Final Sec. 382 Regs. on distributions from qualified trusts.

• Author: Fairbanks, Greg A.

While Sec. 382 is extremely complicated, there has been a level of certitude for practitioners that, if all the provisions applicable to a Sec. 382 analysis are properly taken into account (no easy feat), a taxpayer should know its cumulative ownership shift when determining whether it has experienced an "ownership change" under Sec. 382(g). However, recently enacted final regulations reshape this theory when distributions from certain qualified trusts (mainly pensions) are involved.

See. 382 Generally

Sec. 382 limits a corporation's ability to use its net operating losses (NOLs) and other attributes after an ownership change. An ownership change occurs when there is a greater-than-50% shift in ownership among "5% shareholders." The determination of 5% shareholders allows for the computation of cumulative ownership shifts. A cumulative computation of the ownership shift is required on each "testing date." The regulations specify various events (e.g., stock issuances, redemptions and stock sales) that give rise to a testing date. Ordinarily, on each testing date, a taxpayer either has an ownership change (in which case the process is stopped, a limit is determined and the analysis is reset) or merely notes the cumulative shift and moves on to the next testing date.

On June 28, 2006, TD 9269 was released, finalizing regulations under Regs. Sec. 1.382-10, which provides special rules on distributions from qualified trusts. The reason for the new regulations was a concern that, absent a special rule, a distribution from such a trust could cause an ownership change. The regulations apply only to qualified trusts as defined in Sec. 401(a) (i.e., pensions and profit-sharing and stock-bonus plans).

The general rule under Sec. 382(1)(3) is that, when determining stock ownership for Sec. 382 purposes, the Sec. 318 constructive ownership rules apply. Thus, if 10 individuals each own 10% of a partnership, which in turn owns 50% of the loss corporation being analyzed, the attribution rules will treat each individual as a 5% owner (and shareholder) of the loss corporation for Sec. 382 purposes; see Sec. 318(a)(2)(A). If the partnership were to dissolve and distribute its assets, there would be no ownership-shift effect with respect to each such individual, because Sec. 382 has already acknowledged them as 5% shareholders.

Trusts: This holds true for most trusts as well. However, the attribution rules explicitly do not apply to trusts described under Sec...