In Notice 2008-100 (the Notice) issued on October 14, 2008, the Internal Revenue Service (IRS) announced that, pending further guidance, any purchase by the U.S. Treasury Department of equity of qualifying financial institutions under the CPP pursuant to the Emergency Stabilization Act of 2008 will not result in an ownership change for purposes of section 382.
Section 382 of the Internal Revenue Code imposes certain limitations on the use of net operating losses (NOLs) and certain other tax attributes, including deductions for “built-in losses,” of corporations following an “ownership change.” An “ownership change” for purposes of section 382 occurs when the ownership of a “loss corporation” (a corporation with NOLs or built-in losses) by 5 percent shareholders changes by more than 50 percent over a three-year period (or since the last ownership change). This can occur, for example, when ownership of a corporation changes hands pursuant to a stock purchase, a tax-free reorganization or, under certain circumstances, a new issuance of stock.
To ensure that a purchase of stock of a loss corporation by the Treasury (directly or via option exercise) under the CPP does not result in an ownership change under section 382 for the loss corporation, Notice 2008-100 provides the following general rules:
(1) The Treasury’s purchase of shares of a loss corporation pursuant to the CPP will not be treated as increasing the Treasury’s ownership in the loss corporation over its lowest percentage owned on any earlier date.
(2) While shares purchased by the Treasury generally will be treated as outstanding for purposes of determining the ownership of the loss corporation by other 5 percent shareholders, to the extent shares purchased by the Treasury are redeemed, such shares will be treated as if they had never been outstanding.
(3) For all federal income tax purposes, any preferred stock of a loss corporation acquired by the Treasury pursuant to the CPP, whether owned by the Treasury or by another person, will be treated as section “1504(a)(4) stock” (so-called, “pure preferred stock”), and therefore will not be considered to be stock for purposes of determining whether an ownership change has occurred.
(4) Any warrants acquired by the Treasury under the CPP, whether held by the Treasury or another person, will be treated as options of the loss corporation and not as stock.
(5) Any option acquired by the Treasury under the CPP will not be deemed exercised under regulations promulgated under section 382.
(6) Any capital contribution made by the Treasury to a loss corporation pursuant to the CPP will not be considered to have been made as part of a plan, a principal purpose of which was to avoid or increase any section 382 limitation (i.e., the “anti-stuffing” rule of section 382(l)(i) is turned off for Treasury contributions).
Taxpayers may rely on the Notice unless and until there is further guidance issued by the IRS.