Sec. 382 final regs. for small shareholders.

• Author: Fairbanks, Greg A.

On Oct. 22, Treasury issued final regulations under Sec. 382 (T.D. 9638) that should help streamline and facilitate analysis of Sec. 382 issues. The final regulations are largely unchanged from the rules proposed in November 2011 (REG-149625-10) with two notable exceptions discussed below. This author previously discussed the proposed regulations in the February 2012 Tax Clinic (see "Proposed Sec. 382 Regs. Simplify Small Shareholder Treatment," 43 The Tax Adviser 80 (February 2012)). This item provides a brief background on the regulations and then discusses the two substantive changes and some planning opportunities.

Sec. 382 states that if there is an "ownership change," net operating losses (NOLs), and certain other tax attributes, are subject to an annual limitation. The statute and regulations are designed to curb "loss trafficking," in which a buyer and target might otherwise engage in a merger, acquisition, or other transaction with the purpose of using an NOL, but without a business-related motive. The rules are designed to preserve the "neutrality principle," which is the idea that NOLs should not be any more or less valuable in the hands of a corporation's new owners than they were in the hands of the old owners and that tax considerations such as pursuing NOLs should not otherwise interfere with business decisions. The statute and Treasury regulations provide a complex set of rules to effectuate long-standing congressional intent to preserve the neutrality principle and stymie loss trafficking.

The final regulations modify several of these rules to provide easier administration and to avoid unfair results, reflecting a shift away from a more rules-based approach to a "purposive" approach (see Notice 2010-49). The three main provisions in the final regulations are (1) a secondary-transfer exception that helps mitigate unintentional ownership changes that may arise in the ordinary course of stock trading; (2) a small-redemption exception that provides relief from small redemptions of stock during a tax year; and (3) modified rules on first-tier (and higher-tier) entities that ease the rules' administrability by disregarding certain events that may take place at the first-tier (or above) level. The two main changes in the final rules are to the modified rules on first-tier entities and the effective date provision.

The final regulations provide that segregation events are generally ignored for first-tier entities that own 10% or...