Proposed Regulations Seek to Ease Compliance with the Loss Trafficking Rules: Treasury Issues Notice of Proposed Rulemaking Limiting the Application of the Section 382 Segregation Rules in Certain Circumstances

Sullivan & Cromwell LLP - November 23, 2011

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 November 22, 2011, the Department of Treasury issued a Notice of Proposed Rulemaking (the “Notice”) containing proposed regulations (the “Proposed Regulations”) intended to lessen the compliance burden on taxpayers determining whether an ownership change has occurred for these purposes. The Proposed Regulations are based upon and take into account comments received in respect of Notice 2010-49, which announced an IRS study on easing the compliance burden of tracking less-than-5% shareholders for these purposes.

Under the Proposed Regulations, taxpayers no longer have to separately track:

  • certain secondary transfers to a public owner;
  • certain small redemptions; and
  • certain shifts of ownership among small shareholders that indirectly hold shares of a corporation that has net operating losses or related tax attributes.

The Notice requests comments regarding:

  • whether refinement of the current small issuance and cash issuance exceptions to the tracking requirements might be warranted; and
  • circumstances under which a group of investors acquiring ownership interests should be aggregated into a single entity for purposes of these rules.