Bercy (370)--(a)(2)(D) reorg, but court said carryback of NOL not prevented by 381(b)(3). Says no problem if really just speaking of one entity. That was the case here, since Bercy merged into a shell sub.
What of (a)(2)(E)? In Bercy, even IRS conceded would be OK. See note 7, page 373. Clearly would be since like a B--is same corp so hard to prevent using NOL.
F reorgs (376) -- not so sig now, since can't do it with many corporations.
BUT, since it is so attractive in terms of NOLs, it always poses some attraction to people.
E reorgs (377) -- Convertible debt as ongoing reorg to make it tax-free. Debt-for-debt issues.
Chapter 13--Section 382.
Libson Shops (380)--16 companies, owned by the same people, doing the same thing in 16 different stores. If they were separate, could not offset losses of one against income of another.
They merge, and resulting company has income. Can it use the losses of predecessors if the assets of those predecessors did not produce income?
Supreme Court said no--even though facts are pretty strong for the t/p: same people; basically same business.
This suggests that losses ought to be attached to a particular business. In fact, section 382 makes the crucial issue whether ownership has changed (although business continuity is not ignored completely).
1988 STATUTE
I. Concept of an "ownership change"
It is all or nothing - if have it, have certain consequences.
II. Results if have an ownership change
A. Losses are restricted to a certain amount each year (section 382(a)).
It is NOT that the losses are scaled down: you still have all of them, just can't use more than a certain amount each year.
B. The amount you can use is the "section 382 limitation": the value of the old loss corporation times the "long-term tax-exempt rate" (section 382(b)(1)).
Understand the concept: if you put the net assets into a partnership, would get a certain return. Only that return could be used to offset preexisting NOLs. The section 382 limitation is intended to reflect that return.
1. Value of the old loss corporation is the value of the equity of the corporation right before the ownership change (section 382(e)).
That is stock, warrants and options, conversion feature of convertible debt, and anything else that is equity, per regulations (section 382(k)(6)).
Specifically, it includes section 1504(a)(4) preferred stock -- section 382(e)(1).
As we will see, this type of stock is NOT taken into account in assessing whether there is an "ownership change"--section 382(k)(6)(A).
Appreciate that these are two different reasons for wanting to know why something is stock: value of corporation and ownership change.
2. "Long-term tax-exempt rate" is the Federal long-term rate (section 1274 as of the ownership change) adjusted to reflect the difference in yields between taxable and tax-exempt obligations (section 382(f)).
Basing this on the Federal rate and then discounting for tax-exempt differential gives a lower figure than might seem appropriate.
On page 388, have explanation of Federal rate -- compromise to reflect fact that actual absorption is lower, but some companies do better.
On page 317 of the actual General Explanation (388 of text), they justify the tax-exempt rate on the basis that the value of the corporation has a premium to reflect the NOL's value.
3. If don't use up the section 382 limitation, can carry unused portion forward (section 382(b)(2)).
Note that this only increases the section 382 limitation for the following year. It does not extend the life of the NOL, which is limited to 15 years.
The 15-year limit in section 172 gives added effect to the section 382 limit.
III. Definition of an "Ownership Change" (section 382(g)).
A. More than 50% owner shift - an increase of more than 50 percentage POINTS in VALUE of stock owned (see section 382(k)(6)(C)) among 5% shareholders (section 382(k)(7)) - those holding 5% or more in value of the stock of the corporation) at any time during the "testing period".
Note that are dealing with a change in percentage points. Talking about going from 10% to 60%, not an increase from 10% to 15%.
"Stock" for this purpose is anything other than section 1504(a)(4) plain vanilla preferred. section 382(k)(6)(A).
Exclude preferred-like stuff; include options and common-like stuff
Look to share in growth;
Makes a difference to CREATE change in ownership;
section 1.382-2T(f)(18).
Testing period is three years ending on change date, or, if less, the period back to when there was a prior ownership change. (section 382(i))
Temporary Regs indicate that knowledge and intention won't expand the testing period beyond three years--section 1.382-2T(d)(5)(ii).
Comparison is testing date v. lowest point in testing period.
So (page 385), if A, B and C are equal owners: A buys B B buys C C buys A There is a change -- section 1.382-2T(c)(4) (example)
On the other hand, if corp has 1,000 shares; 300 sold to B. Then issue 100 each to C, D and E. That is OK; 600 changed hands, but B is not at 30% on testing date. section 1.382-2T(e)(1)(iii), Ex (3).
If the non-5% owners own more than the then non-5% owners did at the beginning of the testing period, then take that into account too. (section 382(g)(4))
B. "Equity Structure Shift (section 382(g)(3)) - as a result of a non-divisive reorg (section 382(g)(3)(A)(i)), 5% shareholders of the new corporation own 50 percentage points more than they did of the old corporation.
C. Under old version of section 382, it made a difference which type of owner shift you had. Now, doesn't matter.
D. The non-5% shareholders are all part of a single group. However, under section 382(g)(4)(B) and section 382(g)(4)(C), can aggregate them into separate groups.
Classic case from Committee Reports is merger of two publicly-traded companies. Treat their s/hs separately, so have owner shift only if profit corp's shareholders end up owning more than half of resulting company.
So, too, for issuance of new stock in excess of 50%--section 1.382-2T(e)(1)(iii), Ex (5).
E. Options--A sells 40% to B; option for 60% to B; A has option to buy 100 from corp. If apply BOTH options, OK (since then A is at 50%); so only look to B's and get shift. Section 1.382-2T(h)(4)(ii), Ex (2). [not in Code & Regs book]
IV. Effects on Built-in Losses and Gains (section 382(h))
A. Built-in loss of corporation is also restricted by this provision.
Compare total basis of assets to total FMV (disregarding cash items and certain securities without appreciable depreciation). If it is more than 15% below total FMV, have net unrealized built-in loss. (section 382(h)(3))
In that case, treat any recognized loss (or depreciation) in an asset, to the extent it is attributable to the built-in loss portion, as if it were a pre-change loss, until have used up the whole net built-in loss amount. (section 382(h)(1)(B))
Do this only for the "recognition period" - through the 10th post-change year (section 382(h)(7)).
B. Similar rule ALLOWS pre-change loss to offset post-change gain. (section 382(h)(1)(A))
C. On the other hand, there is a fear that companies with built-in gains will be ACQUIRED in order to use up the ACQUIRING company's losses.
Section 384 prevents that, by saying that if have built in gain and are acquired, can't offset the recognized built-in gain against pre-acquisition losses of other entities.
General structure is taken from section 382(h)--section 384(c)(4).
V. Must have continuity of business enterprise during the two years after the change date or get NO NOLs. (section 382(c))
Change date is first day have more than 50% shift or day of transfer of stock or assets. (section 382(j)).