Final Regulations Ease Compliance with the Loss Trafficking Rules: IRS Finalizes Regulations Limiting the Application of the Section 382 Segregation Rules in Certain Circumstances

Sullivan & Cromwell LLP - November 6, 2013

Under Section 382 of the Internal Revenue Code, a corporation’s use of net operating losses is limited if there is an “ownership change.” On October 22, 2013, the Internal Revenue Service adopted Final Regulations intended to lessen the compliance burden on a corporation determining whether it has experienced an ownership change for these purposes. The Final Regulations are based upon and take into account comments received in respect of the Proposed Regulations issued on November 22, 2011. The Final Regulations are generally effective from October 22, 2013 but can in some cases be applied to transactions occurring prior to that date.

Under the Final Regulations, a corporation that has net operating losses no longer has to separately track:

  • certain secondary transfers of its stock to a public owner;
  • certain small redemptions it or its corporate shareholders make; and
  • certain shifts of ownership among small shareholders that indirectly hold its shares.

The Final Regulations also clarify rules for small issuances by corporations directly owning 5% or more of a Loss Corporation, as described below, in determining whether an ownership change with respect to such Loss Corporation has occurred.