Interpreting SEC schedules 13D and 13G for sec. 382 purposes.

• Author: Fairbanks, Greg A.

Sec. 382 requires a taxpayer corporation to track the ownership shifts among "5% shareholders." If the positive shifts among such shareholders should exceed 50% over the lowest percentage of stock held by such shareholders within the applicable testing period, the result is an ownership change that will limit the taxpayer's ability to use its net operating losses (NOLs) and other attributes after that ownership change. The determination of what constitutes a 5% shareholder and how they are tracked is governed by a complex set of Treasury regulations. For Sec. 382 purposes, the 5% ownership threshold for tracking is concerned with economic ownership (which person holds the rights to dividends, proceeds on liquidation, etc.).

Public Versus Privately Held Corporations

The regulations under Sec. 382 provide a number of simplifying conventions and assumptions to enable taxpayers to comply with the mandates of Sec. 382 without the process becoming exceedingly cumbersome. However, there is a natural difference between a privately held corporation and one that is publicly traded. In the case of a privately held corporation, the taxpayer ought to have actual knowledge of all shareholders on all testing dates when Sec. 382 consequences need to be determined. This knowledge will typically be in the form of a stock registry or stock ledger. Thus, when determining 5% shareholders of a privately held corporation, the taxpayer will typically be able to rely on actual knowledge, and the simplifying conventions and assumptions are available mostly to further help the taxpayer.

However, in the case of a publicly traded corporation, the taxpayer will likely not have that information. If the taxpayer is an SEC registrant, the SEC filing rules generally will require any person who acquires more than 5% of the beneficial ownership of stock to file an SEC Schedule 13D, Statement of Beneficial Ownership, or 13G, Short Form Statement of Beneficial Ownership, as appropriate. Temp. Regs. Sec. 1.382-2T(k)(1) allows a taxpayer to rely on the existence or absence of the Schedule 13D and 13G filings on testing dates to establish those persons who have a direct ownership interest of 5% or more. This provision ostensibly simplifies the process for the taxpayer, who can turn to an established source for information on the company's ownership. However, the SEC filings are concerned with beneficial ownership, while Sec. 382 tracks changes in economic ownership. Although these...