IRS provides guidance on pre-ownership change capital contributions.

• Author: Cook, Mark G.

Ses. 382 provides limitations on the amount of a pre-ownership change loss that a taxpayer can use to reduce post-change taxable income. Sec. 383 limits the use of pre-change credits and capital losses using the ownership change rules found in Sec. 382.

Generally, the Sec. 382 limitation is approximately equal to the loss corporation's fair market value multiplied by the applicable long-term tax-exempt rate (Sec. 382(b)(1)). This rate is approximately equal to the three-month average federal long-term tax-exempt bond rate (Sec. 382(f)). A provision found in Sec. 382(1)(1) provides that if a capital contribution is made within two years of the ownership change and is part of a plan, a principal purpose of which is to avoid or increase the Sec. 382 limitation, then the increase in the loss corporation's value is disregarded for purposes of the calculation of the Sec. 382 or 383 limitations.

The IRS intends to issue regulations regarding the application of this provision. Until they are issued, the rules set forth in Notice 2008-78 apply and can be relied on by taxpayers. The general rule outlined in the notice is that a capital contribution made in the two-year period before the ownership change will not be presumed to be a part of a plan the principal purpose of which is to avoid or increase the Sec. 382 and 383 limitations.

Just as with most IRS guidance, the Service does its best to provide assistance to taxpayers by first indicating that the determination as to whether the taxpayer made a capital contribution with the intent of increasing the Sec. 382 and 383 limitations is made based on an analysis of all the facts and circumstances surrounding the contribution. In addition, the IRS provides some additional guidance in the form of four safe harbors that may be relied on where it might otherwise be unclear whether such a contribution was made as part of a plan to increase the Sec. 382 and 383 limitations.

The IRS will not consider a taxpayer's capital contribution as part of a plan to increase the limitations if one of the following four safe harbors is satisfied:

1. The contribution is not made by a controlling...