Limitation on Net Operating Loss Carryforwards and Certain Built-in Losses Following Ownership Change; Rule for Value of a Loss Corporation Under the Jurisdiction of a Court in a Title II Case

[Federal Register: March 18, 1994]

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DEPARTMENT OF THE TREASURY
26 CFR Parts 1, 301 and 602

[TD 8530]
RIN 1545-AQ60

Limitation on Net Operating Loss Carryforwards and Certain Built-
In Losses Following Ownership Change; Special Rule for Value of a Loss
Corporation Under the Jurisdiction of a Court in a Title 11 Case

AGENCY: Internal Revenue Service, Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final regulations that provide guidance
on determining the value of a loss corporation following an ownership
change to which section 382(l)(6) of the Internal Revenue Code of 1986
applies. Under sections 382 and 383, the value of the loss corporation,
together with certain other factors, determines the rate at which
certain pre-change tax attributes may be used to offset post-change
income and tax liability. These rules are needed to provide guidance to
taxpayers concerning compliance with sections 382 and 383.

DATES: These regulations are effective as of March 17, 1994.
For date of applicability of Sec. 1.382-9, see Sec. 1.382-9(p).

FOR FURTHER INFORMATION CONTACT: Robert Liquerman of the Office of the
Assistant Chief Counsel (Corporate), Office of Chief Counsel, Internal
Revenue Service, 1111 Constitution Avenue NW., Washington, DC 20224
(Attention CC:DOM:CORP:T:R) or telephone (202) 622-7750 (not a toll-
free number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

The collections of information contained in these final regulations
have been reviewed and approved by the Office of Management and Budget
in accordance with the requirements of the Paperwork Reduction Act (44
U.S.C. 3504(h)) under control number 1545-1324. The estimated annual
burden per respondent with respect to the Sec. 1.382-9(i) election
varies from 5 to 30 minutes, depending on individual circumstances,
with an estimated average of 15 minutes. The estimated annual burden
per respondent with respect to the Sec. 1.382-9(p)(2) election varies
from 5 to 30 minutes, depending on individual circumstances, with an
estimated average of 15 minutes.
These estimates are approximations of the average time expected to
be necessary for a collection of information. They are based on such
information as is available to the Internal Revenue Service. Individual
respondents or recordkeepers may require more or less time, depending
on their particular circumstances.
Comments concerning the accuracy of these burden estimates and
suggestions for reducing these burdens should be directed to the
Internal Revenue Service, Attn: IRS Reports Clearance Officer, T:FP,
Washington, DC 20224, and to the Office of Management and Budget, Attn:
Desk Officer for the Department of the Treasury, Office of Information
and Regulatory Affairs, Washington, DC 20503.
The collections of information in this regulation are in
Secs. 1.382-9(i) and 1.382-9(p)(2). This information serves as evidence
of an election to apply section 382(l)(6) of the Internal Revenue Code
(Code) in lieu of section 382(l)(5) and an election to apply
retroactively the provisions of the final regulations. The information
is required by the Internal Revenue Service to assure that a loss
corporation uses the proper amount of carryover attributes following
specified types of ownership changes.

Background

This document contains final regulations to be added to 26 CFR part
1 under section 382 of the Code. The Service published proposed
amendments to the regulations under section 382 in the Federal Register
on August 6, 1992 (57 FR 34736). See also 1992- 2 C.B. 616. The rules
are effective with respect to any ownership change occurring on or
after March 17, 1994. However, a loss corporation may elect to apply
the rules in the final regulations in their entirety to any ownership
change occurring before March 17, 1994, including ownership changes to
which section 382(l)(5) applied. Written comments were received, but no
public hearing was held as none was requested.

Explanation of Provisions

Section 382(l)(6) of the Code provides a special valuation rule for
certain ownership changes that result from a title 11 or similar case
to which section 382(l)(5) does not apply. Under this special valuation
rule, the value of the loss corporation reflects any increase in value
resulting from any surrender or cancellation of creditors' claims in
the bankruptcy transaction. The proposed regulations provide rules
regarding the application of this special valuation rule and the
coordination of that rule with other statutory rules related to the
value of a loss corporation.
The proposed regulations, with a few changes to respond to
comments, are adopted as final regulations. The changes, as well as
certain comments and suggestions that were not adopted in the final
regulations, are discussed below.
The proposed regulations provide that the value of a loss
corporation under the special valuation rule of section 382(l)(6) of
the Code is the lesser of the value of its stock immediately after the
ownership change, or the value of its assets (determined without regard
to liabilities) immediately before the ownership change. The proposed
regulations further provide that the value of the loss corporation's
pre-change assets is reduced by the amount of any capital contribution
to which section 382(l)(1) applies. The proposed regulations could be
read to require such a reduction even in cases in which the value of
the pre-change assets would not reflect the value of the contributed
assets, as would be the case, for example, when the contribution is
concurrent with the ownership change. To avoid this possibility, the
final regulations provide that the value of the pre-change assets of
the loss corporation is determined without regard to any capital
contribution to which section 382(l)(1) applies.
Section 382(l)(5)(H) of the Code allows a loss corporation to elect
not to have the provisions of section 382(l)(5) apply. The proposed
regulations provide that this election must be made by the due date
(including extensions) of the loss corporation's return for the taxable
year in which the ownership change occurs. The proposed regulations
also provide that this election is irrevocable. One commenter suggested
that the final regulations allow a taxpayer to file an election after
the prescribed due date upon a showing of reasonable cause. The
commenter also suggested that taxpayers be allowed to revoke an
election.
The Treasury and the Service believe that the general standards and
procedures under Sec. 301.9100-1 of the Procedure and Administrative
Regulations provide adequate relief for taxpayers seeking to make a
retroactive election under section 382(l)(5)(H) of the Code for an
ownership change occurring on or after March 17, 1994. A specific
regulatory provision allowing an election after the prescribed due date
or allowing revocation of an election would inappropriately allow the
loss corporation the benefit of hindsight to determine the relative
advantages of sections 382(l)(5) and 382(l)(6). Therefore, the final
regulations retain the rules of the proposed regulations that the
election is irrevocable and must be made on the return of the loss
corporation for the taxable year including or ending with the change
date. Because of uncertainties that existed with respect to the
application of sections 382(l)(5) and 382(l)(6) before issuance of
final regulations, transitional rules are provided in Secs. 1.382-
9(d)(6)(ii) and (p)(2) that allow taxpayers to retroactively file or
revoke a prior section 382(l)(5)(H) election for an ownership change
occurring before March 17, 1994.
A commenter suggested that the final regulations clarify that a
loss corporation need not use liquidation value in determining the
value of its gross assets, and that the corporation may take into
account the value of any intangible assets, such as goodwill and going
concern value. The Treasury and the Service have determined that the
proposed clarification is unnecessary. The valuation rule refers to
``the value of the loss corporation's pre-change assets,'' without
limitation to either liquidation value or tangible assets. Therefore,
if a loss corporation is able to establish the existence and value of
any intangible assets, that value may be taken into account.
The proposed regulations provide that the amount received by a loss
corporation for the issuance of debt is treated as a capital
contribution that must be excluded from the value of its pre-change
assets if the issuance of the debt is part of a plan a principal
purpose of which is to increase the value of the loss corporation under
the rules of the proposed regulations. A commenter questioned the
appropriateness of treating an issuance of debt as a capital
contribution. The commenter also suggested that, if the proposed rule
is retained, it should be subject to an exception for cases in which
the loss corporation uses the proceeds of the debt to fund operating
expenses.
The final regulations retain the rule of the proposed regulations
regarding the treatment of certain debt issuances as capital
contributions. The Treasury and the Service believe that this rule
effectuates the principles of section 382(l)(1) of the Code. The
Treasury and the Service will consider possible exceptions to this rule
in the context of providing general guidance under section 382(l)(1).
Section 382(l)(5)(D) of the Code provides that, if a second
ownership change occurs within two years after an ownership change to
which section 382(l)(5) applies, the section 382 limitation with
respect to the second ownership change is zero. A commenter suggested
that the final regulations provide that the zero limitation applies
only to losses incurred prior to the first ownership change. The final
regulations do not provide such a rule because it would be inconsistent
with the language of section 382(l)(5)(D).
The proposed regulations provide that the value of the stock of a
loss corporation does not include stock issued with a principal purpose
of increasing the section 382 limitation without subjecting the
investment to the entrepreneurial risks of corporate business
operations. A commenter requested that the final regulations provide
further guidance regarding the stock subject to this rule. The Treasury
and the Service believe that additional guidance is not necessary
because the test sufficiently limits the scope of this anti-abuse
provision.
The proposed regulations provide that the value of any stock issued
in connection with the ownership change cannot exceed the value of the
property received by the loss corporation in consideration for the
stock. A commenter questioned the appropriateness of this limitation.
The final regulations, however, retain the limitation to preclude any
claims that the stock is worth more than what was paid for it. The
limitation avoids the valuation disputes that would result from these
claims. Further, the limitation on losses provided by section 382(a) of
the Code is intended to measure the earnings power of the corporation.
When a loss corporation issues stock, it increases its earnings power
by the value of the property it receives, regardless of whether that
value represents a fair price for the stock.

Special Analyses

It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866. It
has also been determined that section 553(b) of the Administrative
Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act
(5 U.S.C. chapter 6) do not apply to these regulations, and therefore,
a Regulatory Flexibility Analysis is not required. Pursuant to section
7805(f) of the Code, the notice of proposed rulemaking for the
regulations was submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on their impact on small
business.

Drafting Information

The principal author of these regulations is Robert Liquerman,
Office of the Assistant Chief Counsel (Corporate), Office of Chief
Counsel, Internal Revenue Service. However, personnel from other
offices of the Internal Revenue Service and Treasury Department
participated in developing the regulations, in matters of both
substance and style.

List of Subjects

26 CFR Part 1

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 301

Employment taxes, Estate taxes, Excise taxes, Gift taxes, Income
taxes, Penalties, Reporting and recordkeeping requirements.

26 CFR Part 602

Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

Accordingly, 26 CFR parts 1, 301 and 602 are amended to read as
follows:

PART 1--INCOME TAXES

Paragraph 1. The authority citation for part 1 is amended by
revising the entry for Sec. 1.382-9 to read as follows:

Authority: 26 U.S.C. 7805 * * * Section 1.382-9 also issued
under 26 U.S.C. 382(l)(1)(B), (l)(3), and (m).

Par. 2. Section 1.382-1 is amended as follows:
1. The entries for Sec. 1.382-9, paragraphs (f), (g), and (h)
continue to be reserved.
2. The entries for Sec. 1.382-9, paragraphs (i), (j), (k), (l),
(m)(2), (n), and (p) are added to read as follows:

Sec. 1.382-1 Table of contents.

* * * * *

Sec. 1.382-9 Special rules under section 382 for corporations
under the jurisdiction of a court in a title 11 or similar case.

* * * * *
(f) through (h) [Reserved].
(i) Election not to apply section 382(l)(5).
(j) Value of the loss corporation in an ownership change to
which section 382(l)(6) applies.
(k) Rules for determining the value of the stock of the loss
corporation.
(1) Certain ownership interests treated as stock.
(2) Coordination with section 382(e)(2).
(3) Coordination with section 382(e)(3).
(4) Coordination with section 382(l)(1).
(5) Coordination with section 382(l)(4).
(6) Special rule for stock not subject to the risk of corporate
business operations.
(i) In general.
(ii) Coordination of special rule and other rules affecting
value.
(7) Limitation on value of stock.
(l) Rules for determining the value of the loss corporation's
pre-change assets.
(1) In general.
(2) Coordination with section 382(e)(2).
(3) Coordination with section 382(e)(3).
(4) Coordination with section 382(l)(1).
(5) Coordination with section 382(l)(4).
(m) * * *
(2) Under section 382(l)(6).
(n) Ownership change in a title 11 or similar case succeeded by
another ownership change within two years.
(1) Section 382(l)(5) applies to the first ownership change.
(2) Section 382(l)(6) applies to the first ownership change.
* * * * *
(p) Effective date for rules relating to section 382(l)(6).
(1) In general.
(2) Ownership change to which section 382(l)(6) applies
occurring before March 17, 1994.
* * * * *
Par. 3. Section 1.382-9 is amended as follows:
1. Paragraphs (f) through (h) continue to be reserved.
2. Paragraphs (i) through (l), (m)(2), (n), and (p) are added to
read as follows:

Sec. 1.382-9 Special rules under section 382 for corporations under
the jurisdiction of a court in a title 11 or similar case.

* * * * *
(f) through (h) [Reserved]
(i) Election not to apply section 382(l)(5). Under section
382(l)(5)(H), a loss corporation may elect not to have the provisions
of section 382(l)(5) apply to an ownership change in a title 11 or
similar case. This election is irrevocable and must be made by the due
date (including any extensions of time) of the loss corporation's tax
return for the taxable year which includes the change date. The
election is to be made by attaching the following statement to the tax
return of the loss corporation for that taxable year: ``This is an
Election Under Sec. 1.382-9(i) not to Apply the Provisions of Section
382(l)(5) to the Ownership Change Occurring Pursuant to a Plan of
Reorganization Confirmed by the Court on [Insert Confirmation Date].''
(j) Value of the loss corporation in an ownership change to which
section 382(l)(6) applies. Section 382(l)(6) applies to any ownership
change occurring pursuant to a plan of reorganization in a title 11 or
similar case to which section 382(l)(5) does not apply. In such case,
the value of the loss corporation under section 382(e) is equal to the
lesser of--
(1) The value of the stock of the loss corporation immediately
after the ownership change (determined under the rules of paragraph (k)
of this section); or
(2) The value of the loss corporation's pre-change assets
(determined under the rules of paragraph (l) of this section).
(k) Rules for determining the value of the stock of the loss
corporation--(1) Certain ownership interests treated as stock. For
purposes of paragraph (j)(1) of this section--
(i) Stock includes stock described in section 1504(a)(4) and any
stock that is not treated as stock under Sec. 1.382-2T(f)(18)(ii) for
purposes of determining whether a loss corporation has an ownership
change; and
(ii) Stock does not include an ownership interest that is treated
as stock under Sec. 1.382-2T(f)(18)(iii) for purposes of determining
whether a loss corporation has an ownership change.
(2) Coordination with section 382(e)(2). In the case of a
redemption or other corporate contraction occurring after and in
connection with the ownership change, the value of the stock of the
loss corporation under paragraph (j)(1) of this section is reduced
under section 382(e)(2).
(3) Coordination with section 382(e)(3). If the loss corporation is
a foreign corporation, in determining the value of the stock under
paragraph (j)(1) of this section, only items treated as connected with
the conduct of a trade or business in the United States are taken into
account.
(4) Coordination with section 382(l)(1). Section 382(l)(1) does not
apply in determining the value of the stock of the loss corporation
under paragraph (j)(1) of this section.
(5) Coordination with section 382(l)(4). If, immediately after the
ownership change, the loss corporation has substantial nonbusiness
assets (as determined under section 382(l)(4)(B) taking into account
only those assets the loss corporation held immediately before the
ownership change), the value of the stock of the loss corporation under
paragraph (j)(1) of this section is reduced by the excess of the value
of such nonbusiness assets over those assets' share of the loss
corporation's indebtedness (determined under section 382(l)(4)(D)
taking into account the loss corporation's assets and liabilities
immediately after the ownership change).
(6) Special rule for stock not subject to the risk of corporate
business operations--(i) In general. The value of the stock of the loss
corporation under paragraph (j)(1) of this section is reduced by the
value of stock that is issued as part of a plan one of the principal
purposes of which is to increase the section 382 limitation without
subjecting the investment to the entrepreneurial risks of corporate
business operations.
(ii) Coordination of special rule and other rules affecting value.
If the value of the loss corporation is modified under another rule
affecting value, appropriate adjustments are to be made so that such
modification is not duplicated under this paragraph (k)(6).
(7) Limitation on value of stock. For purposes of paragraph (j)(1)
of this section, the value of stock of the loss corporation issued in
connection with the ownership change cannot exceed the cash and the
value of any property (including indebtedness of the loss corporation)
received by the loss corporation in consideration for the issuance of
that stock.
(l) Rules for determining the value of the loss corporation's pre-
change assets--(1) In general. Except as otherwise provided in this
paragraph (l), the value of the loss corporation's pre-change assets is
the value of its assets (determined without regard to liabilities)
immediately before the ownership change.
(2) Coordination with section 382(e)(2). Section 382(e)(2) does not
apply in determining the value of the pre-change assets of the loss
corporation under paragraph (j)(2) of this section.
(3) Coordination with section 382(e)(3). If the loss corporation is
a foreign corporation, in determining the value of the pre-change
assets under paragraph (j)(2) of this section, only assets treated as
connected with the conduct of a trade or business in the United States
are taken into account.
(4) Coordination with section 382(l)(1). For purposes of paragraph
(j)(2) of this section, the value of the pre-change assets of the loss
corporation is determined without regard to the amount of any capital
contribution to which section 382(l)(1) applies. For purposes of
applying this paragraph (l)(4), the receipt of cash or property by the
loss corporation in exchange for the issuance of indebtedness is
considered a capital contribution if it is part of a plan one of the
principal purposes of which is to increase the value of the loss
corporation under paragraph (j) of this section.
(5) Coordination with section 382(l)(4). If, immediately after the
ownership change, the loss corporation has substantial nonbusiness
assets (as determined under section 382(l)(4)(B) taking into account
only those assets the loss corporation held immediately before the
ownership change), the value of the loss corporation's pre-change
assets is reduced by the value of the nonbusiness assets.
(m) * * *
(2) Under section 382(l)(6). If section 382(l)(6) applies to an
ownership change of a loss corporation, section 382(c) and the
regulations thereunder apply to the ownership change.
(n) Ownership change in a title 11 or similar case succeeded by
another ownership change within two years--(1) Section 382(l)(5)
applies to the first ownership change. If section 382(l)(5) applies to
an ownership change and, within the two-year period immediately
following such ownership change, a second ownership change occurs,
section 382(l)(5) cannot apply to the second ownership change and the
section 382(a) limitation with respect to the second ownership change
is zero.
(2) Section 382(l)(6) applies to the first ownership change. If the
value of a loss corporation in an ownership change was determined under
section 382(l)(6) and a second ownership change occurs within the two-
year period immediately following the first ownership change, the value
of the loss corporation under section 382(e) with respect to the second
ownership change is not reduced under section 382(l)(1) for any
increase in value of the loss corporation previously taken into account
under section 382(l)(6) with respect to the first ownership change.
* * * * *
(p) Effective date for rules relating to section 382(l)(6)--(1) In
general. Paragraphs (i), (j), (k), (l), (m)(2), and (n)(2) of this
section apply to any ownership change occurring on or after March 17,
1994.
(2) Ownership change to which section 382(l)(6) applies occurring
before March 17, 1994. In the case of an ownership change occurring
before March 17, 1994, the loss corporation may elect to apply the
rules of paragraphs (j), (k), (l), (m)(2), and (n)(2) of Sec. 1.382-9
in their entirety. The election must be made by the later of the due
date (including any extensions of time) of the loss corporation's tax
return for the taxable year which includes the change date or the date
that the loss corporation files its first tax return after May 16,
1994. The election is made by attaching the following statement to the
return: ``This is an Election to Apply Secs. 1.382-9 (j), (k), (l),
(m)(2), and (n)(2) of the Income Tax Regulations to the Ownership
Change Occurring Pursuant to a Plan of Reorganization Confirmed by the
Court on [Insert Confirmation Date].'' In connection with making this
election, on the same return the loss corporation may also elect not to
apply section 382(l)(5) to the ownership change under paragraph (i) of
this section (if the loss corporation has not already done so pursuant
to Sec. 301.9100-7T(a) of this chapter). If, under the applicable
statute of limitations, the loss corporation may file amended returns
for the year of the ownership change and all subsequent years (an open
year), an electing loss corporation must file an amended return for
each prior affected year to reflect the elections. If, under the
applicable statute of limitations, the loss corporation may not file an
amended return for the year of the ownership change or any subsequent
year (a closed year), an electing loss corporation must file an amended
return for each affected open year to reflect the elections and the
section 382 limitation resulting from the ownership change must be
appropriately adjusted for the earliest open year (or years) to reflect
the difference between the amount of pre-change losses actually used in
closed years and the amount of pre-change losses that would have been
used in such years applying the rules of paragraphs (j), (k), (l),
(m)(2), (n)(2) of this section to the ownership change.

PART 301--PROCEDURE AND ADMINISTRATION

Par. 4. The authority citation paragraphs for Sec. 301.9100-7T are
removed from the authority citation for part 301, and the following
entry is added:

Authority: 26 U.S.C. 7805 * * * Section 301.9100-7T also issued
under 26 U.S.C. 42, 48, 56, 83, 141, 142, 143, 145, 147, 165, 168,
216, 263, 263A, 448, 453C, 468B, 469, 474, 585, 616, 617, 1059,
2632, 2652, 3121, 4982, 7701; and under the Tax Reform Act of 1986,
100 Stat. 2746, sections 203, 204, 243, 311, 646, 801, 806, 905,
1704, 1801, 1802, and 1804. * * *

Par. 5. Section 301.9100-7T is amended as follows:

Sec. 301.9100-7T [Amended]

1. The table in paragraph (a)(1) is amended by removing each line,
from each column, where the entry for ``section 621(a)'' appears.
2. Paragraph (a)(4)(ii) is amended by removing each line, from each
column, where the entry ``621(a)'' appears.

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 6. The authority citation for part 602 continues to read as
follows:

Authority: 26 U.S.C. 7805.

Sec. 602.101 [Amended]

Par. 7. The table of control numbers in Sec. 602.101(c) is amended
by revising the entry for Sec. 1.382-9 to read as follows:

``1.382-91
1545-1260, 1545-1324''.
Margaret Milner Richardson,
Commissioner of Internal Revenue.

Approved: February 24, 1994.
Leslie Samuels,
Assistant Secretary of the Treasury.
[FR Doc. 94-6086 Filed 3-17-94; 8:45 am]
BILLING CODE 4830-01-U