[Code of Federal Regulations]
[Title 26, Volume 4]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.382-2T]
[Page 454-490]
TITLE 26--INTERNAL REVENUE
CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY
(CONTINUED)
PART 1_INCOME TAXES--Table of Contents
Sec. 1.382-2T Definition of ownership change under section 382, as
amended by the Tax Reform Act of 1986 (temporary).
(a) Ownership change--(1) In general. A corporation is a new loss
corporation and thus subject to limitation under section 382 only if an
ownership change has occurred with respect to such corporation. An
ownership change occurs with respect to a corporation if it is a loss
corporation on a testing date and, immediately after the close of the
testing date, the percentage of stock of the corporation owned by one or
more 5-percent shareholders has increased by more than 50 percentage
points over the lowest percentage of stock of such corporation owned by
such shareholders at any time during the testing period. See paragraph
(a)(2)(i) of this section for the definition of testing date. See
paragraph (d) of this section for the definition of testing period. See
Sec. 1.382-2(a)(1) and paragraph (f)(3) of
[[Page 455]]
this section for the respective definition of loss corporation and new
loss corporation. See paragraph (g) of this section for the definition
of 5-percent shareholder. See section 383 and Sec. 1.383-1 for rules
relating to loss corporations that have an ownership change and have
capital loss carryovers, excess foreign taxes carried over under section
904(c), carryovers of general business credits under section 39, or
unused minimum tax credits under section 53.
(2) Events requiring a determination of whether an ownership change
has occurred--(i) Testing dates prior to November 5, 1992. Except as
otherwise provided in this paragraph (a)(2)(i), a loss corporation is
required to determine whether an ownership change has occurred
immediately after any owner shift, any equity structure shift, or any
transaction in which an option with respect to stock of the loss
corporation is--
(A) Transferred to (or by) a 5-percent shareholder (or a person who
would be 5-percent shareholder if the option were treated as exercised),
or
(B) Issued by the loss corporation, a first tier entity, or a higher
tier entity that owns five percent or more of the loss corporation
(determined without regard to the application of paragraph (h)(2)(i)(A)
of this section). Notwithstanding the preceding sentence, any transfer
of stock of the loss corporation (or an option with respect to such
stock) in any of the circumstances described in section 382(l)(3)(B), or
any equity structure shift that is not also an owner shift, is not an
event that requires the loss corporation to make a determination of
whether an ownership change has occurred. For purposes of this section,
each date on which a loss corporation is required to make a
determination of whether an ownership change has occurred is referred to
as a testing date, all computations of increases in percentage ownership
are to be made as of the close of the testing date, and any transactions
described in this paragraph (a)(2)(i) that occur on that date are
treated as occurring simultaneously at the close of the testing date.
See paragraphs (e)(1) and (2) of this section for the respective
definitions of owner shift and equity structure shift. See paragraphs
(f)(9) and (14) of this section for the respective definitions of first
tier entity and higher tier entity. See paragraph (m)(4)(vii) of this
section for special rules regarding the effective date of the provisions
of this paragraph (a)(2)(i).
(ii) Information statement required. A loss corporation must file a
statement with its income tax return for each taxable year that it is a
loss corporation in which an owner shift, equity structure shift or
other transaction described in paragraph (a)(2)(i) of this section
occurs. The statement must--
(A) Indicate whether any testing dates occurred during the taxable
year;
(B) Identify each testing date, if any, on which an ownership change
occurred;
(C) Identify the testing date, if any, that occurred during and
closest to the end of each of the three month periods ending on March
31, June 30, September 30 and December 31 during the taxable year,
regardless of whether an ownership change occurred on the testing date,
(D) Identify each 5-percent shareholder on each such testing date;
(E) State the percentage ownership of the stock of the loss
corporation for each 5-percent shareholder as of each such testing date
and the increase, if any, in such ownership during the testing period;
and
(F) Disclose the extent to which the loss corporation relied upon
the presumptions regarding stock ownership under paragraph (k)(i) of
this section to determine whether an ownership change occurred on any
identified testing date.
See Sec. 1.383-1(k) and paragraph (m)(4)(v) of this section for
transitional rules regarding the filing of information statements.
(iii) Records to be maintained by loss corporation. A loss
corporation shall keep such records as are necessary to determine: (A)
The identity of its 5-percent shareholders, (B) the percentage of its
stock owned by each such 5-percent shareholder, and (C) whether the
section 382 limitation is applicable. Such records shall be retained so
long as they may be material in the administration of any internal
revenue law.
[[Page 456]]
(b) Nomenclature and assumptions. For purposes of the example in
this section--
(1) L is a loss corporation, and, if there is more than one loss
corporation, they are designated as L1, L2,
L3, etc.
(2) P is a corporation that is not a loss corporation, and, if there
is more than one such corporation, they are designated as P1,
P2, P3, etc.
(3) HC is a corporation whose assets consist solely of the stock of
other corporations.
(4) E is an entity other than a corporation (e.g., a partnership),
and, if there is more than one such entity, they are designated as
E1, E2, E3, etc.
(5) Unless otherwise stated--
(i) A, B, C, D, AA, BB, CC, and DD are unrelated individuals who own
interests in corporations or other entities only to the extent expressly
stated,
(ii) All corporations have one class of stock outstanding and each
share of stock has the same fair market value as each other share,
(iii) The capital structure of the loss corporation and its business
do not change over time, and
(iv) The rules of paragraphs (k)(2) and (4) of this section are not
applicable.
(6) Public L represents a group of unrelated individuals and
entities that own direct (and not indirect) stock ownership interests in
loss corporation L, each of whom owns less than five percent of the
stock of the loss corporation, and, if there is more than one loss
corporation, such groups are designated as Public L1, Public
L2, Public L3, etc.
(7) Public P represents a group of unrelated individuals and
entities that own direct (and not indirect) stock ownership interests in
corporation P, each of whom owns less than five percent of the stock of
the corporation, and, if there is more than one corporation, such groups
are designated as Public P1, P2, P3,
etc.
(8) Public E represents a group of unrelated individuals and
entities that own direct (and not indirect) ownership interests in
entity E, each of whom owns less than five percent of the entity, and,
if there is more than one entity, such groups are designated as Public
E1, Public E2, Public E3, etc.
(c) Computing the amount of increases in percentage ownership--(1)
In general. In order to determine whether an ownership change has
occurred on a testing date, the loss corporation must identify each 5-
percent shareholder whose percentage of stock ownership in the loss
corporation immediately after the close of the testing date has
increased, compared to such shareholder's lowest percentage of stock
ownership in such corporation at any time during the testing period. The
amount of the increase in the percentage of stock ownership in the loss
corporation of each 5-percent shareholder must be computed separately by
comparing the percentage ownership of each such 5-percent shareholder
immediately after the close of the testing date to such shareholder's
lowest percentage ownership at any time during the testing period. Each
such increase in the percentage ownership of a 5-percent shareholder is
then added together with any other such increases of other 5-percent
shareholders to determine whether an ownership change has occurred.
Because only those 5-percent shareholders whose percentages of stock
ownership have increased are taken into account, a 5-percent shareholder
is disregarded if his percentage of stock ownership, immediately after
the close of the testing date, has decreased (or has remained the same),
compared to his lowest percentage ownership interest on any previous
date during the testing period.
(2) Example.
Example. (i) A and B each own 40 percent of the outstanding L stock.
The remaining 20 percent of the L stock is owned by 100 unrelated
individuals, none of whom own as much as five percent of L stock
(``Public L''). C negotiates with A and B to purchase all their stock in
L.
(ii) The acquisitions from both A and B are completed on September
13, 1990. C's acquisition of 80 percent of L stock results in an
ownership change because C's percentage ownership has increased by 80
percentage points as of the testing date, compared to his lowest
percentage ownership in L at any time during the testing period (0
percent).
(3) Related and unrelated increases in percentage stock ownership.
The determination whether an ownership change has occurred is made
without regard to
[[Page 457]]
whether the changes in stock ownership of the loss corporation (by one
or more 5-percent shareholders) result from related or unrelated events.
(4) Example.
Example. (i) L has outstanding 200 shares of common stock. A, B and
C respectively own 100, 50 and 50 shares of the L stock. On January 2,
1988, A sells 60 shares of L stock to B. Thus, B's percentage ownership
interest in L increases by 30 percentage points, from 50 shares to 110
shares. On January 1, 1989, A purchases C's entire interest in L. Thus,
A's percentage ownership interest in L increases by 25 percentage
points, compared to his lowest percentage ownership interest in L, from
40 shares immediately following the January 2, 1988 sale to B to 90
shares. Even though A's ownership interest in L as of January 1, 1989
has decreased, compared to his 50 percent ownership interest at the
beginning of the testing period, A is a 5-percent shareholder who must
be taken into account for purposes of the computation required under
paragraph (c)(1) of this section because his interest in L on that
testing date (45 percent) has increased, compared to his lowest
percentage ownership interest in L at any time during the testing period
(20 percent following the sale to B).
(ii) Accordingly, although A and B jointly have increased their
aggregate total ownership interest in L between January 2, 1988 and
January 1, 1989 by only 25 percentage points (i.e., the total ownership
interest in L held by A and B at all times is not less than a 75 percent
interest), the total of their separate increases in the percentage stock
ownership of L, compared to their respective lowest percentage ownership
interests at any time during the testing period, is 55 percentage
points. Thus, an ownership change occurs as a result of A's acquisition
of L stock on January 1, 1989.
(d) Testing period--(1) In general. Except as otherwise provided in
paragraphs (d) and (m) of this section, the testing period for any
testing date is the three-year period ending on the testing date. See
paragraph (a)(2)(i) of this section for the definition of testing date.
(2) Effect of a prior ownership change. Following an ownership
change, the testing period for determining whether a subsequent
ownership change has occurred shall begin no earlier than the first day
following the change date of the most recent ownership change. See
paragraph (f)(19) of this section for the definition of change date.
(3) Commencement of the testing period--(i) In general. Except as
otherwise provided in paragraph (d)(3)(ii) of this section, the testing
period for any loss corporation shall not begin before the earlier of
the first day of either--
(A) The first taxable year from which there is a loss or excess
credit carryforward to the first taxable year ending after the testing
date, or
(B) The taxable year in which the testing date occurs.
(ii) Exception for corporations with net unrealized built-in loss.
Paragraph (d)(3)(i) of this section shall not apply if the corporation
has a net unrealized built-in loss (determined after application of
section 382(h)(3)(B)) on the testing date, unless the loss corporation
establishes the taxable year in which the net unrealized built-in loss
first accrued.
In that event, the testing period shall not begin before the earlier
of--
(A) The first day of the taxable year in which the net unrealized
built-in loss first accrued, or
(B) The day described in paragraph (d)(3)(i) of this section. See
section 382(h) for the definition of net unrealized built-in loss.
(4) Disregarding testing dates. Any testing date that occurs before
the beginning of the testing period shall be disregarded for purposes of
this section.
(5) Example.
Example. (i) A owns all 100 outstanding shares of L stock. A sells
40 shares to B on January 1, 1988. C purchases 20 shares of L stock from
A on July 1, 1991. In determining if an ownership change occurs on the
July 1, 1991 testing date, B's acquisition of L stock is disregarded
because it occurred before the testing period that ends on such testing
date. Thus, B's ownership interest in L does not increase during the
testing period, and no ownership change results from C's acquisition.
(ii) The facts are the same as in (i), except that throughout the
period during which B negotiated his stock purchase transaction with A,
B knew that C intended to attempt to acquire a significant stock
interest in L. Also, B and C have been partners in a number of
significant business ventures. The result is the same as in (i).
(e) Owner shift and equity structure shift--(1) Owner shift--(i)
Defined. For purposes of this section, an owner shift is any change in
the ownership of the stock of a loss corporation that affects
[[Page 458]]
the percentage of such stock owned by any 5-percent shareholder. See
paragraph (g) of this section for the definition of a 5-percent
shareholder. An owner shift includes, but is not limited to, the
following transactions:
(A) A purchase of disposition of loss corporation stock by a 5-
percent shareholder,
(B) A section 351 exchange that affects the percentage of stock
owned by a 5-percent shareholder,
(C) A redemption or a recapitalization that affects the percentage
of stock owned by a 5-percent shareholder,
(D) An issuance of loss corporation stock that affects the
percentage of stock owned by a 5-percent shareholder, and
(E) An equity structure shift that affects the percentage of stock
owned by a 5-percent shareholder.
(ii) Transactions between persons who are not 5-percent shareholders
disregarded. Transfers of loss corporation stock between persons who are
not 5-percent shareholders of such corporation (and between members of
separate public groups resulting from the application of the segregation
rules of paragraphs (j)(2) and (3)(iii) of this section) are not owner
shifts and thus are not taken into account. See paragraph (h)(4)(xi) of
this section for a similar rule applicable to transfers of options.
(iii) Examples.
Example (1). A has owned all 1000 shares of outstanding L stock for
more than three years. On June 15, 1988, A sells 300 of his L shares to
B. This transaction is an owner shift. No other 5-percent shareholder
has increased his percentage ownership of L stock during the testing
period. Thus, the owner shift resulting from B's acquisition does not
result in an ownership change, because B has increased his stock
ownership in L by only 30 percentage points.
Example (2). The facts are the same as in Example (1). In addition,
on June 15, 1989, L issues 100 shares to each of C, D and AA. The stock
issuance is an owner shift. The transaction, however, does not result in
an ownership change, because B, C, D and AA (the 5-percent shareholders
whose stock ownership has increased as of the testing date, compared to
any other time during the testing period) have increased their
percentage of stock ownership in L by a total of only 46.2 percentage
points during the testing period (by 23.1 percentage points [300 shares/
1300 shares] for B, and 7.7 percentage points [100 shares/1300 shares]
for each of C, D and AA).
Example (3). All 1000 shares of L stock are owned by a group of 100
unrelated individuals, none of whom own as much as five percent of L
stock (``Public L''). Several of the members of Public L sell their L
stock, amounting to a 30 percent ownership interest in L, to B on June
15, 1988. The sale of stock to B is an owner shift. Between June 16,
1988 and June 15, 1989, each of the remaining individuals in Public L
sells his stock to another person who is not a 5-percent shareholder.
Under paragraph (e)(1)(ii) of this section, trading activity among the
members of Public L is disregarded and does not result in an owner
shift. On June 15, 1989, L issues 100 shares to each of C, D and AA. The
only sale transactions by members of Public L that are taken into
account in determining whether an ownership change occurs on June 15,
1989 are the sales to B on June 15, 1988. Because B, C, D and AA
together have increased their percentage ownership of L stock as a
result of B's purchase and the stock issuance by an amount not in excess
of 50 percentage points during the testing period ending on June 15,
1988, an ownership change does not occur on that date.
Example (4). The facts are the same as in Example (2). In addition,
on December 15, 1989, L redeems 200 of the L shares from A. The
redemption is an owner shift that results in an ownership change,
because B, C, D and AA are 5-percent shareholders whose percentage
ownership of L increase by a total of 54.6 percentage points during the
testing period (by 27.3 percentage points [300 shares/1100 shares] for B
and 9.1 percentage points [100 shares/1100 shares] for each of C, D and
AA).
Example (5). L is owned entirely by 10,000 unrelated shareholders,
none of whom owns as much as five percent of the stock of L (``Public
L''). Accordingly, Public L is L's only 5-percent shareholder. See
paragraph (j)(1) of this section. There are one million shares of common
stock outstanding. On December 1, 1988, L issues two million new shares
of its common stock to members of the public, none of whom owned any L
stock prior to the issuance. Following the public offering, no
shareholder of L owns, directly or indirectly, five percent or more of L
stock. Under paragraph (j)(2) of this section, however, all of the newly
issued stock is treated as acquired by a 5-percent shareholder (``Public
NL'') that is unrelated to Public L. Therefore, the public offering
constitutes an owner shift that results in an ownership change because
Public NL's percentage of stock ownership in L increased by 66\2/3\
percentage points (two million shares acquired in the public offering/
three million shares outstanding following the offering) over its lowest
percentage ownership during
[[Page 459]]
the testing period (0 percent prior to the offering).
Example (6). The facts are the same as in Example (5), except that L
issues only 500,000 new shares of L stock on December 1, 1988, and
Public NL's percentage ownership interest in L increases by only 33\1/3\
percentage points (500,000 shares acquired in the public offering/1.5
million shares outstanding following the offering). During the two years
following December 2, 1988, 14 percent of the stock outstanding on that
date is sold over a public stock exchange. On December 3, 1990, A
purchases five percent of L stock (75,000 shares) over a public stock
exchange. The purchase of five percent of L stock by A is an owner shift
and is presumed to have been made proportionately from Public L and
Public NL under paragraph (j)(1)(vi) of this section. Under paragraph
(e)(1)(ii) of this section, transfers of L stock in transactions not
involving A (i.e., in transactions among or between members of separate
public groups resulting from the application of paragraphs (j)(2) and
(3) of this section) are not taken into account, and do not constitute
owner shifts. (Transfers between members of Public NL and Public L,
which are treated as separate 5-percent shareholders solely by virtue of
paragraph (j)(2) of this section, are disregarded even if L has actual
knowledge of any such transfers.) A and Public NL, the only 5-percent
shareholders whose interests in L have increased during the testing
period, have increased their respective stock ownership by only 36\2/3\
percentage points--five percentage points for A [75,000 shares/1.5
million shares outstanding] and 31\2/3\ percentage points for Public NL
[((500,000 shares issued in the public offering)--(5 percent x 500,000
shares presumed to have been acquired by A)) /1.5 million shares
outstanding]. Accordingly, there is no ownership change with respect to
L notwithstanding that, taking into account the public trading, a change
of more than 50 percentage points in the ultimate beneficial ownership
of L stock occurred during the three-year period ending on the December
3, 1990 testing date.
Example 7. The facts are the same as in Example 6, except that five
percent of the L stock has always been owned by P which, in turn, has
always been owned by Public P. On December 6, 1990, P sells all of its L
stock over a public stock exchange. Although the trading of P stock
among persons that are not 5-percent share-holders (without regard to
the segregation rules of paragraph (j) of this section) are disregarded
under paragraph (e)(1)(ii) of this section, the disposition of the L
stock by P is not disregarded because the L stock is transferred in a
transaction that is subject to paragraph (j)(3)(i) of this section.
(2) Equity structure shift--(i) Tax-free reorganizations. An equity
structure shift is any reorganization within the meaning of section 368
with respect to which the loss corporation is a party to the
reorganization, except that such term does not include a reorganization
described in--
(A) Section 368(a)(1)(D) or (G) unless the requirements of section
354(b)(1) are met, or
(B) Section 368(a)(1)(F).
(ii) Transactions designated under section 382(g)(3)(B) treated as
equity structure shifts. [Reserved]
(iii) Overlap of owner shift and equity structure shift. Any equity
structure shift that affects the percentage of loss corporation stock
owned by a 5-percent shareholder also constitutes an owner shift. See
paragraph (e)(i)(E) of this section
(iv) Examples.
Example (1). A owns all of the stock of L and B owns all of the
stock of P. On October 13, 1988, L merges into P in a reorganization
described in section 368a(1)(A). As a result of the merger, A and B own
25 and 75 percent, respectively, of the stock of P. The merger is an
equity structure shift (and, because it affects the percentage of L
stock owned by 5-percent shareholders, it also constitutes an owner
shift). On the October 13, 1988 testing date, B is a 5-percent
shareholder whose stock ownership in the loss corporation following the
merger has increased by 75 percentage points over his lowest percentage
of stock ownership in L at any time during the testing period (0 percent
prior to the merger). Accordingly, an ownership change occurs as a
result of the merger. P is thus a new loss corporation and L's pre-
change losses are subject to limitation under section 382.
Example (2). (i) A owns 100 percent of L1 stock and B
owns 100 percent of L2 stock. On January 1, 1988,
L1 merges into L2 in a reorganization described in
section 368(a)(1)(A). Immediately after the merger, A and B own 40
percent and 60 percent, respectively, of the L2 stock. There
is an equity structure shift (as well as an owner shift) with respect to
both L1 and L2 on January 1, 1988.
(ii) Because the percentage of L2 stock owned by B
immediately after the merger (60 percent) increases by more than 50
percentage points over the lowest percentage of the stock of
L1 owned by B during the testing period (0 percent prior to
the merger), there is an ownership change with respect to L1.
L2 is a new loss corporation and thus, under Sec. 1.382-
2(a)(1)(iii) of this section, the pre-change losses of L1
must be accounted for
[[Page 460]]
separately by L2 from the losses of L2
(immediately before the ownership change) and are subject to limitation
under section 382. See Sec. 1.382-2(a)(1)(iv) of this section for rules
that end separate accounting for L1's pre-change losses on
any testing date occurring on or after January 29, 1991.
(iii) L2 is a new loss corporation because it is a
successor corporation to L1. There is no ownership change
with respect to L2, however, because A's stock ownership in
L2 increased by only 40 percentage points (to 40 percent)
over the amount owned by A prior to the merger (0 percent). Therefore,
the pre-change losses of L2 are not limited under section 382
as a result of the merger.
Example (3). The result in Example (2) would be the same if
L1 had survived the merger (i.e., L2 merged into
L1) with A and B owning 40 and 60 percent, respectively, of
L1 stock. L1's pre-change losses would be
accounted for separately and limited under section 382 and the pre-
change losses of 2 would be accounted for separately under
Sec. 1.382-2(a)(1)(iii) of this section, but would not be limited under
section 382. See Sec. 1.382-2(a)(1)(ii) for the treatment of
2 following the transaction.
Example (4). The facts are the same as Example (2), except, instead
of acquiring 1 in a merger, 2 acquires all of the
1 stock from A on January 1, 1988, solely in exchange for
stock representing a 40 percent interest in 2, in a
reorganization described in section 368(a)(1)(B). The acquisition of
stock by 2 is an equity structure shift (as well as an owner
shift) with respect to 1 that results in an ownership change
with respect to 1 because the percentage of 1
stock owned by B immediately after the reorganization (60 percent, by
virtue of B's ownership of 2, through the operation of the
constructive ownership rules of paragraph (h) of this section) increases
by more than 50 percentage points over the lowest percentage of
1 stock owned by B at any time during the testing period (0
percent prior to the reorganization). The acquisition also results in an
equity structure shift and an owner shift with respect to 2,
but 2 incurs no ownership change, because A's stock ownership
in 2 increased by only 40 percentage points over the
percentage of 2 stock owned by A prior to the reorganization
(0 percent).
(f) Definitions. For purposes of this section--
(1) Loss corporation. See section 382 and Sec. 1.382-2(a)(1) for
the definition of a loss corporation.
(2) Old loss corporation. The term old loss corporation means any
corporation with respect to which there is an ownership change and that
was a loss corporation immediately before the ownership change.
(3) New loss corporation. The term new loss corporation means a
corporation with respect to which there is an ownership change if,
immediately after such change, it is a loss corporation. A successor
corporation to the corporation described in the preceding sentence also
is a new loss corporation.
(4) Successor corporation. See Sec. 1.382-2(a)(5) for the
definition of successor corporation.
(5) Predecessor corporation. See Sec. 1.382-2(a)(6) for the
definitions of predecessor corporation.
(6) Shift. As the context may require, a shift means an equity
structure shift, an owner shift or both.
(7) Entity. See Sec. 1.382-3(a)(1) for the definition of an entity.
(8) Direct ownership interest. A direct ownership interest means the
interest a person owns in an entity, including a loss corporation,
without regard to the constructive ownership rules of paragraph (h) of
this section.
(9) First tier entity. A first tier entity is an entity that, at any
time during the testing period, owns a five percent or more direct
ownership interest in the loss corporation.
(10) 5-percent owner. A 5-percent owner is any individual that, at
any time during the testing period, owns a five percent or more direct
ownership interest in a first tier entity or a higher tier entity. See
paragraph (g) of this section for rules to determine whether, as a
result of the constructive ownership rules of paragraph (h) of this
section, a 5-percent owner is a 5-percent shareholder.
(11) Public shareholder. A public shareholder is any individual,
entity, or other person with a direct ownership interest in a loss
corporation of less than five percent at all times during the testing
period.
(12) Public owner. A public owner is any individual, entity, or
other person that, at all times during the testing period, owns less
than a five percent direct ownership interest in a first tier entity or
any higher tier entity.
(13) Public group. A public group is a group of individuals,
entities, or other persons each of whom owns, directly or
constructively, less than five percent of the loss corporation. See
paragraphs (g) and (j) of this section for the rules
[[Page 461]]
applicable to identify public groups and to determine whether a public
group is a 5-percent shareholder.
(14) Higher tier entity. A higher tier entity is any entity that, at
any time during the testing period, owns a five percent or more direct
ownership interest in a first tier entity or in any higher tier entity.
(15) Indirect ownership interest. An indirect ownership is an
interest a person owns in an entity determined solely as a result of the
application of the constructive ownership rules of paragraph (h) of this
section and without regard to any direct ownership interest (or other
beneficial ownership interest) in the entity.
(16) Highest tier entity. A highest tier entity is a first tier
entity or a higher tier entity that is not owned, in whole or in part,
at any time during the testing period by a higher tier entity.
(17) Next lower tier entity. The next lower tier entity with respect
to a first tier entity is the loss corporation. The next lower tier
entity with respect to a higher tier entity is any first tier entity or
other higher tier entity in which the higher tier entity owns, at any
time during the testing period, a five percent or more direct ownership
interest.
(18) Stock--(i) In general. For further guidance, see Sec. 1.382-
2(a)(3)(i).
(ii) Treating stock as not stock. Any ownership interest that
otherwise would be treated as stock under paragraph (f)(18)(i) of this
section shall not be treated as stock if--
(A) As of the time of its issuance or transfer to (or by) a 5-
percent shareholder, the likely participation of such interest in future
corporate growth is disproportionately small when compared to the value
of such stock as a proportion of the total value of the outstanding
stock of the corporation,
(B) Treating the interest as not constituting stock would result in
an ownership change, and
(C) The amount of the pre-change loss (determined as if the testing
date were the change and treating the amount of any net unrealized
built-in loss as a pre-change loss) is more than twice the amount
determined by multiplying
(1) the value of the loss corporation (as determined under section
382(e)) on the testing date, by
(2) the long-term tax exempt rate (as defined in section 382(f)) for
the calendar month in which the testing date occurs.
Stock that is not treated as stock under this paragraph (f)(18)(ii),
however, is taken into account for purposes of determining the value of
the loss corporation under section 382(e).
(iii) Treating interests not constituting stock as stock. Any
ownership interest that would not be treated as stock under paragraph
(f)(18)(i) of this section (other than an option that is subject to
paragraph (h)(4) of this section) shall be treated as constituting stock
if--
(A) As of the time of its issuance or transfer to (or by) a 5-
percent shareholder (or a person who would be a 5-percent shareholder if
the interest not constituting stock were treated as stock), such
interest offers a potential significant participation in the growth of
the corporation,
(B) Treating the interest as constituting stock would result in an
ownership change, and
(C) The amount of the pre-change losses (determined as if the
testing date were the change date and treating the amount of any net
unrealized built-in loss as a pre-change loss) is more than twice the
amount determined by multiplying
(1) The value of the loss corporation (as determined under section
382(e)) on the testing date, by
(2) The long-term tax exempt rate (as defined in section 382(f)) for
the calendar month in which the testing date occurs.
An ownership interest is that treated as stock under this paragraph
(f)(18)(iii) is taken into account for purposes of determining the value
of the loss corporation under section 382(e). See Sec. 1.382-4(d)(12)
for rules that apply with respect to options and this paragraph
(f)(18)(iii).
(iv) Stock of the loss corporation. The stock of the loss
corporation means stock of such corporation within the meaning of this
paragraph (f)(18) and, as the
[[Page 462]]
context may require, includes any indirect ownership interest in the
loss corporation.
(19) Change date. The change date means the date on which a shift
(or any other transaction described in paragraph (a)(2)(i) of this
section) that is the last component of an ownership change occurs.
(20) Year. A year, or any multiple thereof, means a 365-day period
(or a 366-day period in the case of a leap year), or any multiple
thereof, unless the year is specifically identified as a taxable year.
(21) Old section 382. ``Old section 382'' means section 382, as in
effect prior to the effective date of section 382 in the Tax Reform Act
of 1986 (the ``Act''), but taking into account section 621(f)(2) of the
Act.
(22) Pre-change loss. See section 382 and Sec. 1.382-2(a)(2) for
the definition of pre-change loss.
(23) Unrelated. Any two persons are unrelated if the constructive
ownership rules of paragraph (h) of this section do not apply to treat
either person as owning stock that is owned, directly or constructively,
by the other person.
(24) Percentage ownership interest. A person's percentage ownership
interest in--
(i) A corporation shall be determined under the rules of this
section that are applicable to the determination of a shareholder's
percentage stock ownership interest in a loss corporation (see
paragraphs (f)(18)(i) through (iii) of this section),
(ii) A partnership shall be equal to the relative fair market value
of such person's partnership interest to the total fair market value of
all outstanding partnership interests, determined without regard to any
limited and preferred partnership interest that is described in
paragraph (h)(2)(ii)(C) of this section,
(iii) A trust shall be determined in accordance with the principles
of section 318(a)(2)(B) for determining the constructive ownership of
stock,
(iv) An estate shall be determined in accordance with the principles
of section 318(a)(2)(A) for determining the constructive ownership of
stock, and
(v) All other entities shall be determined by reference to the
person's relative economic interest in the entity, taking into account
all of the relevant facts and circumstances.
(g) 5-percent shareholder--(1) In general. Subject to the rules of
paragraphs (k)(2) and (4) of this section, the term 5-percent
shareholder means--
(i) An individual that owns, at any time during the testing period,
(A) A direct ownership interest in the stock of the loss corporation
of five percent or more or
(B) An indirect ownership interest in the stock of the loss
corporation of five percent or more by virtue of an ownership interest
in any one first tier entity or higher tier entity,
(ii) A public group, of either a first tier entity or a higher tier
entity, identified as a 5-percent shareholder under paragraph
(j)(1)(iv)(A) or (B) of this section,
(iii) A public group of the loss corporation identified as a 5-
percent shareholder under paragraph (j)(1)(iv)(C) of this section, and
(iv) A public group, of the loss corporation, a first tier entity or
a higher tier entity, identified as a 5-percent shareholder under
paragraph (j)(2) or (3) of this section. An individual owning five
percent or more of the stock of the loss corporation at any time during
the testing period is a 5-percent shareholder notwithstanding that the
individual may own less than five percent of the stock of the loss
corporation on the testing date. See paragraph (g)(5)(i)(B) of this
section for rules permitting a loss corporation to make an adjustment in
cases described in the preceding sentence.
(2) Determination of whether a person is a 5-percent shareholder.
Except as provided in paragraphs (k)(2) and (4) of this section, a
person shall be treated as constructively owning stock of the loss
corporation pursuant to paragraph (h)(2) of this section only if the
loss corporation stock is attributed to such person in the person's
capacity as a higher tier entity or a 5-percent owner of the first tier
entity or higher tier entity from which such stock is attributed. See
paragraph (k)(3) of this section for rules explaining the extent of the
obligation of the loss corporation to determine the identity of its 5-
percent shareholders. Nothing in this
[[Page 463]]
paragraph (g)(2), however, shall limit the attribution of loss
corporation stock under section 318(a)(2) and paragraph (h) of this
section to a public owner.
(3) Determination of the percentage stock ownership interest of a 5-
percent shareholder. Subject to the rules of paragraphs (k)(2) and (4)
of this section, in determining a 5-percent shareholder's percentage
ownership interest in the loss corporation, the shareholder's direct
ownership interest, if any, and each indirect ownership interest that he
may have in the loss corporation in his capacity as a 5-percent owner of
any one first tier entity or higher tier entity, if any, are required to
be added together and taken into account with respect to such
shareholder only to the extent that each such direct or indirect
ownership interest constitutes five percent or more of the stock of the
loss corporation.
(4) Examples.
Example (1) (i) Twenty percent of L stock is owned by A, 10 percent
is owned by P1, 20 percent is owned by E, a joint venture,
and the remaining 50 percent of L stock is owned by Public L.
P1 is owned 15 percent by B and 85 percent by Public
P1. E is owned 30 percent by P2 and 70 percent by
P3, which, in turn, are owned by Public P2 and
Public P3, respectively.
(ii) The ownership structure of L is illustrated by the following
chart:
[GRAPHIC] [TIFF OMITTED] TC17OC91.002
(iii) P1 and E, each of which has a direct ownership
interest in L of five percent or more, are first tier entities. The
shareholders with direct ownership interests in L who individually own
less than five percent of L are public shareholders (Public L). B, who
has a direct ownership interest of five percent or more in
P1, is a 5-percent owner of
[[Page 464]]
P. P2 and P3, and P3, each of which has
a direct ownership interest in a first tier entity (E) of five percent
or more, are higher tier entities with respect to L and, because neither
entity is owned at any time during the testing period by a higher tier
entity, they also are highest tier entities. The shareholders of
P2 and P3 (Public P2 and Public
P3, respectively) are public owners of such entities, because
none of those shareholders own five percent or more of either entity at
any time during the testing period.
(iv) A, who has a 20 percent direct ownership interest in L, is a 5-
percent shareholder of L. Because, by application of the constructive
ownership rules of paragraph (h) of this section, B owns only 1.5
percent of L stock in his capacity as a 5-percent owner of P1
(15 percent ownership of P1 x 10 percent ownership of L), B
is not a 5-percent shareholder of L, even though he is a 5-percent owner
of P1. Under the rules of paragraph (j) of this section,
therefore, B is treated as a member of Public P1. See Example
(3) of paragraph (j)(1)(vi) of this section for a determination of which
public owners and public shareholders constitute public groups that are
treated as 5-percent shareholders of L.
Example (2) (i) The facts are the same as in Example (1), except
that P3 is owned 60 percent by C, 30 percent by
P4, and 10 percent by Public P3. The stock of
P4 is owned by a group of persons (Public P4),
none of whom own five percent or more of the stock of P4.
(ii) The ownership structure of L is illustrated by the following
chart:
[[Page 465]]
[GRAPHIC] [TIFF OMITTED] TC17OC91.003
(iii) The defined terms are the same as in Example (1), except that
P3 is a higher tier entity, not a highest tier entity,
because five percent or more of P3 is, in turn, owned by
another entity (P4 ). P4, which owns five percent
or more of a higher tier entity (P3), also is a higher tier
entity and, because it is not owned at any time during any testing
period by any entity that is also a higher tier entity, P4 is
a highest tier entity. All of the shareholders of P4, none of
which own a direct ownership interest of five percent or more in
P4, are public owners of P4.
(iv) C is a 5-percent owner of P3 and, under the
constructive ownership rules of paragraph (h) of this section, C
indirectly owns 8.4 percent of L ([60 percent ownership of
P3] x [70 percent ownership of E] x [20 percent ownership of
L]), in his capacity as a 5-percent owner of P3. B is a 5-
percent owner of P1 and, under the constructive ownership
rules of paragraph (h) of his section, B owns 1.5 percent of L ([15
percent ownership of P1] x [10 percent ownership of L]) in
his capacity as a 5-percent owner of P1. Therefore, C is a 5-
percent shareholder of L, but B is not a 5-percent shareholder of L,
even though he is a 5-percent owner of P1. See Example (4) of
[[Page 466]]
paragraph (j)(1)(vi) of this section for a determination of which public
owners and public shareholders constitute public groups that are treated
as separate 5-percent shareholders of L.
Example (3) (i) L is owned 30 percent by A and 70 percent by P. A
owns six percent of P stock and the balance (94 percent) is owned
equally by 500 unrelated shareholders (``Public P'').
(ii) A is a 5-percent shareholder because he directly owns 30
percent of L. Even though A is a 5-percent owner of P, A's 4.2 percent
indirect ownership interest in L (six percent ownership interest in P x
P's 70 percent ownership of L) is generally not taken into account in
determining A's ownership interest, because such indirect ownership
interest is less than five percent. Instead, A's 4.2 percent indirect
interest is treated under paragraph (j)(1)(iv) of this section as owned
by Public P. If, however, L has actual knowledge of A's less-than-five-
percent indirect ownership interest in L and is thus subject to
paragraph (k)(2) of this section, or paragraph (k)(4) of this section
otherwise applies, L must take A's total 34.2 percent ownership interest
into account in determining A's percentage ownership in L.
Example (4). The facts are the same as in Example (3), except that A
owns ten percent of P's stock. Because A's indirect ownership interest
in L in his capacity as a 5-percent owner of P is five percent or more,
both A's 30 percent direct ownership interest in L and his seven percent
indirect ownership interest in L (10 percent ownership interest in P x
P's 70 percent ownership of L) are taken into account in determining his
ownership interest in L, without regard to L's actual knowledge or
whether paragraph (k)(4) of this section applies.
Example 5 See Sec. 1.382-3(a)(1)(ii) for additional examples with
respect to the definition of an entity.
(5) Stock ownership presumptions in connection with certain
acquisitions, and dispositions of loss corporation stock--(i) In
general. For purposes of this section--
(A) If an individual owns less than five percent of the stock of a
loss corporation during the testing period (excluding the testing date)
and acquires an amount of such stock so that the individual becomes a 5-
percent shareholder on the testing date, the loss corporation may treat
any interest in the loss corporation owned by such individual prior to
that acquisition as owned by a public group during the period of such
individual's ownership of that interest and as not owned by the 5-
percent shareholder during the same period, and
(B) If a 5-percent shareholder's percentage ownership interest in
the loss corporation is reduced to less than five percent, the loss
corporation may presume that the remaining stock owned by such 5-percent
shareholder immediately after such reduction is the stock owned by such
shareholder for each subsequent testing date having a testing period
that includes the date on which the reduction occurred as long as such
shareholder continues to own less than five percent of the stock of the
loss corporation. In that event, such ownership interest shall be
treated as owned by a separate public group for purposes of the rules of
paragraph (j)(2)(vi) of this section.
(ii) Example.
standing. All of the L stock is owned equally by 40 unrelated,
individual shareholders, including A (who owns 2.5 percent of L stock).
Because no person owns as much as five percent of L stock, Public L is
the only 5-percent shareholder of L. See paragraph (j)(1) of this
section. A purchases 5,000 shares of L stock over a public stock
exchange on June 8, 1989. The purchase is an owner shift. When added to
his ownership interest before that date (the testing date), A owns 7,500
shares of L stock (7.5 percent). Under paragraph (g)(5)(i)(A) of this
section, L may treat A and Public L as having owned 0 percent and 100
percent, respectively, at all times prior to June 8, 1989 (rather than
having owned 2.5 percent by A and 97.5 percent by Public L, even if L
has actual knowledge of A's less than five percent ownership interest).
The increase in A's stock ownership of L as of June 8, 1989 thus would
be 7.5 percentage points, rather than 5.0 percentage points, for
purposes of determining whether an ownership change occurs on that
testing date and any subsequent testing date.
(h) Constructive ownership of stock--(1) In general. Subject to
certain modifications set forth in this section and section 382(l)(3),
the constructive ownership rules of section 318(a) generally apply for
purposes of determining ownership of loss corporation stock.
(2) Attribution from corporations, partnerships, estates and
trusts--(i) In general. Stock owned (directly or indirectly) by an
entity shall be attributed to its owners--
[[Page 467]]
(A) Except as otherwise provided in this section, by treating the
stock attributed pursuant to section 318(a)(2) as no longer being owned
by the entity from which it is attributed, and
(B) If attribution is from a corporation, without regard to the 50
percent stock ownership limitation contained in section 318(a)(2)(C).
(ii) Limitation on attribution from entities with respect to certain
interests. Section 318(a)(2) shall not apply to treat the stock of the
loss corporation that is owned directly by a first tier entity (or
indirectly by any higher tier entity) as being indirectly owned by any
person that has an ownership interest in the first tier entity (or any
higher tier entity) to the extent that such interest is (or is
attributable to)--
(A) Stock of any such entity that is described in section
1504(a)(4),
(B) Any ownership interest in any such entity that does not
constitute stock under paragraph (f)(18)(ii) of this section, or
(C) If the entity is not a corporation, any ownership interest in
any such entity that has characteristics similar to the interests
described in paragraph (h)(2)(ii)(A) or (B) of this section.
The ownership interests described in this paragraph (h)(2)(ii) shall not
be taken into account in determining a person's percentage ownership
interest in an entity under paragraph (f)(24) of this section.
(iii) Limitation on attribution from certain entities. For purposes
of this section, except as provided in paragraphs (k)(2) and (4) of this
section, each of the following shall be treated as an individual who is
unrelated to any other owner (direct or indirect) of the loss
corporation--
(A) Any entity other than a higher tier entity that owns five
percent or more of the loss corporation stock (determined without regard
to paragraph (h)(2)(i)(A) of this section) on a testing date, a first
tier entity or the loss corporation,
(B) A qualified trust described in section 401(a),
(C) Any State, any possession of the United States, the District of
Columbia, the United States (or any agency or instrumentality thereof),
any foreign government, or any political subdivision of any of the
foregoing, and
(D) Any other person designated by the Internal Revenue Service in
the Internal Revenue Bulletin.
Stock of a loss corporation that is owned by any such person shall thus
not be attributed to any other person for purposes of this section. See
paragraph (g)(2) of this section limiting attribution from a first tier
entity or a higher tier entity to any person that is not a 5-percent
owner or a higher tier entity.
(iv) Examples.
Example (1). All the stock of L is owned by A. B and C respectively
own 70 and 30 percent of the outstanding P stock. P acquires 60 percent
of the outstanding L stock from A on July 1, 1988 (a testing date).
After the acquisition, P is a first tier entity and a higher tier entity
of L. B and C are each 5-percent owners of P and also are 5-percent
shareholders of L having a 42 percent and 18 percent stock ownership
interest in L, respectively, through the operation of the constructive
ownership rules of paragraph (h) of this section. Because B and C
together have increased their ownership in L by more than 50 percentage
points during the testing period ending on the testing date (60 percent
on the testing date and 0 percent prior thereto), an ownership change
occurs with respect to L on July 1, 1988.
Example (2). The facts are the same as in Example (1), except that B
and C are not shareholders in a corporation, but instead are partners in
a general partnership, E. B and C respectively own 70 percent and 30
percent of E. E acquires 60 percent of the L stock on July 1, 1988. The
results are the same as in Example (1).
Example (3). The facts are the same as in Example (1), except that
the acquisition is accomplished in a transaction that qualifies under
section 351(a). In that transaction, HC is formed through (i) a
contribution of money by P in exchange for 60 shares of HC common stock
and (ii) a contribution of all the outstanding shares of L stock plus
cash by A in exchange for 40 shares of HC common stock and 30 shares of
HC preferred stock that is described in section 1504(a)(4). The
respective values of each share of HC stock, common and preferred, are
equal. The stock of L is attributed to A through his interest in HC
common stock, but not through his interest in HC preferred stock (see
paragraph (h)(2)(ii)(A) of this section). Thus, A is treated as owning
indirectly only 40 percent of L. B and C are 5-percent shareholders of L
having indirect ownership interests in L of 42 percent and 18 percent,
respectively, through their ownership of HC common stock. The
[[Page 468]]
results are therefore the same as in Example (1).
(3) Attribution to corporations, partnerships, estates and trusts.
Except as otherwise provided by regulation under section 382 or by the
Internal Revenue Service in the Internal Revenue Bulletin, the rules of
section 318(a)(3) shall not apply in determining the ownership of stock
under this section.
(4) Option attribution--(i) In general. Solely for the purpose of
determining whether there is an ownership change on any testing date,
stock of the loss corporation that is subject to an option shall be
treated as acquired on any such date, pursuant to an exercise of the
option by its owner on that date, if such deemed exercise would result
in an ownership change. The preceding sentence shall be applied
separately with respect to--
(A) Each class of options (i.e., options with terms that are
identical, issued by the same issuer, and issued on the same date) owned
by each 5-percent shareholder (or person who would be a 5-percent
shareholder if the option were treated as exercised), and
(B) Each 5-percent shareholder, each owner of an option who would be
a 5-percent shareholder if the option were treated as exercised, and
each combination of such persons.
(ii) Examples.
Example (1). (i) A owns all of the 100 shares of outstanding L
stock. A grants options for the purchase of his L stock, exercisable for
10 years from the date of issuance, in the following transactions: An
option to B for four shares (issued January 1, 1988), an option to C for
six shares (issued June 1, 1989), and an option to D for 15 shares
(issued July 30, 1989). On July 30, 1990, A sells 41 shares of his L
stock to BB.
(ii) Pursuant to paragraph (a)(2)(i) of this section, the date on
which each option is acquired is a testing date. The issuance of options
to acquire L stock to each of B, C, and D is not treated as an
acquisition of the underlying stock on any such testing date since such
treatment with respect to any one of the option owners (or any
combination thereof) would not have resulted in an ownership change on
any of those testing dates.
(iii) The date on which BB acquires 41 shares also is a testing
date. BB's acquisition of 41 percent of the L stock, taken together with
the shift in ownership that would result if the options held by B, C and
D were exercised, would result in an ownership change, because the stock
owned or treated as owned by Public L (a group including only B, the
sole shareholder who owns less than five percent of L stock), C, D and
BB would have increased by 66 percentage points (four, six, 15, and 41
percentage points, respectively) during the testing period. Subject to
paragraph (h)(4)(ix) of this section, the options are treated as
exercised and an ownership change occurs on July 30, 1990, pursuant to
paragraph (h)(4)(i) of this section. Accordingly, no new testing period
can begin before July 31, 1990. Under paragraph (h)(4)(x)(F) of this
section, the option attribution rules of paragraph (h)(4)(i) of this
section shall not be applicable with respect to any of the options owned
by B, C, and D immediately before the ownership change until such time,
if any, that such options are transferred to (or by) 5-percent
shareholder (or a person who would be a 5-percent shareholder if such
option were exercised). In addition, the subsequent exercise of any of
those options by A, B, or C (the persons owning such options immediately
before the ownership change) is disregarded. See paragraph (h)(4)(vi) of
this section. Also see paragraph (h)(4)(viii) of this section for the
treatment of options that lapse or are forfeited.
(iv) The facts are the same as in (i), except that the sale of A's
41 shares of L stock to BB occurs on July 30, 1995. Because the options
are treated as exercised and the related stock is treated as acquired on
the July 30, 1995 testing date, the results are the same as described in
(iii).
Example (2) (i) A owns all of the outstanding 100 shares of the
stock of L. On July 22, 1988, the value of A's stock in L is $500 and
the following agreements are entered into: (i) A sells 40 shares of his
L stock to B for $200, (ii) in exchange for $10, A grants B an option to
acquire the balance of his L stock for $305 at any time before July 22,
1992, and (iii) L grants A an option to acquire 100 shares of L stock at
a price of $600 exercisable until such time as B's option is no longer
outstanding.
(ii) If the stock subject to the options owned by both A and B were
treated as acquired on the July 22, 1988 testing date, B would have
increased his ownership interest in L by only 50 percentage points to 50
percent ([40 shares purchased + 60 shares acquired pursuant to the
option]/200 outstanding shares of L stock, including 100 shares deemed
outstanding pursuant to the option issued to A by L) as compared with 0
percent prior to July 22, 1988. In determining whether the options with
respect to the stock of L would, if exercised, result in an ownership
change, paragraph (h)(4)(i)(B) of this section requires that such
options be treated as exercised separately with respect to each 5-
percent shareholder, each person who would be a 5-percent shareholder if
the option were treated as exercised or each
[[Page 469]]
combination of such persons. Therefore, by treating the option owned by
A as not having been exercised and the option owned by B as having been
exercised, B's interest in L increases by 100 percentage points during
the testing period. An ownership change with respect to L therefore
results from the transactions occurring on July 22, 1988.
(iii) Contingencies. Except as provided in paragraph (h)(4)(x)(D) of
this section, the extent to which an option is contingent or otherwise
not currently exercisable shall be disregarded for purposes of this
section.
(iv) Series of options. For purposes of this section, an option to
acquire an option with respect to the stock of the loss corporation, and
each one of a series of such options, shall be considered as an option
to acquire such stock.
(v) Interests that are similar to options. For purposes of this
section,
(A) An interest that is similar to an option includes, but is not
limited to, a warrant, a convertible debt instrument, an instrument
other than debt that is convertible into stock, a put, a stock interest
subject to risk of forfeiture, and a contract to acquire or sell stock,
and
(B) Any such interest shall be treated as an option.
(vi) Actual exercise of options--(A) In general. The actual exercise
of any option in existence immediately before and after an ownership
change, whether or not the option was treated as exercised in connection
with the ownership change under paragraph (h)(4)(i) of this section,
shall be disregarded for purposes of this section, but only if the
option is exercised by the 5-percent shareholder (or person who would
have been a 5-percent shareholder if the options owned by such person
had been exercised immediately before the ownership change) who owned
the option immediately before and after such ownership change.
(B) Actual exercise within 120 days of deemed exercise. If the
actual exercise of an option occurs on or before the end of the period
which is 120 days after the date on which the option is treated as
exercised under paragraph (h)(4)(i) of this section, the loss
corporation may elect to treat paragraphs (h)(4)(i) and (vi)(A) of this
section as not applying to such option and take into account only the
acquisition of loss corporation stock resulting from the actual exercise
of the option. An election under this paragraph (h)(4)(vi)(B) shall have
no effect on the determination of whether an ownership change occurs,
but shall apply only for the purpose of determining the date on which
the change date occurs. An election under this paragraph (h)(4)(vi)(B)
shall be made in the statement described in paragraph (a)(2)(ii) of this
section.
(vii) Effect of deemed exercise of options on the outstanding stock
of the loss corporation--(A) Right or obligation to issue stock. Solely
for purposes of determining whether an ownership change has occurred
under paragraph (h)(4)(i) of this section, the deemed exercise of an
option with respect to unissued stock (or treasury stock) of a
corporation shall result in a corresponding increase in the amount of
its total outstanding stock.
(B) Right or obligation to acquire outstanding stock by the loss
corporation. Solely for purposes of determining whether an ownership
change has occurred under paragraph (h)(4)(i) of this section, the
deemed exercise of a right to transfer outstanding stock to the issuing
corporation (or a right of the issuing corporation to acquire its stock)
shall result in a corresponding decrease in the amount of its total
outstanding stock.
(C) Effect on value of old loss corporation. The deemed exercise of
an option with respect to unissued stock (or treasury stock) under
paragraph (h)(4)(i) of this section shall have no effect on the
determination of the value of the old loss corporation and the
computation of the section 382 limitation. See section 382(l)(1)(B)
disregarding capital contributions made during the two-year period
preceding the change date for purposes of computing the section 382
limitation.
(viii) Options that lapse or are forfeited. If an option that is
treated as exercised under paragraph (h)(4)(i) of this section lapses
unexercised or the owner of such option irrevocably forfeits his right
to acquire stock pursuant to the option, the option shall be treated for
purposes of this section as if it never had been issued. In that case,
the loss
[[Page 470]]
corporation may file an amended return for prior years (subject to any
applicable statute of limitations) if the section 382 limitation was
thus inapplicable. If paragraph (h)(4)(i) of this section applied to an
option (or options) with respect to a taxable year for which an income
tax return has not been filed by the date that the option (or options)
lapses or is irrevocably forfeited, the loss corporation may treat
paragraph (h)(4)(i) of this section as inapplicable to such option (or
options).
(ix) Option rule inapplicable if pre-change losses are de minimis.
Paragraph (h)(4)(i) of this section shall not apply to treat the stock
of the loss corporation as acquired by the owner of an option if, on a
testing date, the amount of pre-change losses (determined as if the
testing date were a change date and treating the amount of any net
unrealized built-in loss as a pre-change loss) is less than twice the
amount determined by multiplying.
(A) The value of the loss corporation (as determined under section
382(e)) on the testing date, by
(B) The long-term tax exempt rate (as defined in section 382(f)) for
the calendar month in which the testing date occurs.
(x) Options not subject to attribution. Paragraph (h)(4)(i) of this
section shall not apply to--
(A) Long-held options with respect to actively traded stock. Any
option with respect to stock of the loss corporation which stock is
actively traded on an established securities market (within the meaning
of section 1273(b)) for which market quotations are readily available,
if such option has been continuously owned by the same 5-percent
shareholder (or a person who would be a 5-percent shareholder if such
option were exercised) for at least three years, but only until the
earlier of such time as--
(1) The option is transferred by or to a 5-percent shareholder (or a
person who would be a 5-percent shareholder if such option were
exercised), or
(2) The fair market value of the stock that is subject to the option
exceeds the exercise price for such stock on the testing date. For
purposes of this paragraph (h)(4)(x)(A), options with respect to the
stock of a loss corporation that are assumed (or substituted) in a
reorganization and converted into options with respect to the stock of
another party to the reorganization shall not be treated as transferred,
provided that there are no changes in the terms of the options, other
than that the stock that may be acquired pursuant to the option is that
of another party to the reorganization and that the amount of stock
subject to the option is adjusted only to reflect the exchange ratio for
the exchange of stock of the loss corporation in the reorganization.
(B) Right to receive or obligation to issue a fixed dollar amount of
value of stock upon maturity of certain debt. Any right to receive or
obligation to issue stock pursuant to the terms of a debt instrument
that, in economic terms, is equivalent to nonconvertible debt because
the right to receive stock of the issuer of a fixed dollar amount is
based upon the fair market value for such stock determined at or about
the date the stock is transferred pursuant to such right or obligation
(i.e., the amount of the stock transferred pursuant to the option is
equal to a fixed dollar amount, divided by the value of each share of
such stock at or about the date of the stock transfer). This paragraph
(h)(4)(x)(B) shall not apply if the method for determining the fair
market value of the stock of the issuer is intended to or, in fact,
provides the owner of the debt instrument with a participation in any
appreciation of any stock of the issuer.
(C) Right or obligation to redeem stock of the loss corporation. Any
right or obligation of the loss corporation to redeem any of its stock
at the time such stock is issued, but only to the extent such stock is
issued to persons who are not 5-percent shareholders immediately before
the issuance.
(D) Options exercisable only upon death, disability or mental
incompetency. Any option entered into between owners of the same entity
(or an owner and the entity in which the owner has a direct ownership
interest) with respect to such owner's ownership interest in the entity
that is exercisable only upon the death, complete disability or mental
incompetency of such owner.
(E) Right to receive or obligation to issue stock as interest or
dividends. Any
[[Page 471]]
right to receive or obligation to issue stock of a corporation in
payment of interest or dividends by the issuing corporation. (For an
example illustrating this exception, see paragraph (j)(2)(iv)(B) of this
section.)
(F) Options outstanding following an ownership change--(1) In
general. Any option in existence immediately before and after an
ownership change, whether or not the option was treated as exercised in
connection with the ownership change under paragraph (h)(4)(i) of this
section, but only so long as the option continues to be owned by the 5-
percent shareholder (or person who was treated as a 5-percent
shareholder) who owned the option immediately before and after such
ownership change.
(2) Example (i) A, B, C and D own all of the outstanding stock of L.
A owns 70 shares of L stock and each of B, C and D own 10 shares of L
stock. On July 12, 1988, L issues warrants to each of its shareholders
entitling them to acquire an additional 8.5 shares of L stock for each
share of stock owned. (ii) If B, C and D, but not A, each exercise their
respective rights to acquire an additional 85 shares of L stock (10
shares x 8.5 shares that may be acquired for each share owned) on July
12, 1988, their combined ownership interest in L on that date would
exceed 80 percent (255 shares deemed to be acquired + 30 shares actually
owned)/355 shares outstanding (actual and deemed)). B, C and D thus
would increase their ownership interest in L by 50.3 percentage points
during the testing period, causing an ownership change, because, under
paragraph (h)(4)(i)(B) of this section, the options are treated as
exercised if the exercise would cause an ownership change.
(iii) Following the ownership change, paragraph (h)(4)(i) of this
section applies to prevent A's right to acquire 595 shares of L stock
(70 shares x 8.5 shares that may be acquired for each share owned) or
the rights held by B, C, or D, to be treated as exercised on any
subsequent testing date, except to the extent that those rights are
transferred. To the extent any of those options are transferred
following the ownership change, paragraph (h)(4)(i) of this section will
apply to any such options on the date of the transfer and on any
subsequent testing date.
(G) Right to acquire loss corporation stock pursuant to a default
under a loan agreement. Any right to acquire stock of a corporation by a
bank (as that term is defined in section 581), an insurance company (as
that term is defined in Sec. 1.801-3(a)), or a trust qualified under
section 401(a) solely as the result of a default under a loan agreement
entered into in the ordinary course of the trade or business of such
bank, life insurance company or qualified trust.
(H) Agreement to acquire or sell stock owned by certain shareholders
upon retirement. Any option entered into between noncorporate owners of
the same entity (or a noncorporate owner and the entity in which the
owner has a direct ownership interest) with respect to such owner's
ownership interest in the entity, but only if each of such owners
actively participate in the management of the entity's trade or
business, the option is issued at a time that the loss corporation is
not a loss corporation and the option is exercisable solely upon the
retirement of such owner. An option with terms described in both this
paragraph (h)(4)(x)(H) and in paragraph (h)(4)(x)(D) of this section
shall also not be subject to paragraph (h)(4)(i) of this section.
(I) [Reserved]
(J) Title 11 or similar case. See Sec. 1.382-9(o) which excepts
certain options created by or under a plan of reorganization in a title
11 or similar case from the operation of paragraph (h)(4)(i) of this
section.
(K)-(Y) [Reserved]
(xi) Certain transfers of options disregarded. Transfers of options
between persons who are not 5-percent shareholders (and between members
of separate public groups resulting from the application of the
segregation rules of paragraphs (j)(2) and (3)(iii) of this section) are
not taken into account. Transfers of options in any of the circumstances
described in section 382(l)(3)(B) are also disregarded and the
transferee shall be treated as having owned the option for the period
that it was owned by the transferor.
(xii) Exercise of an option that has not been treated as stock. The
acquisition of stock pursuant to the actual exercise of an option (other
than an option described in paragraph (h)(4)(vi)(A) of this section)
shall not be disregarded.
(xiii) Effective date. See paragraph (m)(4)(vi) of this section for
special rules regarding the effective date of the provisions of this
paragraph (h)(4).
(5) Stock transferred under certain agreements. Notwithstanding
paragraph (h)(4) of this section, no shift results solely because under
section 1058(a)--
[[Page 472]]
(i) A shareholder transfers stock of a corporation pursuant to an
agreement that meets the requirements of section 1058(b), or
(ii) A person having rights under such an agreement exchanges those
rights for stock identical to the stock transferred pursuant to the
agreement.
(6) Family attribution. For purposes of this section--
(i) Paragraphs (1) and (5)(B) of section 318(a) shall not apply,
(ii) An individual and all members of his family described in
section 318(a)(1) shall be treated as one individual,
(iii) Subject to paragraph (k)(2) of this section, paragraph
(h)(6)(ii) of this section shall not apply to members of a family who,
without regard to that paragraph (h)(6)(ii), would not be 5-percent
shareholders, and
(iv) If under paragraph (h)(6)(ii) of this section, an individual
may be treated as a member of more than one family, and each family that
is treated as one individual is a 5-percent shareholder (or would be
treated as a 5-percent shareholder if such individual were treated as a
member of such family), then such individual shall be treated only as a
member of the family that results in the smallest increase in the total
percentage stock ownership of the 5-percent shareholders on the testing
date and shall not be treated as the member of any other family.
(i) [Reserved]
(j) Aggregation and segregation rules. For purposes of this section,
except as provided in paragraphs (k)(2) and (4) of this section--
(1) Aggregation of public shareholders and public owners into public
groups--(i) Public group. Under this paragraph (j), a loss corporation
or other entity can be treated as owned, in whole or in part, by one or
more public groups. A public group can include public shareholders,
public owners, and 5-percent owners who are not 5-percent shareholders
of the loss corporation.
(ii) Treatment of a public group that is a 5-percent shareholder.
Each public group that is treated as a 5-percent shareholder under
paragraph (g)(1)(ii), (iii) or (iv) of this section shall be treated as
one individual. See paragraph (j)(2)(iv) for a rule combining certain de
minimis public groups.
(iii) Presumption of no cross-ownership. The public owners, 5-
percent owners who are not 5-percent shareholders and public
shareholders in any public group, subject to paragraphs (j)(2)(iii),
(k)(2) and (k)(4) of this section, are presumed not to be members of any
other public group. It also is presumed that each such person is
unrelated to all other shareholders (direct and indirect) of the loss
corporation. See paragraph (h)(6)(iii) of this section. The members of a
public group that exists by virtue of its direct ownership interest in
an entity are presumed not to be members (and not to be related to a
member) of any other public group that exists at any time by virtue of
its direct ownership interest in any other entity. To the extent that
the presumptions adopted in this paragraph (j)(1)(iii) are not
applicable because the loss corporation has actual knowledge of facts to
the contrary and is thus subject to paragraph (k)(2) of this section,
public shareholders, public owners and 5-percent owners who are not 5-
percent shareholders may be aggregated into additional public groups.
(iv) Identification of the public groups treated as 5-percent
shareholders--(A) Analysis of highest tier entities. The loss
corporation must identify first tier entities and higher tier entities
in order to identify any highest tier entities that must be identified
under paragraph (k)(3) of this section. The loss corporation must then
identify any 5-percent owners of each such highest tier entity who
indirectly own, at any time during the testing period, five percent or
more of the loss corporation through the ownership interest in such
highest tier entity. Under paragraph (g)(1)(i)(B) of this section, any
such 5-percent owner is a 5-percent shareholder. See paragraph (k)(3) of
this section for rules explaining the extent of the obligation of the
loss corporation to determine the identity of its shareholders. Each
person who has an ownership interest in any highest tier entity and who
is not treated as a 5-percent shareholder (i.e., persons who are public
owners or 5-percent owners who are not 5-percent shareholders) is a
member of the public group of that highest tier entity. A public group,
so identified, that indirectly owns five percent
[[Page 473]]
or more of the loss corporation on the testing date is treated under
paragraph (g)(1)(ii) of this section as a 5-percent shareholder. If the
public group so identified owns less than five percent of the loss
corporation on the testing date, such public group is treated as part of
the public group of the next lower tier entity.
(B) Analysis of other higher tier entities and first tier entities.
The analysis and aggregation of public groups described in paragraph
(j)(1)(iv)(A) of this section is repeated for any next lower tier entity
and successively for any next lower tier entity of any entity described
in this paragraph (j)(1)(iv)(B) until applied to each first tier entity.
(C) Aggregation of the public shareholders. The public shareholders
are aggregated and, under paragraph (g)(1)(iii) of this section, are
treated as a public group that is a 5-percent shareholder without regard
to whether such group, at any time during the testing period, owns five
percent or more of the loss corporation. For this purpose, if the public
group of any first tier entity indirectly owns less than five percent of
the loss corporation on the testing date, and is thus not treated as a
5-percent shareholder, but is treated as part of the public group of the
loss corporation under paragraph (j)(1)(iv)(A) or (B) of this section,
the ownership interest of that group is included in the public group of
the loss corporation referred to in the preceding sentence.
(v) Appropriate adjustments. A loss corporation may apply the
principles of paragraph (g)(5) of this section with respect to--
(A) Any public group that is treated as a 5-percent shareholder on
the testing date if such public group, at any time during the testing
period, was treated as part of the public group of the next lower tier
entity, or
(B) Any public group that is treated as part of the public group of
a next lower tier entity if such public group, at any time during the
testing period, was part of the public group of a higher tier entity
that was treated as a 5-percent shareholder and had a direct or indirect
ownership interest in such lower tier entity.
(vi) Examples.
Example (1) (i) All of the stock of L is owned by 1,000
shareholders, none of whom own as much as five percent of L stock
(``Public L''). All of the stock of P is owned by 150,000 shareholders,
none of whom own as much as five percent of P stock (``Public P'').
Between July 12, 1988 and August 13, 1988, P purchases all of the L
stock through a series of transactions on the public stock exchange. P's
percentage of direct stock ownership in L increases from 4.9 percent to
five percent on July 15, 1988, and from 50 percent to 51 percent on July
30, 1988.
(ii) Before July 15, 1988, P is a public shareholder of L. On and
after July 15, 1988, P is a first tier entity (and a highest tier
entity) of L. Accordingly, under the rules of paragraph (j)(1) of this
section, Public P, on and after July 15, 1988, is treated as a public
group that is a 5-percent shareholder. Each acquisition by P on and
after such date affects the percentage of L stock that is owned by
Public P and thus constitutes an owner shift.
(iii) Immediately after the transaction on July 30, 1988, P owns 51
percent of L stock. Under paragraph (j)(1)(iv)(A) of this section,
Public P thus owns 51 percent of L. Under paragraph (j)(1)(iv)(C) of
this section, Public L, the public group that includes the public
shareholders of L, is treated as a 5-percent shareholder that owns 49
percent of L. Under paragraph (j)(1)(iii) of this section, Public L and
Public P are presumed not to have any common members and it is also
presumed that no member of either public group is related to any other
member of either of the two public groups.
(iv) Assuming that the presumption provided in paragraph (j)(1)(iii)
of this section (i.e., that no person owns stock in both P and L) is not
rebutted to any extent, Public P is treated as a 5-percent shareholder
whose stock ownership in L, as of the July 30, 1988 testing date, has
increased by 51 percentage points over its lowest percentage of stock
ownership in L at any time during the testing period (0 percent prior to
July 12, 1988). Accordingly, an ownership change with respect to L
occurs as a result of P's acquisition on July 30, 1988. L is thus a new
loss corporation and its pre-change losses are subject to limitation
under section 382.
Example (2) (i) All of the stock of P is owned by 1,000 unrelated
shareholders, none of whom owns as much as five percent of P stock.
L1 is a wholly owned subsidiary of P. On January 2, 1988, P
distributes all of the L1 stock pro rata to its shareholders.
(ii) Prior to the stock distribution, the public owners of P are
members of a public group (``Public P'') that is treated as a 5-percent
shareholder owning 100 percent of the stock of L1.
See paragraph (j)(1)(iv)(A) of this section. Following the stock
distribution to the P shareholders, L1 is owned by 1,000
public
[[Page 474]]
shareholders that are members of a public group (``Public
L1'') that is treated as a 5-percent shareholder owning 100
percent of the stock of L1. See paragraph (j)(1)(iv)(C) of
this section.
(iii) Public P and Public L1 are treated as unrelated,
individual 5-percent shareholders under paragraph (j)(1)(iii) of this
section. Although the members of one public group are presumed not to be
members of any other public group under paragraph (j)(1)(iii) of this
section, L1 has actual knowledge that all of its public
shareholders immediately following the distribution (Public
L1) received L1 stock pro rata in respect to the
outstanding P stock and thus were also members of Public P. Applying
paragraph (k)(2) of this section, the loss corporation may take into
account the identity of ownership interests between Public L1
and Public P to establish that Public L1 did not increase its
percentage ownership in L1. Accordingly, the transaction
would not constitute an owner shift.
Example (3) (i) The facts are the same as in Example (1) of
paragraph (g)(4) of this section. Thus, 20 percent of L stock is owned
by A, 10 percent is owned by P1, 20 percent is owned by E, a
joint venture, and the remaining 50 percent of L stock is owned by
Public L. P1 is owned 15 percent by B and 85 percent by
Public P1. E is owned 30 percent by P2 and 70
percent by P3, which are owned by Public P2 and
Public P3, respectively. See Example (1)(ii) of paragraph
(g)(4) of this section for a chart illustrating this ownership
structure.
(ii) The public owners of P2 and P3 (Public
P2 and Public P3, respectively), are public groups
that are treated as 5-percent shareholders of L, because each such
public group indirectly owns five percent or more of L stock (six
percent by Public P2 [(30 percent ownership of E)x(20 percent
ownership of L)] and 14 percent by Public P3 [(70 percent
ownership of E)x(20 percent ownership of L)]). The public owners of
P1 (``Public P1''), who indirectly own 8.5 percent
of L stock [(85 percent ownership of P1)x(10 percent
ownership of L)] and B, who indirectly owns 1.5 percent of L and is thus
included in Public P1 under paragraph (j)(1)(iv)(A) of this
section, are members of a public group that is treated as a 5-percent
shareholder of L that owns ten percent of L stock. Finally, the public
group of L (``Public L'') is a 5-percent shareholder that owns 50
percent of L. Accordingly, A, Public L, Public P1 (including
B), Public P2, and Public P3 are the only 5-
percent shareholders of L.
Example (4) (i) The facts are the same as Example (3) above, except
that P3 is owned 60 percent by C, 30 percent by
P4, and 10 percent by P3. The stock of
P4 is publicly traded and is owned by Public P4.
The facts are thus the same as in Example (2) in paragraph (g)(4) of
this section. See Example (2)(ii) of paragraph (g)(4) of this section
for a chart illustrating this ownership structure.
(ii) The public owners of P4 (a highest tier entity) are
members of a public group that indirectly owns 4.2 percent of L ([30
percent ownership of P3]x[70 percent ownership of E]x[20
percent ownership of L]). For purposes of identifying public groups that
are 5-.percent shareholders, L is not required to identify P4
as a highest tier entity under paragraph (k)(3) of this section because
P4 does not own five percent or more of L stock. Moreover,
under paragraph (h)(2)(iii) of this section, P4 generally is
treated as an individual from which there is no attribution of loss
corporation stock. The public group of P3 (including
P4) indirectly owns 5.6 percent of L ([40 percent of
P3]x[70 percent ownership of E]x[20 percent of L]), and is
thus a 5-percent shareholder of L. The public groups of P2
and P1 (both Public P1 and B), respectively, also
own five percent or more of L stock and are thus 5-percent shareholders
of L. In addition, the public group of L is a 5-percent shareholder
regardless of whether it owns five percent of L stock. Accordingly, A,
Public L, Public P3 (including P4), Public
P2, and Public P1 (including B), are the only 5-
percent shareholders of L.
Example (5)(i) On September 4, 1987, L is owned 14 percent by each
of A and B, 30 percent by each of P1 and P2, four
percent by each of C and P3, and two percent by each of D and
AA. P1 is owned 30 percent by each of A, B, and P4
and 10 percent by D. P2 is owned 70 percent by A, 10 percent
by each of B and D, six percent by DD and four percent by C. AA owns 100
percent of the stock of P3. P4 is owned 60 percent
by C and 20 percent by each of BB and CC.
(ii) The ownership structure of L is illustrated by the following
chart:
[[Page 475]]
[GRAPHIC] [TIFF OMITTED] TC17OC91.004
(iii) In order to identify L's 5-percent shareholders and their
respective ownership interests in L on September 4, 1987, the rules of
paragraph (j)(1) of this section apply to identify the public groups
that are treated as separate 5-percent shareholders. Analysis begins
with any highest tier entity, such as P4. Each of
P4's shareholders is a 5-percent owner of P4.
C4 owns 5.4 percent of L in his capacity as a 5-percent owner
of P4 and therefore is a 5-percent shareholder.
Notwithstanding that C actually owns, directly and by attribution, 10.6
percent of L (four percent directly, 5.4 percent indirectly through
P4, and 1.2 percent through P2), C's ownership
interest in L as a 5-percent shareholder is presumed to include only the
5.4 percent indirect ownership through P4. (Under paragraphs
(g) and (k)(2) of this section, however, L must account for C's direct
and indirect ownership interests in determining whether an ownership
change occurs on any testing date if it has actual knowledge of such
ownership on or berfore the date that its income tax return is filed for
the taxable year that includes the testing date). Although BB and CC are
each 5-percent owners of P4, they are not 5-percent
shareholders and therefore are members of the public group of
P4. Because the public group of P4 indirectly owns
only 3.6 percent of L, it is treated under paragraph (j)(1)(iv)(A) of
this section as part of the public group of the next lower tier entity,
P1.
(iv) With respect to P1, a first tier entity, each of its
shareholders are 5-percent owners. Because A and B each indirectly own
nine percent of L as 5-percent owners of P1 and A indirectly
owns 21 percent of L as a 5-percent owner of P2, they are
each 5-percent shareholders without regard to their direct
[[Page 476]]
ownership interests in L. A's ownership interest in L as a 5-percent
shareholder is 44 percent (14 percent directly, nine percent in his
capacity as a 5-percent owner of P1, and 21 percent in his
capacity as a 5-percent owner of P2). B's ownership interest
in L as a 5-percent shareholder is 23 percent (14 percent directly and
nine percent in his capacity as a 5-percent and nine percent in his
capacity as a 5-percent owner of P1). B's ownership interest
as a 5-percent shareholder does not include the three percent interest
he owns indirectly through P2. (Under paragraphs (g) and
(k)(2) of this section, however, L must account for B's direct and
indirect ownership interests, including his three percent interest
through P2, in determining whether an ownership change occurs
on any testing date if L has actual knowledge of such ownership on or
before the date that its income tax return is filed for the taxable year
that includes the testing date.) D is a 5-percent owner of
P1. Although D owns eight percent of L (two percent directly,
three percent indirectly through P1, and three percent
indirectly through P2), he is not a 5-percent shareholder
because he does not own five percent or more of L stock either directly
or in his capacity as a 5-percent owner of either P1 or
P2. (Under paragraphs (g) and (k)(2) of this section,
however, L must account for D's direct and indirect ownership interests
in determining whether an ownership change occurs on any testing date to
the extent L has actual knowledge of such ownership amounting to five
percent or more of L stock before the date that its income tax return is
filed for the taxable year that includes the testing date.) The public
group of P1 (comprised of the public group of P4
and D's direct ownership interest in P1) has a 6.6 percent
interest in L and is therefore treated as a separate 5-percent
shareholder.
(v) With respect to highest tier entity P2, D is a 5-
percent owner who is not a 5-percent shareholder for the reason
described in the preceding subdivision. DD is a 5-percent owner of
P2, who is not a 5-percent shareholder, because DD indirectly
owns only 1.8 percent of L. Assuming that L does not have actual
knowledge of B's and C's direct ownership interest in P2,
those interests are accounted for in computing the ownership interest
are accounted for in computing the ownership interest of the public
group of P2. Therefore, each of P2's shareholders,
except A who is a 5-percent shareholder in his capacity as a 5-percent
owner of P2, are treated as members of the public group of
P2 that owns nine percent of L and is thus treated as a
separate 5-percent shareholder.
(vi) Because the direct ownership interest of P3 is less
than five percent, it is a public shareholder. Therefore, assuming that
L does not have actual knowledge of C's, D's, or AA's direct and/or
indirect ownership interests in L, the public group of L is a separate
5-percent shareholder owning 12 percent of L (comprised of the direct
ownership interests of C, D, AA and P3).
(2) Segregation rules applicable to transactions involving the loss
corporation--(i) In general. For purposes of this section, if--
(A) A transaction is described in paragraph (j)(2)(iii) of this
section, and
(B) The loss corporation has one or more direct public groups
immediately before and after the transaction,
the stock owned by such direct public group or groups is subject to the
segregation rules described in paragraph (j)(2)(iii) of this section for
purposes of determining whether an ownership change has occurred on the
date of the transaction (and on any subsequent testing date with a
testing period that includes the date of such transaction). See
paragraph (j)(3) of this section for the application of the rules of
this paragraph (j)(2) to transactions involving first tier entities or
higher tier entities.
(ii) Direct public group. For purposes of this section, a direct
public group is any public group of the loss corporation described in
paragraph (j)(1)(iv)(C) of this section or any public group of the loss
corporation resulting from the application of paragraph (j)(2)(iii) or
(j)(3)(i) of this section.
(iii) Transactions to which segregation rules apply--(A) In general.
The segregation rules of this paragraph (j)(2)(iii) apply to any
transaction described in paragraph (j)(2)(iii)(B), (C), (D), (E), or (F)
of this section in the manner specified. The presumptions adopted by
this paragraph (j)(2)(iii) shall not apply only if, and to the extent
that, the loss corporation either has actual knowledge of facts to the
contrary regarding its stock ownership and is thus subject to paragraph
(k)(2) of this section, or is subject to paragraph (k)(4) of this
section. Any direct public group that is required to be identified as a
result of a transaction described in paragraph (j)(2)(iii) of this
section shall be treated as a 5-percent shareholder under paragraph
(g)(1)(iv) of this section without regard to whether such group, at any
time during the testing period, owns five percent or more of the loss
corporation stock. To the extent that the presumptions are rebutted, the
public
[[Page 477]]
shareholders, public owners and 5-percent owners who are not 5-percent
shareholders may be aggregated into additional public groups. For an
exception applicable to certain regulated investment companies, see
Sec. 1.382-3(k)(1).
(B) Certain equity structure shifts and transactions to which
section 1032 applies--(1) In general. In the case of--
(i) A transaction that is an equity structure shift that also is
described in section 381(a)(2) and in which the loss corporation is a
party to the reorganization, or
(ii) A transfer of the stock of the loss corporation (including
treasury stock) by the loss corporation in any other transaction to
which section 1032 applies,
each direct public group that exists immediately after such transaction
shall be segregated so that each direct public group that existed
immediately before the transaction is treated separately from the direct
public group that acquires stock of the loss corporation in the
transaction. The direct public group that acquires stock of the loss
corporation in the transaction is presumed not to include any members of
any direct public group that existed immediately before the transaction.
For purposes of this paragraph (j)(2)(iii)(B), a person is treated as
acquiring stock of the loss corporation in a reorganization as the
result of the person's ownership interest in another corporation that
succeeds to the loss corporation's pre-change losses (determined as if
the testing date were the change date and treating the amount of any net
unrealized built-in loss as a pre-change loss) in a transaction to which
section 381(a)(2) applies. In determining whether a transaction is
described in section 1032 for purposes of this paragraph (j)(2)(iii)(B),
the transfer by the loss corporation of any interest not constituting
stock that is treated as stock under paragraph (f)(18)(iii) of this
section shall be treated as the transfer of stock. See Sec. 1.382-3(j)
for exceptions to the segregation rules of this paragraph
(j)(2)(iii)(B)(1).
(2) Examples.
Example (1) (i) P1 owns 60 percent of the stock of L. The
remaining L stock (40 percent) is owned by Public L. A owns 40 percent
of the P1 stock. The remaining P1 stock (60
percent) is owned by Public P1. P2 is a publicly
traded corporation owned by shareholders who each own less than five
percent of P2 stock (Public P2).
(ii) On May 22, 1988, L merges into P2 in a transaction
described in section 368(a)(1)(A), with the shareholders of L receiving
an amount of P2 stock equal to 70 percent of the value of
P2 immediately after the reorganization.
(iii) Immediately before the merger, L's 5-percent shareholders were
Public L (40 percent), Public P1 (36 percent), and A (24
percent). Although the shareholders of P2 (immediately before
the merger) do not acquire any stock in the merger, they are treated as
acquiring a direct ownership interest in the loss corporation in the
reorganization because P2 succeeds to the pre-change losses
of L in a transaction to which section 381(a)(2) applies. As a result of
the merger, which constitutes a transaction described in
(j)(2)(iii)(B)(1) of this section, L's direct public group, Public L,
must be segregated from the direct public group that would otherwise
exist after the transaction (Public L and Public P2). Public
L, the direct public group that exists before the merger, has a
continuing 28 percent interest in the loss corporation [70 percent of
P2 shares received in the merger x 40 percent shares of L
owned prior to the merger] that must be segregated from the interests
acquired by Public P2.
(iv) In addition, Public P1, which owns five percent or
more of the stock of P2 through P1's ownership
interest in P2, also is segregated from any other public
group (i.e., both Public L and Public P2) under paragraph
(j)(1) of this section. Therefore, under paragraphs (j)(1) and (2) of
this section, Public P2 (excluding the members of Public L
and Public P1 immediately before the merger) is treated as a
separate public group and 5-percent shareholder.
(v) The only 5-percent shareholder whose interest in the loss
corporation, P2, has increased during the testing period is
Public P2. Its interest has increased by 30 percentage
points. Accordingly, no ownership change results from the merger. For
purposes of measuring the shift in ownership of P2 on any
subsequent testing date with a testing period that includes May 22, 1988
(the date on which L merged into P2), Public P2
will continue to be treated as a direct public group, separate from
Public L (the members of which own P2 stock as a result of
the merger) and Public P1.
Example (2) (i) P and L are each owned by 21 equal shareholders.
Each of 14 of the shareholders of P and L are owners of both
corporations (``common owners''). L has actual knowledge of this cross
ownership. therefore, as a group, these persons own 66\2/3\ percent of
each of P and L. P stock has a value of $600 and L stock has a value of
$400.
[[Page 478]]
(ii) P merges into L under section 368(a)(1)(A) on June 10, 1988.
Ordinarily, the direct public group of L that exists immediately before
the transaction would be segregated from the direct public group that
acquires stock in the merger (the public group of P immediately before
the merger). In view of the common ownership of P and L, however, a
third group may be created under paragraph (j)(2)(iii)(A) of this
section so that L's owners following the merger would be: The common
owners (66\2/3\ percent), Public L, less the common owners, 13\1/3\
percent), and Public P, less the common owners (20 percent).
Accordingly, the only 5-percent shareholder increasing its ownership
interest by 20 percentage points and no ownership change occurs as a
result of the merger.
Example (3) (i) L is entirely owned by Public L. L commences and
completes a public offering of common stock on January 22, 1988, with
the result that its outstanding stock increases from 100,000 shares to
300,000 shares. No person owns as much as five percent of L stock
following the public offering.
(ii) The public offering of L stock is a transaction to which
section 1032 applies. Immediately before the public offering, L's only
5-percent shareholder was Public L, a direct public group. Therefore,
Public L (as in existence immediately before the transaction) must be
segregated from the direct public group that would otherwise exist
immediately after the transaction. Under paragraph (j)(2)(iii)(B)(1) of
this section, the acquisition of 200,000 shares of L stock in the public
offering must be treated as acquired by a direct public group (``New
Public L'') that is separate from Public L. Each such public group is
treated as an individual that is a separate 5-percent shareholder. See
paragraphs (g)(1)(iv) and (j)(1)(ii) of this section.
(iii) As a result of the public offering, L has two 5-percent
shareholders, Public L and New Public L, which own 33\1/3\ percent and
66\2/3\ percent of the stock of L, respectively. Because the members of
New Public L are presumed not to be members of Public L (and not to be
related to any such members), the ownership interest of New Public L
immediately prior to the offering of stock was 0 percent.
(iv) New Public L is a 5-percent shareholder that has increased its
ownership interest in L by more than 50 percentage points during the
testing period (by 66\2/3\ percentage points). Thus, there is an
ownership change with respect to L. For purposes of subsequent
transactions, Public L and New Public L will not be segregated into two
public groups because a new testing period commences on the day
following the change date, January 23, 1988 (i.e., any subsequent
testing date will not have a testing period that includes the date of
the public offering).
Example (4) The facts are the same as in Example (3), but L
establishes that 60,000 shares of the newly issued L stock were acquired
by its shareholders of record on the date of the stock issuance (i.e.,
members of Public L, referred to as Acquiring Public L) by persons
owning 27 percent of the L stock immediately before the stock issuance.
Accordingly, L has actual knowledge that New Public L acquired no more
than 140,000 shares of L stock in the public offering. Under paragraphs
(j)(2)(iii) and (k)(2) of this section, New Public L may be treated as
having increased its ownership interest in L by 46\2/3\ percentage
points (140,000 shares acquired in the offering/300,000 shares
outstanding). L also has actual knowledge that the members of Public L
owning 27 percent of L stock immediately before the stock issuance
(27,000 shares/100,000 shares outstanding) own 29 percent of L stock
immediately after such issuance ([27,000 shares + 60,000 shares acquired
in the offering]/300,000 shares outstanding). Assuming that L chooses to
take its actual knowledge into account for purposes of determining
whether an ownership change occurred on January 22, 1988, Public L is
segregated into two direct public groups immediately before the stock
issuance so that the two percentage point increase in the ownership
interest in L by Acquiring Public L is taken into account. The total
increased ownership interest in L by New Public L and Acquiring Public L
on the testing date over their lowest ownership interest during the
testing period is 48 2/3 percent. Thus, no ownership change occurs with
respect to L.
Example (5) (i) L is owned entirely by 10,000 unrelated individuals,
none of whom own as much as five percent of L stock (``Public L''). P is
owned entirely by 1,500 unrelated individuals, none of whom own as much
as five percent of P stock (``Public P''). On December 22, 1988, L
acquires all of the P stock from Public P in exchange for L stock
representing 25 percent of the value of L, in a transaction described in
section 368(a)(1)(B).
(ii) Under paragraph (j)(2)(iii)(B)(1) of this section, Public L,
the direct public group that owns L stock immediately before and after
the transaction to which section 1032 applies, is treated separately
from Public P, the direct public group that acquires L stock in the
transaction. Because Public P's percentage ownership interest in L
increases to only 25 percent (as compared with 0 percent before the
acquisition), no ownership change occurs. For purposes of determining
whether an ownership change occurs on any testing date with a testing
period that includes December 22, 1988, Public L and Public P will
continue to be treated as separate 5-percent shareholders.
(iii) See Example (4) in paragraph (j)(3)(iv) of this section for
the application of paragraph (j)(2)(iii)(B) of this section to a
reorganization under section 368(a)(1)(B) in which the loss corporation
is acquired.
[[Page 479]]
(C) Redemption-type transactions--(1) In general. In the case of a
transaction in which the loss corporation acquires its stock in exchange
for property, each direct public group that exists immediately before
the transaction shall be segregated at that time (and thereafter) so
that the stock that is acquired in the transaction is treated as owned
by a separate public group from each public group that owns the stock
that is not acquired. For purposes of the preceding sentence, the term
property shall include stock described in section 1504(a)(4) and stock
described in paragraph (f)(18)(ii) of this section. Each direct public
group that owned the stock that is acquired in the transaction is
presumed not to own any such stock immediately after the transaction.
(2) Examples.
Example (1). L is entirely owned by Public L. There are 500,000
shares of L stock outstanding. On July 12, 1988, L acquires 150,000
shares of its stock for cash. Because L's acquisition is a redemption,
Public L is segregated into two different public groups immediately
before the transaction (and thereafter) so that the redeemed interests
(``Public RL'') are treated as part of a public group that is separate
from the ownership interests that are not redeemed (``Public CL'').
Therefore, as a result of the redemption, Public CL's interest in L
increases by 30 percentage points (from 70 percent (350,000/500,000) to
100 percent) on the July 12, 1988 testing date. Because the resulting
increase is not more than 50 percentage points, no ownership change
occurs. For purposes of determining whether an ownership change occurs
on any subsequent testing date having a testing period that includes
such redemption, Public CL is treated as a 5-percent shareholder whose
percentage ownership interests in L increased by 30 percentage points as
a result of the redemption.
Example (2). L is entirely owned by Public L. There are 250,000
shares of L common stock outstanding. On April 22, 1988, L acquires
100,000 shares of its outstanding common stock in exchange for 100,000
shares of preferred stock described in section 1504(a)(4). (The
transaction thus constitutes a recapitalization within the meaning of
section 368(a)(1)(E).) As a result of the recapitalization, which is a
transaction described in paragraph (j)(2)(iii)(C) of this section,
Public L is segregated into two different public groups immediately
before the transaction (and thereafter) so that the stock acquired by L
is treated as owned by a public group (``Public RL'') that is separate
from the public group that owns the stock that is not so acquired
(``Public CL''). Therefore, as a result of the transaction, Public CL's
interest in L increases by 40 percentage points (from 60 percent to 100
percent). Because the resulting increase is not more than 50 percentage
points, no ownership change occurs. For purposes of determining whether
an ownership change occurs on any subsequent testing date with a testing
period that includes the date of the recapitalization, Public CL is
treated as a separate 5-percent shareholder whose percentage ownership
interest increased by 40 percentage points as a result of the redemption
type transaction.
(D) Acquisition of loss corporation stock as the result of the
ownership of a right to acquire stock--(1) In general. In the case of a
deemed acquisition of stock of the loss corporation as the result of the
ownership of a right issued by the loss corporation to acquire such
stock (see paragraph (h)(4) of this section), each direct public group
that exists immediately after such acquisition shall be segregated so
that each direct public group that existed immediately before the
transaction is treated separately from the direct public group that is
deemed to acquire stock of the loss corporation as a result of the
ownership of the right to acquire such stock. The direct public group
that is treated as acquiring stock of the loss corporation in the
transaction is presumed not to include any members of any direct public
group that existed immediately before the transaction. In applying the
rules of paragraph (h)(4) of this section, the segregation rules of this
paragraph (j)(2)(iii)(D) shall apply before making the determination
required under that paragraph (h)(4) of this section. See Sec. 1.382-
3(j)(9) for rules relating to this paragraph (j)(2)(iii)(D).
(2) Example.
(i) L has 700,000 shares of common stock outstanding. Public L owns
all of the outstanding L common stock. On May 20, 1988, L issues a class
of debentures to the public that, in the aggregate, may be converted
into 300,000 shares of L common stock. On September 7, 1988,
P1 acquires 210,000 shares of L common stock over a public
stock exchange. None of the L debentures have been converted as of that
date.
(ii) By virtue of L's issuance of convertible debentures, May 20,
1988 is a testing date. See paragraph (a)(2)(i) of this section.
Immediately before the issuance of the convertible debentures, L's only
5-percent shareholder
[[Page 480]]
was Public L, a direct public group. Therefore, under paragraph
(j)(2)(iii)(D) of this section, Public L must be segregated from the
direct public group that would otherwise exist immediately after the
transaction for the purpose of applying paragraph (h)(4) of this
section, so that any acquisition of L stock through the conversion of
L's debentures is treated as made by a public group other than Public L
(``New Public L''). Assuming the largest increase in the total
percentage stock ownership of New Public L on the testing date (see
paragraph (h)(4) of this section), New Public L would have increased its
ownership interest in L by 30 percentage points. Therefore, the stock of
L would not be treated as acquired pursuant to a deemed conversion of
the L debentures on May 20, 1988, under paragraph (h)(4) of this
section, because the conversion would not cause an ownership change.
(iii) P1's acquisition of L common stock results in
second testing date. For the purpose of applying paragraph (h)(4) of
this section, Public L must again be segregated from the direct public
group that would otherwise result from conversion of the debentures, so
that a deemed acquisition of L stock through the conversion of L's
debentures on September 7, 1988 is treated as made by a public group
other than Public L (``New Public L''). As on the previous testing date,
New Public L would have increased its ownership interest in L by 30
percentage points if it were treated as having acquired L common stock
pursuant to the conversion of the L debentures. The increase in New
Public L's ownership, taken together with P1's 21 percentage
point ownership increase in L during the testing period [210,000 shares
deemed converted/(700,000 (actual) + 300,000 (deemed) shares
outstanding)], results in an ownership change.
(E) Transactions identified in the Internal Revenue Bulletin. Any
transaction that is designated by the International Revenue Service in
the Internal Revenue Bulletin shall be subject to the rules, as provided
in such bulletin, similar to the rules described in this paragraph
(j)(2)(iii).
(F) Issuance of rights to acquire loss corporation stock--(1) In
general. In the case of any transaction that is described in paragraph
(j)(2)(iii)(B), (D) or (E) of this section in which the loss corporation
issues rights to acquire its stock to the members of more than one
public group, those rights shall be presumed to be exercised pro rata by
each such public group as those rights are actually exercised. See Sec.
1.382-3(j)(10) for an exception to the application of the rule of this
paragraph (j)(2)(iii)(F)(1) to stock issued on the exercise of a
transferable option.
(2) Example.
(i) L, which has six million shares outstanding, is owned entirely
by Public L and P is owned entirely by Public P. On November 30, 1988, P
merges into L in a transaction qualifying under section 368(a)(1)(A)
with Public P receiving four million shares of L stock as a result of
the reorganization. Under paragraph (j)(2)(iii)(B) of this section,
Public L and Public P continue to be treated as separate public groups
following the merger. Pursuant to the plan of reorganization, L also
issues an amount of warrants in L stock pro rata to Public L and Public
P that, if exercised, would result in the issuance of an additional two
million shares of L stock. On November 30, 1989, when only one-half of
the outstanding warrants have been exercised, A acquires all of the
unexercised warrants.
(ii) Without regard to the warrants distributed in reorganization,
Public P's ownership interest in L increases by 40 percentage points on
November 30, 1988, relative to its lowest ownership interest in L at any
time during the testing period (0 percent prior to the merger). For
purposes of determining whether an ownership change occurs on November
30, 1988, the segregation rules of paragraphs (j)(2)(iii)(B) and (D) of
this section does not require that a third direct public group be
separately identified and treated as acquiring the warrants, because L
has actual knowledge that Public L and Public P acquired the distributed
warrants in proportion to their respective ownership interests in L
stock. Because the largest increase in the ownership of L on the testing
date results from treating only Public P as exercising the distributing
warrants, in which event, its ownership interest would increase by 44.4
percentage points ([four million shares acquired in the merger + 800,000
shares deemed acquired]/10.8 million (actual and deemed) shares
outstanding), the issuance of the warrants by L does not cause an
ownership change on November 30, 1988.
(iii) Under paragraph (j)(2)(iii)(F)(1) of this section, each actual
exercise of warrants to acquire one million shares of L stock between
November 30, 1988 and November 30, 1989 is treated as made pro rata by
Public L and Public P (600,000 shares to Public L and 400,000 shares to
Public P). Accordingly, as a result of the actual exercises of warrants
during that period the ownership interests of the only 5-percent
shareholders, Public L and Public P, are proportionately increased.
(iv) A's acquisition of the all of the outstanding warrants on
November 30, 1989 requires the determination whether there has been an
ownership change with respect to L, because A would be 5-percent
shareholder
[[Page 481]]
under paragraph (g)(1)(i) of this section owning 8\1/3\ percent of the L
stock if the acquired warrants were exercised (one million shares deemed
acquired/12 million (actual and deemed) shares outstanding). See
paragraph (a)(2)(i) of this section. Under paragraph (h)(4)(i) of this
section, A is not treated as having exercised those warrants, because an
ownership change would not results. (Public P's 36\2/3\ percentage point
increase [(four million shares acquired in the merger + 400,000 shares
deemed acquired)/12 million (actual and deemed) shares outstanding] and
A's 8\1/3\ percentage point increase is not greater than 50 percentage
points).
(iv) Combination of de minimis public groups--(A) In general.
Notwithstanding paragraph (j)(2)(iii)(A) of this section, any public
group first identified during a taxable year, as a result of any
transaction described in paragraph (j)(2)(iii)(B), (D), (E), or (F) of
this section, that owns less than five percent of loss corporation stock
may be combined, at the option of the loss corporation, with any other
such groups also first identified as a result of any such transaction
that occurs during such taxable year.
(B) Example.
(i) L is widely held with no person owning as much as five percent
of the L stock at any time (``Public L''). L's taxable year ends on
December 31. On January 1, 1989, L issues a class of debt maturing on
December 31, 2019 (``Class A Debentures'') with respect to which it will
semi-annually issue L stock in discharge of its interest obligation. In
addition, L issues an amount of L stock to the public in two separate
transactions during 1989. As a percentage of the L stock outstanding at
the close of L's taxable year on December 31, 1989, L issued .45 percent
of its stock on each of two dates in payment of interest with respect to
the Class A Debentures, 4.5 percent of its stock in the first stock
offering and six percent of its stock in the second stock offering.
During 1990, L did not issue stock other than in payment of interest
with respect to the Class A Debentures. As a percentage of L stock
outstanding on December 31, 1990, L issued .41 percent of its stock on
each of two dates during 1990 with respect to its outstanding debt.
(ii) Under paragraph (h)(4)(x)(E) of this section, L's obligation to
issue stock in satisfaction of the interest with respect to the Class A
Debentures until December 31, 2019, is not subject to paragraph
(h)(4)(i) of this section and thus is taken into account only as such
stock is issued.
(iii) The application of the segregation rules of paragraphs
(j)(2)(iii)(B) and (iv) of this section require the identification of at
least two additional, separate direct public groups during 1989. First,
the persons who acquire six percent of L stock in a public offering to
which section 1032 applies must be treated as a separate 5-percent
shareholder (``Public 1L''). See paragraph (j)(2)(iii)(B) of this
section. Even though this group was first identified in 1989, it may not
be combined with other public groups also first identified in 1989
because it owns five percent or more of L stock. Second, although each
of the three other issuances of L stock during the year ordinarily
result in the identification of an additional, separate direct public
group, each such direct public group may be combined with the two other
such groups into a single public group (``Public 2L''). As of the end of
1989, Public 2L would own a total of 5.4 percent of the stock of L.
(iv) The application of the segregation rules of paragraphs
(j)(2)(iii)(B) and (iv) of this section require the identification of at
least one additional, direct public group during 1990. Because each
additional, direct public group first identified in 1990 acquires less
than five percent of L stock, they may be combined into a single public
group (``Public 3L'') owning .82 percent of the stock of L. Public 3L is
treated as a five percent shareholder even though it owns less than five
percent of the stock of L. See paragraph (j)(2)(iv)(A) of this section.
(v) Multiple transactions--(A) In general. If a transaction (or any
part thereof) is described by more than one subdivision of paragraph
(j)(2)(iii) of this section, each such subdivision shall apply to the
transaction (or each part of the transaction) in the manner that results
in the largest increase in the percentage stock ownership by the 5-
percent shareholders.
(B) Example.
(i) All of the common stock of L is owned by 1,000 unrelated
persons, none of whom owns as much as five percent of the L stock
(``Public CL''). L has outstanding a class of preferred stock described
in section 1504(a)(4) that is owned in equal amounts by 500 unrelated
persons (``Public PL'').
(ii) On September 4, 1988, L rearranges its capital structure by
redeeming 70 percent of the common stock owned by 700 of the
shareholders in exchange for cash. In addition, all of the preferred
stock is exchanged for a new class of common stock (nonvoting)
representing 40 percent of the value of L.
(iii) With respect to the part of the transaction that is treated as
a redemption under paragraph (j)(2)(iii)(C) of this section (the
exchange of common stock for cash), Public CL is segregated into two
different public groups immediately before the transaction (and
[[Page 482]]
thereafter) so that the owners of the redeemed stock (``Public RCL'')
are treated as part of a public group that is separate from the public
group comprised of the owners of the stock that is not redeemed
(``Public CCL''). As a result of the redemption, Public CCL's percentage
ownership interest in L thus increases by 30 percentage points from 30
percent to 60 percent (taking into account all transactions occurring on
the testing date, because the change in ownership is measured under
paragraph (a)(1)(i) of this section by reference to each 5-percent
shareholder's ownership interest immediately after the testing date). In
addition, the exchange of preferred stock for nonvoting common stock is
a transaction to which section 1032 applies. Under paragraph (j)(2)(v)
of this section, the part of the transaction to which section 1032
applies is also subject to the segregation rules in the manner specified
in paragraph (j)(2)(iii)(B) of this section. Accordingly, Public PL, the
direct public group that acquires L nonvoting common stock in exchange
for L preferred stock, must be treated as a separate public group from
the other direct public groups, Public CCL and Public RCL. As a separate
public group, Public PL's percentage stock ownership in L increases by
40 points (as compared to 0 percent prior to the transaction).
(iv) In summary, Public CCL increases its percentage ownership in L
by 30 percentage points and Public PL increases its percentage ownership
by 40 percentage points. Consequently, an ownership change occurs with
respect to L on September 4, 1988.
(vi) Acquisitions made by either a 5-percent shareholder or the loss
corporation following application of the segregation rules. Unless a
different proportion is established by either the loss corporation or
the Internal Revenue Service, the acquisition of loss corporation stock
by either a 5-percent shareholder or the loss corporation on any date on
which more than one public group of the loss corporation exists by
virtue of the application of the rules of this paragraph (j)(2) shall be
treated as being made proportionately from each public group existing
immediately before such acquisition. See paragraph (g)(5)(i)(B) of this
section for the application of this paragraph to the ownership interest
of a 5-percent shareholder that owns less than five percent of the stock
of the loss corporation on the testing date.
(3) Segregation rules applicable to transactions involving first
tier entities or higher tier entities--(i) Dispositions. If a loss
corporation is owned, in whole or in part, by a public group (or
groups), the rules of paragraphs (j)(2)(iii)(B) and (iv) of this section
shall apply to any transaction in which a first tier entity or an
individual that owns a direct ownership interest in the loss corporation
of five percent or more transfers a direct ownership interest in the
loss corporation to public shareholders. Therefore, each direct public
group that exists immediately after such a disposition shall be
segregated so that the ownership interests of each public group that
existed immediately before the transaction are treated separately from
the public group that acquires stock of the loss corporation as a result
of the disposition by the individual or first tier entity. The
principles of this paragraph (j)(3)(i) shall also apply to transactions
in which an ownership interest in a higher tier entity that owns five
percent or more of the loss corporation (determined without regard to
the application of paragraph (h)(2)(i)(A) of this section) or a first
tier entity is transferred to a public owner or 5-percent owner who is
not a 5-percent shareholder.
(ii) Example.
(A) L is owned equally by Public L, P and E. Public L consists of
150 equal, unrelated shareholders. P is owned by Public P, a group
consisting of 1,500 equal, unrelated shareholders. E is a partnership
and none of its partners are 5-percent owners. On October 22, 1988, E
sells its entire interest in L over a public stock exchange. No
individual or entity acquires as much as five percent of L's stock as
the result of E's disposition of the L stock.
(B) The disposition of the L stock by E is a transaction that causes
the segregation of L's direct public group that exists immediately
before the transaction (Public L) from the direct public group that
acquires L stock in the transaction (Public EL). As a result, L has
three 5-percent shareholders, Public L, Public P (through the
application of paragraph (j)(1) of this section) and Public EL, each of
which owns 33\1/3\ percent of L stock. Therefore, Public EL is a 5-
percent shareholder that has increased its ownership interest in L by
33\1/3\ percentage points during the testing period. For purposes of
subsequent transactions, Public L and Public EL will continue to be
treated as separate direct public groups until any subsequent testing
date that does not have a testing period that includes E's disposition
of L stock.
[[Page 483]]
(iii) Other transactions affecting direct public groups of a first
tier entity or higher tier entity. The rules of paragraphs (j)(2)(i),
(iii), (iv) and (v) of this section shall apply to transactions
described in such paragraphs that involve either a higher tier entity
that owns five percent or more of the loss corporation (determined
without regard to the application of paragraph (h)(2)(i)(A) of this
section) or a first tier entity. In applying those rules for purposes of
this paragraph (j)(3)(iii), each direct public group of a first tier
entity or a higher tier entity is any public group of any such entity
identified in paragraph (j)(1)(iv)(A) or (B) of this section or
resulting from the application of this paragraph (j)(3)(iii). The
principles of paragraph (j)(2)(iii)(C) of this section also shall apply
to any transaction that has the effect of a redemption-type transaction
(e.g., an acquisition by the loss corporation of stock in a first tier
entity).
(iv) Examples.
Example (1) The facts are the same as in Example (1) of paragraph
(j)(2)(iii)(B)(2) of this section, except that Public L and
P1 own 40 percent and 60 percent, respectively, of the stock
of HC which, in turn, owns 100 percent of L and HC merges into
P2. Under paragraph (j)(3)(iii) of this section, the rules of
paragraph (j)(2)(iii)(B) of this section apply to segregate HC's direct
public group (Public L) immediately before the merger from the direct
public group (Public P2) that acquires loss corporation stock
in the merger. The consequences of the merger of HC into P2
are thus the same as in Example (1) of paragraph (j)(2)(iii)(B)(2) of
this section.
Example (2) (i) Twenty-five individual shareholders each own four
percent of L (``Public L''). Public L is therefore the only 5-percent
shareholder of L. Each of the shareholders of L contribute their L stock
to a newly formed corporation, HC. In exchange for their contribution of
L stock, HC issues 100 percent of each of its two classes of common
stock (voting and nonvoting).
(ii) The formation of HC, a first tier entity of L, is a transaction
to which section 1032 applies. Under paragraph (j)(3)(iii) of this
section, the rules of paragraphs (j)(1)(iii) and (j)(2)(iii)(B) of this
section are applied to this transaction with the result that the
shareholders of HC, immediately after the issuance of HC stock, are
presumed not to include any persons that previously had a direct or
indirect ownership interest in L. The presumption underlying those
rules, however, is rebutted by establishing that all of the HC stock
outstanding immediately after the transaction was issued solely in
exchange for L stock. Thus, Public HC (immediately after the
transaction) and Public L (immediately before the transaction) would be
treated owned by the same direct public group.
Example (3) (i) All of the stock of L is owned by unrelated
shareholders, none of whom owns as much as five percent of L stock. P
also is owned by unrelated shareholders, none of whom owns as much as
five percent of P stock. On November 22, 1988, P incorporates
P1 with a contribution of P stock. Immediately thereafter,
P1 acquires all of the properties of L in exchange for its P
stock in a forward triangular merger qualifying under sections 368
(a)(1)(A) and (a)(2)(D). The P stock transferred by P1 equals
45 percent of the total outstanding P stock.
(ii) Immediately before the merger of L into P1, P's only
5-percent shareholder was Public P, a direct public group of P. The
rules of paragraph (j)(2)(iii)(B) of this section thus apply to the
transaction under paragraph (j)(3)(i) of this section since P, a first
tier entity, is a party to the reorganization described in such
paragraph. Although Public P does not acquire any stock in the merger,
it is treated as acquiring stock in the loss corporation, P1,
because such corporation succeeds to the pre-change losses of L in a
transaction to which 381(a) applies. As a result of the merger, Public
P, the direct public group of P that exists immediately before the
merger, must be segregated from the direct public groups acquiring P
stock in the reorganization. Public P is, therefore, treated as
acquiring 55 percent of the outstanding stock of the loss corporation,
P1, in the transaction. The transaction, therefore, results
in an ownership change for P1.
Example (4) (i) L is owned 20 percent by A and 80 percent by 1,000
unrelated individuals and entities, none of whom owns as much as five
percent of L stock (``Public L''). P is owned 10 percent by B, 40
percent by E, and 50 percent by 5,000 unrelated individuals, none of
whom owns as much as five percent of P stock (``Public P''). E is owned
30 percent by C and 70 percent by 30 unrelated individuals, none of whom
owns as much as five percent of E (``Public E'').
(ii) On October 31, 1987, P acquires all of the L stock from A and
Public L in exchange for P stock representing 20 percent of the value of
P (determined immediately after the acquisition) in a transaction
described in section 368(a)(1)(B). After the acquisition, P is owned
eight percent by B, 32 percent by E, four percent by A, and 56 percent
by 6,000 unrelated individuals, none of whom owns as much as five
percent of P. Because L is wholly owned by P immediately after the
acquisition, L, under paragraph (j)(1) of this section, is treated as
owned as follows: Eight percent by B, 9.6 percent by C (through C's
ownership
[[Page 484]]
interest in E, a highest tier entity, and E's ownership interest in P, a
first tier entity), 22.4 percent by Public E (through its ownership
interest in E and E's ownership interest in P), four percent by A, and
56 percent by the shareholders who each own less than five percent of L
through their ownership interest in P.
(iii) Under paragraph (j)(3)(iii) of this section, the rules of
paragraph (j)(2)(iii)(B) of this section apply to the reorganization
since the transaction involved a first tier entity of L. Thus, the
direct public group of P that exists immediately after the transaction
must be segregated into two public groups--the direct public group of P
that existed immediately before the acquisition (Public P) is treated
separately from the direct public group consisting of the persons who
acquire P stock in the transaction (Public L). Accordingly, immediately
after the reorganization, Public P and Public L own 40 percent and 16
percent of L, respectively. See paragraph (h) of this section. (Under
paragraph (g)(5)(ii)(B) of this section, L may treat the four percent of
L stock owned by A immediately after the reorganization as the amount of
L stock owned by A for each subsequent testing date having a testing
period that includes the reorganization.)
(iv) In summary, after applying the rules of paragraphs (j)(1) and
(3) of this section, L is treated as owned as follows:
------------------------------------------------------------------------
Percentage
5-percent shareholder ownership
interest
------------------------------------------------------------------------
A......................................................... 4.0
B......................................................... 8.0
C......................................................... 9.6
Public E.................................................. 22.4
Public P.................................................. 40.0
Public L.................................................. 16.0
------------------------------------------------------------------------
(v) The reorganization results in an ownership change, because B, C,
Public E and Public P, all of whom are 5-percent shareholders, together
have increased their percentage ownership in L by 80 percentage points
as compared to their lowest percentage ownership in L at any time during
the testing period (0 percent prior to the acquisition).
(v) Acquisitions made by a 5-percent shareholder, a higher tier
entity, or a first tier entity following application of the segregation
rules. The rules of paragraph (j)(2)(vi) of this section shall apply to
the acquisition of an ownership interest in a first tier entity (or
higher tier entity) if more than one direct public group of any such
entity are segregated under the rules of this paragraph (j)(3).
Accordingly, an acquisition by such an entity or a 5-percent shareholder
of any ownership interest in such an entity shall be treated as made
proportionately from the direct public groups resulting from the
application of this paragraph (j)(3).
(k) Operating rules--(1) Presumptions regarding stock ownership.
Subject to paragraphs (k)(2) and (4) of this section, for purposes of
applying paragraphs (f), (g), (h), and (j)(1) of this section--
(i) Stock subject to regulation by the Securities and Exchange
Commission. With respect to loss corporation stock that is described in
Rule 13d-1(d) of Regulation 13D-G (or any rule or regulation to
generally the same effect), promulgated by the Securities and Exchange
Commission under the Securities and Exchange Act of 1934 (``registered
stock''), a loss corporation may rely on the existence and absence of
filings of Schedules 13D and 13G (or any similar schedules) as of any
date to identify all of the corporation's shareholders who have a direct
ownership interest of five percent or more (both individuals and first
tier entities) on such date. A loss corporation may similarly rely on
the existence and absence of such filings as of any date with respect to
registered stock of any first tier entity or any higher tier entity to
identify the 5-percent owners of any such entities on such date who
indirectly own five percent or more of the loss corporation stock, and
are thus 5-percent shareholders, and to identify any higher tier
entities of such entities.
(ii) Statements under penalties of perjury. A loss corporation may
rely on a statement, signed under penalties of perjury, by an officer,
director, partner, trustee, executor or similar responsible person, on
behalf of a first tier entity or a higher tier entity to establish the
extent, if any, to which the ownership interests of any 5-percent owners
or higher tier entities with respect to such entities have changed
during a testing period. A loss corporation may not rely on such a
statement (A) that it knows to be false or (B) that is made by either a
first tier entity or higher tier entity that owns 50 percent or more of
the stock of the loss corporation. For purposes of the preceding
sentence, any first tier entities and higher tier entities that are
known by the loss corporation to be members of
[[Page 485]]
the same controlled group (within the meaning of section 267(f)) shall
be treated as one corporation.
(2) Actual knowledge regarding stock ownership. For purposes of this
section (other than paragraphs (g)(5) and (j)(1)(v) of this section), to
the extent that the loss corporation has actual knowledge of stock
ownership on any testing date (or acquires such knowledge before the
date that the income tax return is filed for the taxable year in which
the testing date occurs) by--
(i) An individual who would be a 5-percent shareholder, but for the
application of paragraphs (h)(2)(iii), (h)(6)(iii) or (g)(2) of this
section, or
(ii) A 5-percent shareholder that would be taken into account, but
for paragraphs (h)(2)(iii), (h)(6)(iii) or (g)(3) of this section,
the loss corporation must take such stock ownership into account for
purposes of determining whether an ownership change has occurred on that
testing date. If a loss corporation acquires such knowledge after such
income tax return is filed, the loss corporation may take such ownership
into account for purposes of determining whether an ownership change
occurred on that testing date and, if appropriate, file an amended
income tax return (subject to any applicable statute of limitations). To
the extent the loss corporation has actual knowledge on or after any
testing date regarding the ownership interest in the loss corporation by
members of one public group (described in paragraphs (g)(1)(ii), (iii)
or (iv) of this section) and the ownership interest of those members in
the loss corporation as members in another such public group, the loss
corporation may take such ownership into account for purposes of
determining whether an ownership change occurred on that testing date.
(3) Duty to inquire as to actual stock ownership in the loss
corporation. For purposes of this section, the loss corporation is
required to determine the stock ownership on each testing date (and,
except as otherwise provided in this section, the changes in the stock
ownership during the testing period) of--
(i) Any individual shareholder who has a direct ownership interest
of five percent or more in the loss corporation,
(ii) Any first tier entity,
(iii) Any higher tier entity that has an indirect ownership interest
of five percent or more in the loss corporation (determined without
regard to paragraph (h)(2)(i)(A) of this section), and
(iv) Any 5-percent owner who indirectly owns five percent or more of
the stock of the loss corporation in his capacity as a 5-percent owner
in any one first tier entity or higher tier entity.
The loss corporation does not have any obligation to inquire or to
determine facts relating to the stock ownership of any shareholders
other than those described in the preceding sentence. In addition, the
loss corporation does not have any obligation to inquire or to determine
if the actual facts relating to the stock ownership of any shareholder
are consistent with the ownership interests of the loss corporation as
determined by applying the presumptions and other rules of paragraphs
(g), (h), (j) or (k)(1) of this section.
(4) Ownership interest structured to avoid the section 382
limitation. For purposes of this section, if the ownership interests in
a loss corporation are structured by a person with a direct or indirect
ownership interest in the loss corporation to avoid treating a person as
a 5-percent shareholder (or to permit the loss corporation to rely on
the presumption provided in paragraph (g)(5)(i)(B) of this section) for
a principal purpose of circumventing the section 382 limitation, then--
(i) Paragraph (h)(2)(iii) of this section shall not apply with
respect to the ownership interests so structured and the constructive
ownership rules of paragraph (h)(2)(i) of this section shall thus apply
to attribute stock from any entity without regard to the amount of stock
it owns in the loss corporation or any other corporation,
(ii) Paragraphs (g)(2) and (3) of this section shall be modified
with respect to the ownership interests so structured so that the
ownership interest of a person includes all of an individual's direct
and indirect ownership in the loss corporation, without regard to
whether each such interest represents five percent or more of the stock
of the loss corporation, and
[[Page 486]]
(iii) Paragraph (g)(5)(i)(B) of this section shall not apply with
respect to the ownership interests so structured so that the ownership
interest of a person takes into account his actual ownership interest in
the loss corporation.
This paragraph (k)(4) shall apply, however, only if application would
result in an ownership change.
(5) Example.
L is owned by 25 individuals who each own four percent of the
outstanding L stock. A purchases 40 percent of L stock from such
shareholders on August 13, 1988. Thereafter, B plans to acquire 15
percent of the L stock. B is advised concerning the potential
application of section 382 to L. On February 1, 1989, B acquires a 15
percent interest in L pursuant to a program in which each of four
corporations, P1 through P4, each of which is
wholly-owned by B, acquire a 3.75 percent interest in L. A principal
purpose of acquiring the L stock through four corporations is to avoid
treating B as owning any ownership interest in L amounting to as much as
five percent, and thus to circumvent the section 382 limitation by
avoiding an ownership change. Under paragraph (k)(4) of this section,
the limitation on the constructive ownership rules of paragraph
(h)(2)(iii) of this section are disregarded and B is treated as a 5-
percent shareholder owning 15 percent of the stock of L by virtue of his
ownership interests in P1 through P4,
notwithstanding paragraph (g)(2) of this section. Accordingly, an
ownership change occurs with respect to L.
(6) First tier entity or higher tier entity that is a foreign
corporation or entity. [Reserved]
(l) Changes in percentage ownership which are attributable to
fluctuations in value. [Reserved]
(m) Effective date--(1) In general. Except as provided in this
paragraph (m), section 382 shall apply to any ownership change that
occurs immediately after an owner shift or an equity structure shift
that occurs after December 31, 1986, or any other event occurring after
such date that requires the determination of whether an ownership change
has occurred under paragraph (a)(2)(i) of this section. In the case of
an equity structure shift (including an equity structure shift that also
constitutes an owner shift), any equity structure shift completed
pursuant to a plan of reorganization adopted before January 1, 1987,
shall be treated as occurring on the date such plan was adopted.
Therefore, section 382 shall apply to any ownership change occurring
immediately after--
(i) An owner shift (excluding an owner shift that also constitutes
an equity structure shift) that occurs on or after January 1, 1987,
(ii) An equity structure shift that occurs after December 31, 1986,
if it is completed pursuant to a plan of reorganization adopted on or
after January 1, 1987, or
(iii) Any transfer or issuance of an option, or other interest that
is similar to an option, that occurs on or after January l, 1987 and
that is taken into account under paragraph (a)(2)(i) of this section.
With respect to equity structure shifts completed pursuant to plans
adopted before January 1, 1987, section 382 shall be inapplicable only
if the equity structure shift that is treated as occurring on the date
the plan of reorganization for such shift was adopted (or other event
occurring after the adoption of such plan) results in an ownership
change before January 1, 1987. In that event, a new testing period for
the loss corporation shall begin on the day after such ownership change.
(2) Plan of reorganization. For purposes of paragraph (m)(1) of this
section, a plan of reorganization shall be treated as adopted on the
earlier of--
(i) The first date that the boards of directors of all the parties
to the reorganization have adopted the plan or have recommended adoption
to their shareholders, or
(ii) The date the shareholders approve such reorganization.
If there is an ownership change with respect to a subsidiary as the
result of a reorganization of the parent, the treatment of the
subsidiary under this paragraph (m)(2) shall be governed by the
classification of the parent-level transaction. For purposes of the
preceding sentence, a corporation shall be treated as a subsidiary of
another corporation only if the other corporation owns stock in that
corporation meeting the requirements of section 1504(a)(2).
(3) Earliest commencement of the testing period. For purposes of
determining if an ownership change has occurred at any time after May 5,
1986, the testing period shall begin no earlier than May
[[Page 487]]
6, 1986. Under paragraph (d)(4) of this section, therefore, shifts in
the ownership of stock of the loss corporation prior to May 6, 1986 are
disregarded.
(4) Transitional rules--(i) Rules provided in paragraph (j) of this
section for testing dates before September 4, 1987. For purposes of
determining whether an ownership change occurs for any testing date
before September 4, 1987.
(A) The rules of paragraph (j)(1) of this section shall apply only
to stock of the loss corporation acquired after May 5, 1986, by any
first tier entity or higher tier entity and shall not apply to any stock
acquired by such an entity on or before that date,
(B) The rules of paragraph (j)(2) of this section shall apply only
to equity structure shifts in which more than one corporation is a party
to the reorganization and shall not apply to any other transactions, and
(C) The rules of paragraph (j)(3) of this section shall apply only
to--
(1) Dispositions of stock acquired by an individual, a first tier
entity or higher tier entity after May 5, 1986 (and shall not apply to
dispositions of stock acquired on or before such date), and
(2) Equity structure shifts in which more than one corporation is a
party to the reorganization (and shall not apply to any other
transactions).
For any testing date before September 4, 1987, however, the loss
corporation is permitted to apply all of the rules of paragraph (j) of
this section. A loss corporation that applies the rules of paragraph (j)
of this section under the preceding sentence must apply all of the rules
of such paragraph in determining whether any ownership change occurs on
any testing dates after May 5, 1986.
(ii) Example.
(i) L is owned entirely by 10,000 unrelated individuals, none of
whom owns as much as five percent of the stock of L (``Public L''). P is
owned entirely by 1,000 unrelated individuals, none of whom owns as much
as five percent of the stock of P (``Public P'').
(ii) Between March 1, 1987 and June 1, 1987, P acquires 45 percent
of L stock in a series of transactions. On June 15, 1987, L redeems 20
percent of the L stock from Public L.
(iii) Under paragraph (m)(4)(i)(A) of this section, the rules of
paragraph (j)(1) of this section apply to the acquisitions made by P,
because they occurred after May 5, 1986. Accordingly, following those
acquisitions, the stock of L is owned 45 percent by Public P and 55
percent by Public L. Because the increase in the percentage ownership by
Public P as a result of P's stock purchases is not more than 50 percent,
no ownership change occurs as the result of P's purchases.
(iv) On or after September 4, 1987, the rules of paragraph
(j)(2)(iii)(C) of this section apply to treat any L stock that is
redeemed as owned by a public group that is separate from the public
group owning the stock that is not redeemed. (Under paragraph
(j)(2)(iii)(C) of this section, the continuing shareholders of Public L,
who owned 35 percent of the stock of L before the redemption ([55
percent--20 percent]/100 percent) increase their ownership interest in L
by 8.8 percentage points as a result of such redemption (43.8 percent--
35 percent)). Those rules, however, do not apply to the June 15, 1987
redemption because it occurs before the date that paragraph (j)(2)(iii)
of this section generally is effective. (Until September 4, 1987,
paragraph (j)(2)(iii) of this section generally is effective only for
equity structure shifts in which more than one corporation is a party to
the reorganization.) Solely because of the application of paragraph
(j)(1) of this section to P's acquisitions of L stock, Public P's
ownership interest in L as a result of the redemption has increased from
45 percentage points to 56.2 percentage points which, compared to its
lowest percentage ownership interest at any time during the testing
period (0 percent prior to March 1, 1987), is a more than 50 percentage
point increase thus causing an ownership change with respect to L on
June 15, 1987.
(iii) Rules provided in paragraph (j) of this section for testing
dates on or after September 4, 1987. For purposes of determining whether
an ownership change occurs for any testing date on or after September 4,
1987, the rules of paragraphs (j)(2) and (3) of this section shall not
apply to identify any public group resulting from--
(A) Any transaction described in such paragraphs (j)(2) and (3),
unless that transaction is also described in paragraph (m)(4)(i)(B) or
(C) of this section, or
(B) Any disposition of stock acquired on or before May 5, 1986, but
only if such disposition or other transaction occurs before September 4,
1987. Thus, for example, the rules of paragraph (j)(2)(iii)(D) of this
section shall apply only to rights to acquire stock of the loss
corporation issued on or after such date.
(iv) Rules provided in paragraphs (f)(18)(ii) and (iii) of this
section. For
[[Page 488]]
purposes of determining whether an ownership change occurs for any
testing date, the rules of paragraphs (f)(18)(ii) and (iii) of this
section apply only to stock (or any other ownership interest) that is--
(A) Issued on or after September 4, 1987, or
(B) Transferred to (or by) a person who is a 5-percent shareholder
(or would be a 5-percent shareholder if paragraph (f)(18)(iii) of this
section were applicable) on or after September 4, 1987.
(v) Rules provided in paragraph (a)(2)(ii) of this section. The
information statement required under paragraph (a)(2)(ii) of this
section is not required to be filed with respect to any taxable year for
which the due date (including extensions) of the income tax return of
the loss corporation is on or before October 5, 1987.
(vi) Rules provided in paragraph (h)(4) of this section. The rules
provided in paragraph (h)(4) of this section do not apply on any testing
date on or after November 5, 1992. The rule provided in paragraph
(h)(4)(viii) of this section applies to the lapse or forfeiture of any
option treated as exercised under paragraph (h)(4)(i) of this section.
If an option is treated as exercised under paragraph (h)(4)(i) of this
section, and the option is actually exercised on a day that is within
120 days after the date on which the option is treated as exercised, the
rule provided in paragraph (h)(4)(vi)(B) of this section applies (even
if the actual exercise of the option occurs on a date on which the rules
of paragraph (h)(4) of this section would not otherwise apply). Thus, in
such a case, the loss corporation may elect to treat paragraphs
(h)(4)(i) and (vi)(A) of this section as not applying to the option and
take into account only the acquisition of loss corporation stock
resulting from the actual exercise of the option.
(vii) Rules provided in paragraph (a)(2)(i) of this section. The
rules provided in paragraph (a)(2)(i) of this section apply to determine
whether dates prior to November 5, 1992, are testing dates. For rules
regarding the determination of whether dates on or after November 5,
1992, are testing dates, see Sec. 1.382-2(a)(4).
(5) Bankruptcy proceedings--(i) In general. In the case of a
reorganization described in section 368(a)(1)(G) or an exchange of debt
for stock in a title 11 or similar case (within the meaning of section
368(a)(3)), section 382 shall not apply to any ownership change
resulting from such a reorganization or proceeding if a petition in such
case was filed with the court before August 14, 1986. Accordingly, any
shift in ownership in the loss corporation arising out of such
reorganization or proceeding shall not be taken into account for
purposes of determining whether an ownership change occurs on any
testing date that occurs after December 31, 1986.
(ii) Example.
(i) L filed a petition in bankruptcy on September 29, 1985. As a
result of a title 11 bankruptcy reorganization of L that is confirmed by
a court on February 2, 1988, there is a shift in the ownership of L so
that JK increased her interest in L by 24 percentage points relative to
her lowest ownership interest in L during the testing period. JK is the
only 5-percent shareholder of L following the reorganization whose
interest in L increased as a result of the transaction. On December 25,
1988, GK purchases 42 percent of the outstanding stock of L from
shareholders other than JK.
(ii) There is no ownership change on December 25, 1988 because the
24 percentage point increase in JK's ownership interest in L is not
taken into account under paragraph (m)(6)(i) of this section.
(iii) The facts are the same as in (i), except that the acquisitions
by JK and GK occurred on August 5, 1986 and September 26, 1986,
respectively. Because paragraph (m)(6)(i) of this section is only
applicable with respect to the determination of whether an ownership
change has occurred on any testing date that occurs after December 31,
1986, there is an ownership change as a result of GK's acquisition on
September 26, 1986. Accordingly, section 382 is inapplicable to such
ownership change under paragraph (m)(1) of this section because it
occurred prior to January 1, 1987. Under paragraph (d)(2) of this
section, the testing period for determining whether an ownership change
occurs on any subsequent testing date shall commence no earlier than
September 27, 1986.
(6) Transactions of domestic building and loan associations. The
rules of paragraph (j)(2)(iii)(B) of this section (and the application
of those rules by virtue of paragraph (j)(3) of this section) shall not
apply to a public offering of stock
[[Page 489]]
by a domestic building and loan association described in section 591 (or
any corporation that owns stock in the association meeting the
requirements of section 1504(a)(2)) prior to January 1, 1989. In the
case of any transaction described in the preceding sentence, any
transitory ownership of stock by any entity that is an underwriter shall
be disregarded so that the rules of paragraph (j)(1) of this section
shall not apply to treat such stock as owned by the owners of the
underwriter and thus the rules of paragraph (j)(3)(i) of this section
shall not apply to the disposition of such stock by the underwriter. For
purposes of this paragraph (m)(7)--
(i) Ownership shall be considered transitory only with respect to an
underwriter acquiring stock in a firm commitment underwriting to the
extent the stock is disposed of pursuant to the offer (but in no event
later than sixty (60) days after the initial offering) and,
(ii) To the extent a transaction may be described both by paragraph
(j)(2)(iii)(B) of this section and any other provision of paragraph
(j)(2)(iii) or (3) of this section, paragraph (j)(2)(v)(A) of this
section shall not apply and the transaction shall be treated as
described solely by paragraph (j)(2)(iii)(B) of this section.
(7) Transactions not subject to section 382--(i) Application of old
section 382. Old section 382 shall not apply to a loss corporation on or
after the date on which an ownership change occurs, but only if such
ownership change results in the application of the section 382
limitation (as defined in section 382(b)) with respect to the loss
corporation.
(ii) Effect on testing period. The application of old section 382 to
a transaction is disregarded for purposes of paragraph (d)(2) of this
section unless the transaction that results in such application is the
last component of an ownership change after May 5, 1986 that is not
subject to section 382 under the effective date rules of this paragraph
(m) (e.g., an ownership change occurring as the result of an
individual's purchase of more than 50 percent of L stock on any date on
or before December 31, 1986).
(iii) Termination of old section 382. [Reserved]
(8) Options issued or transferred before January 1, 1987--(i)
Options issued before May 6, 1986. An option issued before May 6, 1986,
is subject to the rules of paragraph (h)(4) of this section only if it
is transferred by (or to) a 5-percent shareholder (or a person who would
be a 5-percent shareholder if the option were treated as exercised) on
or after such date. In all other cases, such an option shall not be
subject to paragraph (h)(4)(i) of this section, but shall be subject to
paragraph (h)(4)(xii) of this section. Thus, for example, a warrant to
acquire stock of the loss corporation issued before May 6, 1986 shall
not be subject to paragraph (h)(4) of this section unless the warrant is
transferred by (or to) a 5-percent shareholder. The exercise of such a
warrant, however, would be taken into account as required by this
paragraph (m)(8)(i) and paragraph (h)(4)(xii) of this section.
(ii) Options issued on or after May 6, 1986 and before September 18,
1986. An option issued or transferred on or after May 6, 1986, and
before September 18, 1986, is subject to the rules of paragraph (h)(4)
of this section.
(iii) Options issued on or after September 18, 1986 and before
January 1, 1987. An option issued or transferred on or after September
18, 1986, and before January 1, 1987, is subject to the rules of
paragraph (h)(4) of this section, except that the option shall be
treated for purposes of this section as if it never had been issued in
the event that either--
(A) The option lapses unexercised or is irrevocably forfeited by the
holder thereof, or
(B) On the date the option was issued, there was no significant
likelihood that such option would be exercised within the five-year
period from the date of such issuance and a purpose for the issuance of
the option was to cause an ownership change prior to January 1, 1987.
(9) Examples. The rules of this paragraph (m) may be illustrated by
the following examples.
Example (1) (i) A owns all 100 outstanding shares of L stock. A
sells 11 shares to B on January 1, 1986. The January 1, 1986 testing
date is disregarded under paragraph (m)(3) of this section. A sells
another 40 shares to B on
[[Page 490]]
January 1, 1988. B's second stock purchase is an owner shift that does
not result in an ownership change. B's percentage ownership interest on
the testing date (51 percent) is only 40 percentage points greater than
the lowest percentage of L stock owned by B at any time during the
testing period (11 percent on and after May 6, 1986).
(ii) The facts are the same as in (i). In addition A sells 20 shares
of his L stock to C on July 1, 1990. C's stock purchase is an owner
shift. Because B and C together have increased their respective
ownership interests in L by 40 and 20 percentage points relative to
their lowest percentage stock ownership interests in L at any time
during the testing period, C's purchase causes an ownership change. The
testing period for any subsequent ownership change begins on the first
day following C's acquisition, July 2, 1990.
Example (2) (i) C has owned 100 percent of L since March 22, 1980.
On October 13, 1986, P merges into L. As a result of the merger, 40
percent of L stock is acquired by A, the sole shareholder of P. The
merger of P into L is both an equity structure shift and an owner shift.
The transaction, however, is not an ownership change with respect to L,
because A's percentage ownership interest has increased by only 40
percentage points. On August 22, 1987, B purchases 15 percent of the L
stock from C. B's purchase constitutes an owner shift resulting in an
ownership change that is subject to section 382 because the aggregate
increases in percentage ownership by B and C (respectively 40 percent
and 15 percent) is more than 50 percentage points.
(ii) The facts are the same as in (i), except that the plan of
reorganization is adopted on October 13, 1986, and the merger is
completed on July 22, 1987. The result is the same as in (i).
(iii) The facts are the same as in (ii), except that the
reorganization is completed on August 22, 1987, and B's purchase of the
L stock occurs one month earlier, on July 22, 1987. Assume that after
the reorganization on August 22, 1987, A and B own 40 percent and 15
percent, respectively, of L stock. Although the merger occurred pursuant
to a plan of reorganization adopted before 1987, L is subject to section
382 following the equity structure shift, because the merger would not
have caused an ownership change if it had been completed in 1986 after
the commencement of the L's testing period.
(iv) The facts are the same as in (ii), except that B's purchase
occurs on June 7, 1986. Assume that immediately after the reorganization
on August 22, 1987, A and B own 40 percent and 15 percent, respectively,
of L stock. Since the reorganization pursuant to a plan adopted before
1987, taken together with the other shifts in the ownership of L's stock
between May 5, 1986, and December 31, 1986, would have caused an
ownership change, section 382 does not apply as a result of the merger.
Since an ownership change occurs as a result of the merger, L's testing
period for purposes of any subsequent ownership change begins on October
14, 1986.
(v) The facts are the same as in (iv), except that B makes an
additional purchase from C of one percent of L's stock on February 14,
1987. The result is the same as in (iv). B's additional purchase,
however, is taken into account for the purpose of determining whether
there is a second ownership change with respect to L.
[T.D. 8149, 52 FR 29675, Aug. 11, 1987, as amended by T.D. 8264, 54 FR
38666, Sept. 20, 1989; T.D. 8277, 54 FR 52936, Dec. 26, 1989; T.D. 8352,
56 FR 29434, June 27, 1991; T.D. 8405, 57 FR 10741, Mar. 30, 1992; T.D.
8407, 57 FR 12210, Apr. 9, 1992; T.D. 8428, 57 FR 38282, Aug. 24, 1992;
T.D. 8440, 57 FR 45712, Oct. 5, 1992; 57 FR 52827, Nov. 5, 1992; T.D.
8490, 59 FR 51573, Oct. 4, 1993; T.D. 8531, 59 FR 12837, Mar. 18, 1994;
T.D. 8679, 61 FR 33315, June 27, 1996; T.D. 8825, 64 FR 36177, July 2,
1999]