IRS issues guidance on Sec. 382 for corporations in the capital purchase program.

• Author: Levy, Marc D.

The IRS has issued guidance (Notice 2008-100) on the application of Sec. 382 to loss corporations whose instruments Treasury acquires pursuant to the Capital Purchase Program (CPP) under the Emergency Economic Stabilization Act of 2008, P.L. 110-343. The IRS intends to issue regulations on the application of Sec. 382 under the CPP, but taxpayers may rely on the guidance in Notice 2008-100 until further guidance is issued. Any contrary guidance will be prospective only.

Sec. 382 limits the amount of a corporation's taxable income in a postchange year that may be offset by prechange losses. The event separating a prechange year from a postchange year is known as an ownership change. An ownership change occurs for a loss corporation on a testing date if, immediately after the close of the testing date, the percentage of the corporation's stock owned by one or more 5% shareholders has increased by more than 50 percentage points over the lowest percentage of the corporation's stock owned by such shareholder(s) at any time during the testing period (Temp. Regs. Sec. 1.382-2T(a)(1)).

For purposes of the ownership change test, Notice 2008-100 provides that if Treasury acquires shares of a loss corporation's stock under the CPP, the ownership represented by those shares on any date on which they are held by Treasury will not cause any increase in Treasury's ownership in the loss corporation for purposes of Sec. 382.

However, for purposes of determining the percentage of loss corporation stock owned by other 5% shareholders on a testing date, the shares held by Treasury generally are considered outstanding.

A special rule for redemptions provides that when shifts in ownership by a 5% shareholder are measured on a testing date occurring after the loss corporation redeems shares of its stock held by Treasury that were acquired under the CPP, the redeemed shares are treated as if they had never been outstanding.

Preferred stock of a loss corporation acquired by Treasury is treated as stock described in Sec...