[Federal Register Volume 79, Number 147 (Thursday, July 31, 2014)]
[Rules and Regulations]
[Pages 44280-44282]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-17832]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9685]
RIN 1545-BM18
Segregation Rule Effective Date
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final and temporary regulations.
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SUMMARY: 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 Federal Register. This
document also modifies the existing regulations to provide a cross-
reference to this temporary regulation.
DATES: Effective Date: These regulations are effective on July 31,
2014.
Applicability Date: For dates of applicability, see section 1.382-
3T(j)(17).
FOR FURTHER INFORMATION CONTACT: Stephen R. Cleary, (202) 317-5353 (not
a toll-free number).
SUPPLEMENTARY INFORMATION:
[[Page 44281]]
Background
Section 382
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 testing
period.
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 Sec. 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 Sec. 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 Sec.
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 the Programs.
Section III(E) of Notice 2010-2 provides the following rule to
govern the sale by Treasury of stock of a corporation to public
shareholders:
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 Sec. 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, Sec. 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 Sec.
1.382-3(j)(13) as now in effect, such a transfer does not create a new
public group.
Explanation of Provision
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.
Special Analyses
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 Federal Register. 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.
Drafting Information
The principal author of these regulations is Stephen R. Cleary of
the
[[Page 44282]]
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.
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 1.382-3T 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 by revising paragraph (j)(17) to
read as follows:
Sec. 1.382-3 Definitions and rules relating to a 5-percent
shareholder.
* * * * *
(j) * * *
(17) Effective/applicability date. [Reserved]. For further
guidance, see Sec. 1.382-3T(j)(17).
* * * * *
0
Par. 3. Section 1.382-3T is added to read as follows:
Sec. 1.382-3T Definitions and rules relating to a 5-percent
shareholder (temporary).
(a) through (j)(16) [Reserved]. For further guidance see Sec.
1.382-3(a) through (j)(16).
(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 (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 Sec.
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 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 stock occurring in taxable
years prior to November 4, 1992.
(18) Expiration date. This section 1.382-3T expires on or before
July 28, 2017.
John Dalrymple,
Deputy Commissioner for Services and Enforcement.
Approved: July 18, 2014.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2014-17832 Filed 7-30-14; 8:45 am]
BILLING CODE 4830-01-P