[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]



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.


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, 
    Applicability Date: For dates of applicability, see section 1.382-

FOR FURTHER INFORMATION CONTACT: Stephen R. Cleary, (202) 317-5353 (not 
a toll-free number).


[[Page 44281]]


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 
    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 
    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 

    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 
    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 

[[Page 44282]]

Office of Associate Chief Counsel (Corporate). However, other personnel 
from the IRS and the Treasury Department participated in their 

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:


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). * * *

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 

* * * * *
    (j) * * *
    (17) Effective/applicability date. [Reserved]. For further 
guidance, see Sec.  1.382-3T(j)(17).
* * * * *

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]