 10 percent of
the number of shares of the redeemed class of loss corporation stock
outstanding at the beginning of the taxable year. Pursuant to this
exception, each public group existing immediately before the redemption
would be treated as redeeming its proportionate share of exempted
stock.
C. General Exception to Segregation Rules for 5-Percent Entities
Under the proposed regulations, the segregation rules would not
apply to certain transactions involving a 5-Percent Entity (general
exception). Under the general exception, the segregation rules would
not apply if, on the date of the transaction at issue, (i) the 5-
Percent Entity owns 10 percent or less (by value) of all the
outstanding stock of the loss corporation (ownership limitation), and
(ii) the direct or indirect investment in the stock of the loss
corporation does not exceed 25 percent of the 5-Percent Entity's gross
assets (asset threshold). For purposes of the asset threshold, the 5-
Percent Entity's cash and cash items within the meaning of section
382(h)(3)(B)(ii) would not be taken into account.
The preamble to the proposed regulations describes the purpose of
the general exception:
The IRS and the Treasury Department believe that the proposal
strikes an appropriate balance between reducing complexity and
safeguarding section 382 policies. The proposal will enable loss
corporations to disregard indirect changes in its ownership that
may, under the current regulations, require burdensome information
gathering and may unnecessarily impede the loss corporation's
ability to reorganize its affairs. At the same time, however, the
proposal imposes criteria that protect the government's interests.
The asset threshold makes it unlikely that the loss corporation's
attributes motivate transactions in the equity of 5-Percent
Entities. Additionally, like the small issuance exception and the
relief for redemptions that appears elsewhere in this proposal, the
ownership limitation makes it unlikely that transactions among Small
Shareholders one or more tiers removed from the loss corporation
implicate loss trafficking concerns. * * *
Summary of Comments and Explanation of Provisions
Comments were received in response to the proposed regulations. A
public hearing was not requested, and none was held. The comments
generally supported the provisions of the proposed regulations, but
requested a number of revisions. After consideration of all the
comments, the proposed regulations are adopted as amended by this
Treasury decision. In general, the final regulations follow the
approach of the proposed regulations, with some revisions. The more
significant comments and revisions are discussed in this section.
A. Secondary Transfer Segregation Rule
The proposed regulations contain a clarification of the application
of Sec. 1.382-2T(j)(3) of the current regulations (secondary transfer
segregation rule). Under the secondary transfer segregation rule, in
general, the segregation rules apply to secondary public transfers of
loss corporation stock (that is, transfers of loss corporation stock
from 5-percent shareholders or first tier entities to public
shareholders). Section 1.382-2T(j)(3) of the current regulations
further provides that the ``principles'' of the foregoing rule apply to
``transactions in which an ownership interest in a higher tier entity
that owns five percent or more of the loss corporation (determined
without regard to [Sec. 1.382-2T(h)(i)(A)]) or a first tier entity is
transferred to a public owner or a 5-percent owner who is not a 5-
percent shareholder.'' The IRS and the Treasury Department became aware
that it is unclear whether the secondary transfer segregation rule
applies to transfers of higher tier entity stock by a transferor that
does not indirectly own five percent or more in the relevant loss
corporation. New Sec. 1.382-3(i) of the proposed regulations would
clarify that the secondary transfer segregation rule applies to a
transfer of higher tier entity stock only if the seller indirectly owns
five percent or more of the loss corporation.
After further considering the interaction between Sec. 1.382-3(i)
and the secondary transfer exception of Sec. 1.382-3(j)(13) of the
proposed regulations, the
[[Page 62420]]
IRS and the Treasury Department have concluded that it is not necessary
to retain a stand-alone rule clarifying the operation of the secondary
transfer segregation rule in the final regulations because the
secondary transfer exception eliminates all of the segregation rules of
Sec. 1.382-2T(j)(3) with respect to all secondary transfers occurring
after the regulations are published as final regulations. However, the
substance of the clarification contained in Sec. 1.382-3(i) of the
proposed regulations has been incorporated into the final version of
the secondary transfer exception of Sec. 1.382-3(j)(13) to confirm
that the segregation rules, and therefore the secondary transfer
exception, apply to secondary transfers of stock of a loss corporation
or 5-Percent Entity only if the transferor indirectly owns 5-percent of
the loss corporation. In addition, the IRS will not challenge
application of the clarification contained in Sec. 1.382-3(i) of the
proposed regulations to transfers occurring on dates before October 22,
2013.
B. Small Redemption Exception
Two commenters requested that the small redemption exception be
expanded to exempt redemptions of up to 25 percent of the total value
of stock or number of shares of a class of stock. The commenters argued
that, because redemptions do not inject new capital into a loss
corporation but rather contract the corporation's capital, the
regulations should allow a more generous exemption from the segregation
rules for redemptions than for stock issuances.
After consideration of the comments, the IRS and the Treasury
Department have determined that the ceiling on the small redemption
exception should remain at 10 percent. As discussed in greater detail
in the preamble to the proposed regulations, the provisions of the
proposed regulations were intended to reduce tax administration and
compliance burdens with respect to transactions that do not implicate
the policies of section 382. To that end, occasional redemptions of
stock, which, in the aggregate, represent a small percentage of the
issuer's equity, are unlikely to be used as a device to shift the
ownership of a loss corporation. Accordingly, relief from application
of the segregation rules is appropriate. Raising the ceiling on the
size of redemptions to which the small redemption exception applies to
25 percent could be used to effectuate significant shifts in ownership
contrary to the policies of section 382.
C. Application of Small Issuance and Small Redemption Exceptions to 5-
Percent Entities
Commenters requested that the small redemption exception be
extended to exempt redemptions of the stock of 5-Percent Entities from
the segregation rules. These commenters noted that the secondary
transfer exception provided in the proposed regulations exempts certain
transfers of the stock of 5-Percent Entities from the segregation
rules, as does the small issuance exception in the current regulations.
Additionally, one commenter noted that if the small redemption
exception were extended to redemptions by 5-Percent Entities, guidance
should be provided to supply the baseline against which to measure the
10-percent limitation of the small redemption exception in such cases.
Specifically, the commenter asked for clarification regarding whether
the limitation would be calculated by reference to the stock of the
redeeming corporation, or, alternatively, by reference to the stock of
the loss corporation.
In response to these comments, the final regulations extend the
small redemption exception to exempt redemptions of the stock of 5-
Percent Entities from the segregation rules. Further, the IRS and the
Treasury Department have concluded that the 10-percent limitation of
the small redemption exception should be measured by reference to the
stock of the entity engaging in the redemption. Calculating the 10-
percent limitation by reference to the stock of the redeeming entity
will ensure that this exception, consistent with its intended purpose,
applies only to redemptions that are ``small.'' For example, assume
that a first tier entity, the stock of which has a value of $150, owns
an 8 percent stake in a loss corporation, the stock of which has an
aggregate value of $750. If the 10-percent limitation were applied by
reference to the value of the loss corporation's stock, then the first
tier entity would be permitted to redeem an amount of stock equal to 50
percent of its pre-existing stock (that is, 10 percent of $750 ($75)/
$150) without application of the segregation rules. This result is
inappropriate. Accordingly, these final regulations provide that the
10-percent limitation of the small redemption exception applies by
reference to the value of the entity (or to the classes of stock of the
entity, as the case may be) that is engaging in the redemption.
In the preamble to the proposed regulations, the IRS and the
Treasury Department requested comments as to whether further refinement
of the small issuance exception in the current regulations might be
warranted in the context of any potential expansion of the additional
exceptions proposed therein. As discussed, these final regulations
expand the small redemption exception to apply to redemptions of the
stock of 5-Percent Entities, and provide that the stock of the 5-
Percent Entity engaging in the redemption is the appropriate baseline
for computing the 10-percent limitation for the small redemption
exception in such cases. In comments received in response to the
proposed regulations, one commenter noted that the small issuance
exception in the current regulations applies to issuances of stock of
5-Percent Entities and contains a parallel 10-percent limitation on the
amount of stock issued that qualifies for this exception. Further, the
commenter pointed out that the same question of the appropriate
baseline for applying the 10-percent limitation exists with regard to
the small issuance redemption. The commenter requested that these final
regulations supply clarification with regard to the appropriate
baseline for applying the small issuance exception to issuances of
stock of 5-Percent Entities.
After consideration of this comment, the IRS and the Treasury
Department have determined that the same policy considerations
discussed with regard to the application of the small redemption
exception to 5-Percent Entities exist with regard to the application of
the small issuance exception to 5-Percent Entities. Thus, these final
regulations provide that the 10-percent limitation of the small
issuance exception in the current regulations is calculated by
reference to the same baseline used for the small redemption exception.
Accordingly, these final regulations provide that the 10-percent
limitation for the application of the small issuance exception to
issuances of stock by a 5-Percent Entity is calculated by reference to
the value of the stock of the issuing entity (or to the classes of
stock of that entity, as the case may be).
D. General Exception to Segregation Rules for 5-Percent Entities
Some commenters proposed increasing the ownership limitation for
the general exception from 10 percent to a higher percentage (between
15 and 30 percent) to increase the number of 5-Percent Entities that
would qualify for the general exception to the segregation rules. After
consideration of these comments, the IRS and the Treasury Department
have concluded that it is appropriate for the ownership limitation of
the general exception to remain at 10
[[Page 62421]]
percent in the final regulations. The IRS and the Treasury Department
believe that maintaining the ownership limitation at 10 percent
represents an appropriate balance between reducing administrative and
compliance burdens while protecting against transactions that may raise
loss trafficking concerns. Accordingly, the final regulations retain
the 10-percent ownership limitation.
Several commenters expressed concern that loss corporations would
not be able to verify that a 5-Percent Entity's ownership of loss
corporation stock does not exceed the 25-percent asset threshold.
Although the loss corporation could request such information from the
5-Percent Entity, there is no requirement that the 5-Percent Entity
provide it (and it may be legally obliged not to provide such
information). In response to that concern, some commenters suggested
that a loss corporation should be able to apply the general exception
if it determines in good faith that it has satisfied a duty of inquiry
with regard to satisfaction of the asset threshold by a particular 5-
Percent Entity. In addition, questions were raised whether the asset
threshold could be replaced with an anti-avoidance rule designed to
frustrate abuses that could arise in the absence of the asset
threshold.
The preamble to the proposed regulations explains that the asset
threshold was created to ensure that the segregation rules would
continue to apply to transactions in the stock of 5-Percent Entities
that were motivated by attempts to exploit the attributes of the loss
corporation. In effect, the IRS and the Treasury Department imposed the
combination of the ownership limitation and the asset threshold as the
equivalent of an anti-avoidance rule, though formulated as an objective
test. However, the comments received indicate that the asset threshold,
as presented in the proposed regulations, would prevent the general
exception to the segregation rules from achieving the goal of reducing
complexity while safeguarding section 382 policies.
After consideration of the comments, the IRS and the Treasury
Department have decided to replace the asset threshold test with an
anti-avoidance rule. The anti-avoidance rule provides that the general
exception to the segregation rules does not apply to a transaction
involving an ownership interest in a 5-Percent Entity if the loss
corporation, directly or through one or more persons, has participated
in planning or structuring the transaction with a view to avoid the
application of the segregation rules. This anti-avoidance rule will
more directly address the tax avoidance concerns underlying the asset
threshold included in the proposed regulations while reducing tax
compliance burdens with regard to transactions with low tax avoidance
potential. The existence of the 10-percent ownership limitation will
ensure that the general exception applies only with regard to
transactions involving holders who have relatively small ownership
interests in the loss corporation and, therefore, are unlikely to be
vehicles for avoidance planning. In addition, this anti-avoidance rule
would not be violated in the common situation in which the loss
corporation seeks and obtains (or seeks and cannot obtain) information
about a proposed transaction that would change the ownership of a 5-
Percent Entity, but the loss corporation does not take part in planning
or structuring the transaction.
E. Correction of General Exception Example
Commenters pointed out a technical error in one general exception
example (Example 11 in Sec. 1.382-3(j)(16) of the proposed
regulations) and requested its correction. The commenters pointed out
that the example mistakenly treats an entity as a first tier entity
although its only interest in the loss corporation is preferred stock
meeting the requirements of section 1504(a)(4). The IRS and the
Treasury Department agree that the example is technically flawed
because section 1504(a)(4) stock is disregarded for purposes of
determining ownership shifts. We note that Example 11 assumes a
modified version of the facts of Example 10. Therefore, in order to
correct the illustration of the general exception by Example 11, these
final regulations contain modifications to Examples 10 and 11, which
provide that, in addition to the preferred stock, the shareholder
entity owns sufficient common stock at the outset of the example to be
tracked as a first tier entity.
F. Effective Dates
The proposed regulations provide that the proposed exceptions to
the segregation rules would apply to testing dates occurring on or
after the date the regulations are published as final regulations in
the Federal Register (the Publication Date). Commenters have requested
that the regulations should allow taxpayers to apply the proposed
regulations retroactively. One commenter suggested that taxpayers
should be permitted to apply the proposed regulations retroactively,
regardless of whether such application would reverse a prior ownership
change either in a closed or an open year, provided that taxpayers were
required to revise carryforward schedules consistently with any such
change. (For example, if application of the proposed regulations in a
closed year would reverse an ownership change, the taxpayer would be
required to adjust its carryforward schedule to the extent net
operating losses would have been absorbed in one or more closed years.)
This commenter pointed to the small issuance and cash issuance
exceptions as provisions with a similar effective date. Another
commenter pointed out that the proposed effective date would create
inconsistencies in the treatment of Small Shareholders on testing dates
within a single testing period when the Publication Date occurs during
the testing period. This comment proposed three alternatives that would
allow a loss corporation to consistently apply the new rules to (a)
testing dates on or after the Publication Date; (b) all testing dates
within a testing period that includes the Publication Date; or (c)
testing periods for which all of the testing dates occur after the
Publication Date.
After consideration of the comments, the final regulations do not
permit taxpayers to apply the final regulations to a testing date
before October 22, 2013 if the application of the final regulations
would result in an ownership change that did not occur, or would
reverse an ownership change that did occur, on a date before October
22, 2013 under the regulations then in effect. The IRS and the Treasury
Department believe that, in general, ownership change determinations
from prior periods should remain fixed, and that the interests of tax
administration are not served by permitting taxpayers to choose whether
it is more advantageous to retain an ownership change result from a
prior period or to reverse that result through the application of new
regulations. For this reason, the final regulations retain the general
effective date of the proposed regulations. The final regulations do,
however, permit taxpayers to apply the provisions of the final
regulations in their entirety to all testing dates that are included in
a testing period beginning before and ending on or after October 22,
2013, subject to the limitations that (1) the final regulations may not
be applied to any date on or before the date of any ownership change
that occurred on a date before October 22, 2013 under the regulations
in effect before October 22, 2013, and (2) they may not be applied if
their application would result in an ownership change occurring on a
date before October 22, 2013 that did not
[[Page 62422]]
occur under the regulations in effect before October 22, 2013.
For example, assume that a loss corporation experienced an
ownership change on October 1, 2012, and the current testing period
began on October 2, 2012. Following the publication of the final
regulations on October 22, 2013, the loss corporation wishes to
permissively apply the regulations to all dates of its testing period
that begins before and ends on or after October 22, 2013. The
regulations may be permissively applied beginning on October 2, 2012,
but only if such application does not result in an ownership change
occurring on a date before October 22, 2013 that did not occur under
the regulations in effect during the period before October 22, 2013.
Because the final regulations 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 that date, the final
regulations may not be permissively applied to October 1, 2012, or any
earlier date.
G. Revisions to the Small Issuance and Cash Issuance Exceptions
The preamble to the proposed regulations requested comments as to
whether further refinement of either or both of the small issuance or
cash issuance exceptions might be warranted in the context of any
potential expansion of the exceptions contained in the proposed
regulations. After consideration of the comments received, the IRS and
the Treasury Department believe that no changes to the small issuance
or cash issuance exceptions should be made, other than the
clarification regarding the calculation of the 10-percent limitation
for the small issuance exception.
Comments generally requested increasing the 10-percent limitation
of the small issuance exception. Because the final regulations do not
increase the 10-percent limitation for the small redemption exception,
the IRS and the Treasury Department have determined that the 10-percent
limitation of the small issuance exception should also not be increased
in order to maintain parity with the small redemption exception.
Furthermore, as discussed in the preamble to the proposed regulations,
the IRS and the Treasury Department remain concerned that transactions
infusing new capital into a loss corporation implicate section 382
policies because the capital infusion can accelerate the use of tax
attributes. This is the case even if the new investors are Small
Shareholders, especially in light of the dilutive effect of the cash
issuance exception on owner shifts attributable to capital-raising
transactions. Accordingly, the final regulations do not expand the 10-
percent limitation of the small issuance exception.
Comments also suggested that the cash issuance exception should
apply to issuances of stock for non-cash property, including debt. One
commenter requested that the IRS and the Treasury Department consider
expanding the definition of a ``cash issuance'' to include loss
corporation stock issued in connection with the conversion of a
convertible debt instrument issued by the loss corporation in exchange
for cash. The commenter asserted that no meaningful distinction existed
between loss corporation stock acquired by a Small Shareholder directly
from the loss corporation in exchange for cash and loss corporation
stock acquired as a result of the conversion of a debt instrument that
was issued by the loss corporation in exchange for cash.
In general, the cash issuance exception is based upon an assumption
that there is overlapping ownership between existing public
shareholders and those shareholders who purchase additional stock of a
loss corporation. In recognition of the fact that a loss corporation
cannot establish this overlapping ownership in many cases, the cash
issuance exception mitigates the owner shift that otherwise would
result if the segregation rules were to apply in a manner that
disregards the overlapping ownership that likely exists.
The IRS and the Treasury Department believe that the assumption of
overlapping ownership does not necessarily extend to existing public
shareholders and purchasers of convertible debt or transferors of non-
cash property for stock. Stated differently, persons who lend money to
a loss corporation or persons who transfer non-cash property for stock
in many cases may be different from public shareholders of the loss
corporation. Furthermore, because infusions of capital into the loss
corporation directly implicate the policies of section 382, the IRS and
the Treasury Department believe that the cash issuance exception should
retain its current scope. Accordingly, these final regulations do not
adopt the commenter's proposal.
H. Coordinated Acquisition Rule
The preamble to the proposed regulations requested comments as to
the scope of Sec. 1.382-3(a), which provides, in part, that a group of
persons making a coordinated acquisition of stock can constitute an
entity for purposes of section 382.
Comments were received requesting guidance that would identify
specific situations in which stock purchases would not be treated as a
coordinated acquisition. For example, one commenter asked for guidance
to provide that a loss corporation may rely on the presence or absence
of a filing with the Securities and Exchange Commission as a ``group''
to establish the presence or absence of a coordinated acquisition.
After considering these comments, the IRS and the Treasury Department
believe that further study of this issue is required, and that the
development of a companion notice of proposed rulemaking to address
this issue would significantly delay issuance of these final
regulations. Accordingly, the coordinated acquisition rule is not
addressed contemporaneously with these final regulations, but may be
addressed in future guidance.
Special Analyses
It has been determined that this Treasury decision 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. It is hereby certified that these
regulations will not have a significant economic impact on a
substantial number of small entities. The certification is based on the
fact that this rule would not impose new burdens on small entities and,
in fact, may reduce the recordkeeping burden on small entities.
Therefore, a Regulatory Flexibility Analysis under the Regulatory
Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to
section 7805(f) of the Code, the notice of proposed rulemaking that
preceded this final regulation was submitted to the Chief Counsel for
Advocacy of the Small Business Administration for comment on its impact
on small business, and no comments were received.
Drafting Information
The principal author of these regulations is Stephen R. Cleary of
the Office of Associate Chief Counsel (Corporate). However, other
personnel from the IRS and the Treasury Department participated in
their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
[[Page 62423]]
Adoptions of Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.382-3 also issued under 26 U.S.C. 382(g)(4)(C) and 26
U.S.C. 382(m). * * *
0
Par. 2. Section 1.382-3 is amended as follows:
0
1. Revising paragraph (j) heading and paragraph (j)(1).
0
2. Revising paragraph (j)(11).
0
3. Redesignating paragraph (j)(13) and (14) as (j)(16) and (17).
0
4. Adding new paragraphs (j)(13) through (15).
0
5. Adding new Examples 5, 6, 7, 8, 9, 10, 11, 12, and 13 to newly
redesignated paragraph (j)(16).
0
6. Revising newly redesignated paragraph (j)(17).
The revisions and additions read as follows:
Sec. 1.382-3 Definitions and rules relating to a 5-percent
shareholder.
* * * * *
(j) Modification of the segregation rules of Sec. 1.382-
2T(j)(2)(iii) and (3)--(1) Introduction. This paragraph (j) exempts, in
whole or in part, certain transfers of stock from the segregation rules
of Sec. 1.382-2T(j)(2)(iii) and (3). Terms and nomenclature used in
this paragraph (j), and not otherwise defined herein, have the same
meanings as in section 382 and the regulations issued under section
382.
* * * * *
(11) Application to first tier and higher tier entities--(i) In
general. The principles of paragraphs (j)(1) through (10) and paragraph
(j)(12) apply to issuances of stock by a first tier entity or a higher
tier entity that owns 5 percent or more of the loss corporation's stock
(determined without regard to Sec. 1.382-2T(h)(2)(1)(A)).
(ii) Small issuance limitation. In applying paragraph (j)(2) of
this section to any issuance of stock by a first tier or higher tier
entity, the small issuance limitations of paragraph (j)(2)(iii)(A) and
(B) of this section are computed by reference to the stock value and
the stock classes of the issuing corporation.
* * * * *
(13) Secondary transfer exception. The segregation rules of Sec.
1.382-2T(j)(3)(i) will not apply to the transfer of a direct ownership
interest in the loss corporation by a first tier entity or an
individual that owns five percent or more of the loss corporation to
public shareholders. Instead, each public group existing at the time of
the transfer will be treated under Sec. 1.382-2T(j)(3)(i) as acquiring
its proportionate share of the stock exempted from the application of
Sec. 1.382-2T(j)(3)(i). The segregation rules also will not apply if
an ownership interest in an entity that owns five percent or more of
the loss corporation (determined without regard to the application of
Sec. 1.382-2T(h)(2)(i)(A)) is transferred to a public owner or a 5-
percent owner who is not a 5-percent shareholder of the loss
corporation. Instead, provided that the transferor is either a 5-
percent owner that is a 5-percent shareholder of the loss corporation
or a higher tier entity owning five percent or more of the loss
corporation (determined without regard to the application of section
1.382-2T(h)(2)(i)(A)), each public group of the entity existing at the
time of the transfer is treated under Sec. 1.382-2T(j)(3)(i) as
acquiring its proportionate share of the transferred ownership
interest. With regard to a transferor that is neither a 5-percent
shareholder of the loss corporation nor a higher tier entity owning
five percent or more of the loss corporation (determined without regard
to the application of Sec. 1.382-2T(h)(2)(i)(A)), see generally Sec.
1.382-2T(e)(1)(ii) (disregarding these transactions if the transferee
is not a 5-percent shareholder).
(14) Small redemption exception--(i) In general. Section 1.382-
2T(j)(2)(iii)(C) does not apply to a small redemption (as defined in
paragraph (j)(14)(ii) of this section), except to the extent that the
total amount of stock redeemed in that redemption and all other small
redemptions previously made in the same taxable year (determined in
each case on redemption) exceeds the small redemption limitation. This
paragraph (j)(14) does not apply to a redemption of stock that, by
itself, exceeds the small redemption limitation.
(ii) Small redemption defined. Small redemption means a redemption
of public shareholders by the loss corporation of an amount of stock
not exceeding the small redemption limitation.
(iii) Small redemption limitation--(A) In general. For each taxable
year, the loss corporation may, at its option, apply this paragraph
(j)(14)--
(1) On a corporation-wide basis, in which case the small redemption
limitation is 10 percent of the total value of the loss corporation's
stock outstanding at the beginning of the taxable year (excluding the
value of stock described in section 1504(a)(4)); or
(2) On a class-by-class basis, in which case the small redemption
limitation is 10 percent of the number of shares of the class redeemed
that are outstanding at the beginning of the taxable year.
(B) Class of stock defined. For purposes of this paragraph
(j)(14)(iii), a class of stock includes all stock with the same
material terms.
(C) Adjustments for stock splits and similar transactions.
Appropriate adjustments to the number of shares of a class outstanding
at the beginning of a taxable year must be made to take into account
any stock split, reverse stock split, stock dividend to which section
305(a) applies, recapitalization, or similar transaction occurring
during the taxable year.
(D) Exception. The loss corporation may not apply this paragraph
(j)(14)(iii) on a class-by-class basis if, during the taxable year,
more than one class of stock is redeemed in a single redemption (or in
two or more redemptions that are treated as a single redemption under
paragraph (j)(14)(v) of this section).
(E) Short taxable years. In the case of a taxable year that is less
than 365 days, the small redemption limitation is reduced by
multiplying it by a fraction, the numerator of which is the number of
days in the taxable year, and the denominator of which is 365.
(iv) Proportionate redemption of exempted stock--(A) In general.
Each direct public group that exists immediately before a redemption to
which this paragraph (j)(14) applies is treated as having been redeemed
of its proportionate share of the amount of stock exempted from the
application of Sec. 1.382-2T(j)(2)(iii)(C) under this paragraph
(j)(14).
(B) Actual knowledge of greater redemption. Under the last sentence
of Sec. 1.382-2T(k)(2), the loss corporation may treat direct public
groups existing immediately before a redemption to which this paragraph
(j)(14) applies as having been redeemed of more stock than the amount
determined under paragraph (j)(14)(iv)(A) of this section, but only if
the loss corporation actually knows that the amount redeemed from those
groups in the redemption exceeds the amount so determined.
(v) Certain related redemptions. For purposes of this paragraph
(j)(14), two or more redemptions (including redemptions of stock by
first tier or higher tier entities) are treated as a single redemption
if--
(A) The redemptions occur at approximately the same time pursuant
to the same plan or arrangement; or
[[Page 62424]]
(B) A principal purpose of redeeming the stock in separate
redemptions rather than in a single redemption is to minimize or avoid
an owner shift under the rules of this paragraph (j)(14).
(vi) Certain non-stock ownership interests. As the context may
require, a non-stock ownership interest in an entity other than a
corporation is treated as stock for purposes of this paragraph (j)(14).
(vii) Application to first tier and higher tier entities--(A) In
general. The principles of this paragraph (j)(14) apply to redemptions
of stock by a first tier entity or a higher tier entity that owns 5
percent of the loss corporation stock (determined without regard to
Sec. 1.382-2T(h)(2)(i)(A)).
(B) Small redemption limitation. In applying this paragraph (j)(14)
to any redemption of stock by a first tier or a higher tier entity, the
small redemption limitations of paragraph (j)(14)(iii)(A) of this
section are computed by reference to the stock value and the stock
classes of the redeeming corporation.
(15) Exception for first tier and higher tier entities--(i) In
general. The segregation rules of Sec. 1.382-2T(j)(3)(iii) will not
apply to a transaction involving stock in a first tier or a higher tier
entity if, after taking into account the results of such transaction
and all other transactions occurring on that date, the first tier or
higher tier entity owns 10 percent or less (by value) of all the
outstanding stock (without regard to Sec. 1.382-2(a)(3)) of the loss
corporation.
(ii) Anti-avoidance rule. The rules of paragraph (j)(15)(i) of this
section do not apply to a transaction involving an ownership interest
in a first tier or higher tier entity if the loss corporation, directly
or through one or more persons, has participated in planning or
structuring the transaction with a view to avoiding the application of
the segregation rules. For this purpose, a transaction includes any
event that would result in segregation under Sec. 1.382-2T(j)(3)(iii),
absent the application of this paragraph (j)(15), and any event (for
example, the formation of a holding company) occurring as part of the
same plan that includes the event that would result in segregation
(without the application of this paragraph (j)(15)). Other anti-
avoidance rules continue to be applicable. See, for example, Sec. Sec.
1.382-2T(k)(4) and 1.382-3(a)(1).
(iii) Special rules. If application of paragraph (j)(15)(i) of this
section results in the combination of public groups, then--
(A) The amount of increase in the percentage of stock ownership of
the continuing public group will be the sum of its increase and a
proportionate amount of any increase by any public group that is
combined with the continuing public group (the former public group);
and
(B) The continuing public group's lowest percentage ownership will
be the sum of its lowest percentage ownership and a proportionate
amount of the former public group's lowest percentage ownership.
(iv) Ownership of the loss corporation. In making the determination
under paragraph (j)(15)(i) of this section--
(A) The rules of Sec. 1.382-2T(h)(2) will not apply;
(B) The entity will be treated as owning the loss corporation stock
that it actually owns, and any other loss corporation stock if that
other stock would be attributed to the entity under section 318(a)
(without regard to paragraph (4) thereof) unless an option is treated
as exercised under Sec. 1.382-4(d)); and
(C) The operating rules of paragraph (j)(15)(v) of this section
will apply.
(v) Operating rules. Subject to the principles of Sec. 1.382-
2T(k)(4), a loss corporation may establish the ownership limitation of
paragraph (j)(15)(i) of this section through either--
(A) Actual knowledge; or
(B) Absent actual knowledge to the contrary, the presumptions
regarding stock ownership in Sec. 1.382-2T(k)(1).
(16) Examples. * * *
Example 5. Secondary transfer exception to segregation rules--no
new public group. (i) Facts. L is owned 60 percent by one public
group (Public L1) and 40 percent by another public group
(Public L2). On July 1, 2014, individual A acquires 10
percent of L's stock over a public stock exchange. On December 31,
2014, A sells all of his L stock over a public stock exchange. No
individual or entity acquires as much as five percent of L's stock
as a result of A's disposition of his L stock. On January 3, 2015,
individual B acquires 10 percent of L's stock over a public stock
exchange. On June 30, 2015, B sells all of her L stock over a public
stock exchange. No individual or entity acquires as much as five
percent of L's stock as a result of B's disposition of her L stock.
(ii) Analysis. The dispositions of the L stock by A and B are
not transactions that cause the segregation of L's direct public
groups that exist immediately before the transaction (Public
L1 and Public L2). When A and B sell their
shares to public shareholders over the public stock exchange, the
shares are treated as being reacquired by Public L1 and
Public L2. As a result, Public L1's ownership
interest is treated as increasing from 54 percent to 60 percent
during the testing period, and Public L2's ownership
interest is treated as increasing from 36 percent to 40 percent
during the testing period.
Example 6. Secondary transfer exception--first tier entity. (i)
Facts. L has a single class of common stock outstanding that is
owned 60 percent by a direct public group (Public L) and 40 percent
by P. P is owned 20 percent by individual A and 80 percent by a
direct public group (Public P). On October 6, 2014, A sells 50
percent of his interest in P to B, an individual who is, and
remains, a member of Public P.
(ii) Analysis. P is an entity that owns five percent or more of
L. A is a 5-percent owner of P that is a 5-percent shareholder of L.
Because A's sale of the P stock is to a member of Public P, the
disposition of the P stock by A is not a transaction that causes the
segregation of P's direct public group that exists immediately
before the transaction (Public P). See paragraph (j)(13) of this
section. When A sells his shares to B, the shares are treated as
being acquired by Public P. As a result, Public P's ownership
interest in L is treated as increasing from 32 percent to 36 percent
during the testing period.
Example 7. Small redemption exception. (i) Facts. L is a
calendar year taxpayer. On January 1, 2014, L has 1,060 shares of a
single class of common stock outstanding, all of which are owned by
a single direct public group (Public L). On July 1, 2014, L acquires
60 shares of its stock for cash. On December 31, 2014, in an
unrelated redemption, L acquires 90 more shares of its stock for
cash. Following each redemption, L's stock is owned entirely by
public shareholders. No other changes in the ownership of L's stock
occur prior to December 31, 2014.
(ii) Analysis--(A) July redemption. The July redemption is a
small redemption because the number of shares redeemed (60) does not
exceed 106, the small redemption limitation (10 percent of the
number of common shares outstanding on January 1, 2014). Under
paragraph (j)(14) of this section, the segregation rules of Sec.
1.382-2T(j)(2)(iii)(C) do not apply to the July redemption. Under
paragraph (j)(14)(iv) of this section, Public L is treated as having
all 60 shares redeemed.
(B) December redemption. The December redemption is a small
redemption because the number of shares redeemed (90) does not exceed
106, the small redemption limitation (10 percent of the number of
common shares outstanding on January 1, 2014). However, under paragraph
(j)(14)(i) of this section, only 46 of the 90 shares redeemed are
exempted from the segregation rules of Sec. 1.382-2T(j)(2)(iii)(C)
because the total number of shares of common stock redeemed in the July
and December redemptions exceeds 106, the small redemption limitation,
by 44. Accordingly, under paragraph (j)(14)(iv) of this section, Public
L is treated as having 46 shares redeemed in the December redemption.
Section 1.382-2T(j)(2)(iii)(C) applies to the remaining 44 shares
redeemed. Accordingly, Public L is segregated into two different public
groups immediately before the transaction (and thereafter) so
[[Page 62425]]
that the redeemed interests (Public RL) are treated as part of a public
group that is separate from the ownership interests that are not
redeemed (Public CL). Therefore, as a result of the December
redemption, Public CL's interest in L increases by 4.4 percentage
points (from 95.6 percent (956/1,000) to 100 percent (910/910)) on the
December 31, 2014 testing date. For purposes of determining whether an
ownership change occurs on any subsequent testing date having a testing
period that includes the December redemption, Public CL is treated as a
5-percent shareholder whose percentage ownership interests in L
increased by 4.4 percentage points as a result of such redemption.
Example 8. Segregation rules inapplicable--proportionate amount.
(i) Facts. P1 is a corporation that owns 8 percent of the
stock of L. The remaining L stock (92 percent) is owned by Public L.
P1 is entirely owned by Public P1.
P2 is a corporation owned 90 percent by individual A and
10 percent by a public group (Public P2). On May 22,
2014, P1 merges into P2 with the shareholders
of P1 receiving an amount of P2 stock equal to
25 percent of the value of P2 immediately after the
reorganization. L was owned 92 percent by Public L and 8 percent by
P1 throughout the testing period ending on the date of
the merger.
(ii) Analysis. Assuming L can establish that P2 owns
10 percent or less (by value) of L on May 22, 2014 pursuant to the
operating rules of paragraph (j)(15)(v) of this section, the
segregation rules of Sec. 1.382-2T(j)(3)(iii) will not apply to
segregate P1's direct public group (Public P1)
immediately before the merger from P2's direct public
group (Public P2). Thus, following the merger,
P2 is owned 67.5 percent (90 percent x 75 percent) by A
and 32.5 percent (25 percent + (10 percent x 75 percent)) by Public
P2. Pursuant to paragraph (j)(15)(iii)(B) of this
section, Public P2's lowest percentage of ownership is
the sum of its lowest percentage of ownership (zero) and a
proportionate amount of former Public P1's lowest
ownership percentage of L of 2.6 percent (32.5 percent x 8 percent).
P2 will be treated as having one public group whose
ownership interest in L was 2.6 percent before the merger and
remains 2.6 percent after the merger. Because Public P2
owns less than 5 percent of L, Public P2 is treated as
part of Public L. See Sec. 1.382-2T(j)(1)(iv). Thus, pursuant to
paragraph (j)(15)(iii)(B) of this section, Public L's lowest
ownership percentage of L during the testing period is 94.6 percent.
Example 9. Segregation rules inapplicable--prior increase in
ownership by former public group during testing period. (i) Facts.
The facts are the same as Example 8, except that P1
acquired its 8 percent interest in L during the testing period that
includes the merger.
(ii) Analysis. Pursuant to the rules of paragraph
(j)(15)(iii)(A) of this section, the amount of increase in the
percentage of stock ownership by Public P2 is the sum of
its increase (zero) and a proportionate amount of the increase by
former Public P1 of 2.6 percent (32.5 percent x 8
percent). Pursuant to paragraph (j)(15)(iii)(B) of this section,
Public P2's lowest percentage of ownership is zero,
because both former Public P1 and Public P2
owned no L stock at the beginning of the testing period.
Accordingly, Public P2, the continuing public group, is
treated as having increased its ownership interest by 2.6 percent.
Because Public P2 is treated as part of Public L, Public
L is treated as increasing its ownership interest by 2.6 percent.
Example 10. Ownership limitation based upon fair market value.
(i) Facts. L has one class of common stock and one class of
preferred stock outstanding. The preferred stock is stock within the
meaning of Sec. 1.382-2(a)(3). Before December 23, 2014, a direct
public group (Public L) owns all of the common stock of L. On
December 23, 2014, P purchases all of the preferred stock of L and a
portion of the common stock of L. On the date of purchase, the value
of the L common stock held by P was greater than 5 percent of the
value of L, and the total value of L common and L preferred stock
held by P was less than 10 percent of the value of all stock of L. P
has one class of common stock outstanding, all of which is owned by
a direct public group (Public P). On October 7, 2015, P redeems 30
percent of its single outstanding class of common stock. On the
redemption date of the P stock, due to a decline in the relative
value of the common stock of L, the preferred stock of L owned by P
represents 40 percent of the value of all the outstanding stock of
L. No ownership change of L occurs between December 23, 2014, and
October 7, 2015.
(ii) Analysis. The rules of paragraph (j)(15) of this section do
not apply to the redemption because P owns more than 10 percent of L
(by value) on that date.
Example 11. Ownership limitation--fair market value includes
preferred stock. The facts are the same as in Example 10, except
that the preferred stock is not stock within the meaning of Sec.
1.382-2(a)(3). Although the preferred stock is not stock for the
purpose of determining owner shifts, the value of that stock is
taken into account in computing the 10-percent limitation of
paragraph (j)(15)(i) of this section. Therefore, the results are the
same as in Example 10.
Example 12. Ownership limitation--application of attribution
rules. (i) Facts. Individual A owns all the outstanding stock of X.
A also owns preferred stock in Y that is not stock within the
meaning Sec. 1.382-2(a)(3), which represents 50 percent of the
value of Y. All the Y common stock is owned by public owners. Each
of X and Y own 6 percent of the single class of L stock outstanding.
On October 6, 2014, Y redeems 15 percent of its common stock.
(ii) Analysis. In determining satisfaction of the ownership
limitation of paragraph (j)(15)(i) of this section, the attribution
rules of section 318(a) apply. Pursuant to section 318(a)(2), A is
treated as owning the L stock owned by X. Pursuant to section
318(a)(3), Y is treated as owning the L stock that A indirectly
owns. Because Y's ownership of L exceeds the 10 percent ownership
limitation of paragraph (j)(15)(i) of this section, the rules of
paragraph (j)(15) of this section do not apply.
Example 13. Anti-avoidance rule. (i) Facts. P1 is a
corporation that owns 10 percent of the stock of L. P1 is
owned entirely by a direct public group (Public P). L has had owner
shifts of 45 percentage points in its current testing period.
P1 is planning to merge into P2, a corporation
which has a public group. Advisers to L, upon learning of the
proposed merger, asked the management of P1 for details
of the proposed merger, including the stock ownership of
P2 after P1 merges into P2. After
finding out that information, L or L's advisers did not request any
changes in the planned transaction.
(ii) Analysis. The anti-avoidance rule of paragraph (j)(15)(ii)
of this section does not apply because L did not participate in
planning or structuring the transaction. Pursuant to paragraph
(j)(15)(i) of this section, Sec. 1.382-2T(j)(3)(iii) does not apply
to cause the segregation of P1's public group from
P2's public group.
(17) Effective/applicability date. This paragraph (j) generally
applies to issuances or deemed issuances of stock in taxable years
beginning on or after November 4, 1992. However, paragraphs (j)(11)(ii)
and (j)(13) through (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. Taxpayers may apply paragraphs (j)(11)(ii)
and (j)(13) through (15) of this section and Examples 5 through 13 of
paragraph (j)(16) of this section in their entirety 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 Sec. 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
[[Page 62426]]
stock occurring in taxable years prior to November 4, 1992.
Beth Tucker,
Deputy Commissioner for Operations Support.
Approved: August 19, 2013.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2013-24538 Filed 10-21-13; 8:45 am]
BILLING CODE 4830-01-P