Sec. 382 operating rules: actual knowledge regarding stock ownership.

• Author: Culafi, Spresa

An ownership change under Sec. 382 can have an onerous impact by substantially limiting a loss corporation's ability to utilize its tax attributes, such as net operating loss carryforwards or built-in losses, potentially resulting in increased tax liabilities or even a valuation allowance for GAAP purposes. In the current business environment, increased capital-raising activities by corporations may have the unintended consequence of triggering an ownership change under Sec. 382. However, historically it was more common to encounter Sec. 382 through an equity structure shift such as a merger or acquisition. Letter Ruling 201110006 addresses a proposed transaction in which the taxpayer is involved in such a potential change in ownership.

Background

To identify whether an ownership change has occurred under Sec. 382, a taxpayer must generally determine if there has been more than a 50 percentage point increase in the stock ownership of 5% shareholders during a testing period of up to three years. One of the main challenges in making this determination, other than the complex operating rules provided in the regulations, is the logistical process a taxpayer must go through to obtain stock ownership information and identify 5% shareholders and their ownership percentage throughout the entire testing period. Public taxpayers may rely on applicable public filings with the Securities and Exchange Commission (SEC) (generally, Schedules 13D or 13G (beneficial owner reports)) in identifying any individuals or entities (i.e., a corporation, partnership, or trust) that directly or indirectly are the beneficial owners of at least 5% of the total value of the outstanding stock of the loss corporation, while nonpublic taxpayers may endure a more laborious process.

The regulations also provide mechanisms by which shareholders owning less than 5% of the outstanding stock are combined into public groups, with each public group being treated as a 5% shareholder. To the extent the taxpayer has actual knowledge that a member of one public group is also a member of another public group, it may use such actual knowledge in determining whether an ownership change occurred; however, "actual knowledge" is not a defined term. Letter Ruling 201110006 responds to a taxpayer's request for clarification on what constitutes acceptable actual knowledge and discusses the impact of using actual knowledge of stock ownership under Temp. Regs. Sec. 1.382-2T(k)(2) in determining whether an ownership change has occurred.

Summary of Facts

Letter Ruling 201110006 demonstrates how one loss corporation obtained actual knowledge regarding stock ownership to identify an overlapping public group through various methods, including phone calls and written inquiries. Both the...