Sec. 382 ownership and fluctuation in value.

• Author: Gruidl, Nick

Corporations incurring net operating losses (NOLs) are often in the unenviable position of watching the price of their stock fluctuate drastically. This can occur with a publicly traded corporation or a privately held venture incurring losses and raising capital through numerous capital increases. For a corporation with more than one class of stock, the effects of this stock price fluctuation can play a significant role in determining whether use of the NOLs could become limited as a result of trading and other equity shifts. In the context of applying the new Sec. 6694 more-likely-than-not (MLTN) standard for undisclosed positions, it is apparent that the IRS needs to issue additional guidance for taxpayers.

Background

In an effort to limit loss trafficking, Congress enacted Sec. 382 to limit the use of corporate NOLs following an ownership change. An ownership change is defined generally as a greater than 50% change in the ownership of stock among certain 5% shareholders over a three-year period (Sec. 382(g)). In the event of an ownership change, use of the loss corporation's NOLs and certain built-in losses is limited to the value of the loss corporation multiplied by the adjusted federal long-term tax-exempt rate (Sec. 382(b)).

In determining a shareholder's percentage ownership change, often-overlooked Sec. 382(1)(3)(C) states, "Except as provided in regulations, any change in proportionate ownership which is attributable solely to fluctuations in the relative fair market values of different classes of stock shall not be taken into account." Interestingly, the regulations state that "[t]he determination of the percentage of stock of any corporation owned by any person shall be made on the basis of the relative fair market value of the stock owned by such person to the total fair market value of the outstanding corporation" (Regs. Sec. 1.3822(a)(3)(i)). It is not clear how the regulation affects the application of Sec. 382 (1)(3)(C), and Temp. Regs. Sec. 1.3822T(1) reserves guidance on the issue.

Guidance on Sec. 382(1)(3)(C)

The IRS has issued a series of private letter rulings that, depending on one's perspective, either fill in the gap or further confuse the issue (Letter Rulings 200622011,200520011,200511008, and 200411012). Each ruling makes the following statement with respect to fluctuation in value of classes of stock:

On any testing date, in determining the ownership percentage of any five percent shareholder, the value of such...