Wrong order of events can lead to Sec. 382 problems in an otherwise simple transaction.
Author | Bailine, Richard W. |
Example: Loss corporation X is owned equally by two shareholders, A and B. The shareholders plan to have A's shares redeemed and to sell half of B's shares to a new investor, C. If the redemption does not either precede or occur on the same day as C's acquisition of shares from B, this apparently simple plan will trigger an ownership change and limit the corporation's use of its net operating loss (NOL).
Sec. 382(g) provides that an ownership change will occur if one or more 5% shareholders increase their ownership of stock of a corporation by more than 50 percentage points over their lowest percent owned during the three-year period ending on the date of the increase. If A's stock is redeemed before the sale of B shares to C, B's ownership will increase from 50% to 100%. The increase will only be 50 percentage points (from 50 to 100) over B's lowest ownership during the three-year testing period. Because an ownership change is only triggered by a "more than 50 Percentage point increase" (emphasis added). there will be no ownership change as a result of the redemption. Similarly, on a later date, when B sells half of his stock to C, C will have an increase in ownership of exactly 50 percentage points; again, no ownership change will be triggered. (Note that on this second testing date B will own 50% of X (no increase over B's lowest ownership during the three-year testing period), and thus B's earlier increase in ownership from 50% to 100% is disregarded in computing the total increase in ownership as of the second testing date.)
With a minor alteration in the order of events, however, the outcome changes. If B were to sell half of his stock to C...
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