• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to secondary sidebar

Alston & Bird Tax Blog

  • Home
  • Services
  • Contacts

Avoiding Section 382

July 5, 2011 By Jasper L. (Jack) Cummings, Jr. and Edward Tanenbaum

Taxpayer evidently is publicly held, but has a large shareholder. Taxpayer apparently has NOLs that it wants to protect from a section 382 limitation upon a change of ownership, and it also wants to sell common stock in private placements. Evidently the amount of stock it would sell would trigger an ownership change, absent some modification of the normal rules.

 

Solution: The large common shareholder is willing to convert to pure preferred stock, which is disregarded for purposes of the ownership change calculations. However, that shareholder does not want to completely miss out on upside growth, which it would because pure preferred cannot participate. Therefore, the shareholder exchanges its common stock for pure preferred stock and warrants to purchase common stock. Then the investors will buy common stock for cash from Taxpayer.

 

Taxpayer had to represent that it was more likely than not that the warrants would not be exercised. Also the shareholder receiving the warrants had to be willing to forego any management or shareholder voting rights.

 

The benefit of removing a common shareholder from the ownership calculation is this: Reg. section 1.382-3(j)(3) contains a modification of the public roup segregation rule, which has the effect of ignoring part of an ownership change upon sales of stock by the loss corporation for cash. The way the exemption works is that it grows as the percentage ownership of “direct public groups” grows. Evidently by eliminating the one shareholder who was willing to exchange its common for preferred and warrants, the direct public groups of the Taxpayer grew in relative ownership of Taxpayer, and that increased the part of the cash issuances of stock that could be ignored for ownership change purposes.

 

The IRS did not rule on aspects of the exchange that would affect the exchanging shareholder.

Filed Under: Corporate - Federal

About Jasper L. (Jack) Cummings, Jr.

Jack Cummings is counsel in the Federal Tax Group of Alston & Bird in Raleigh and Washington, D.C. He served as IRS associate chief counsel (corporate) and chair of the Corporate Tax Committee of the ABA Section of Taxation.

[Read Bio]

About Edward Tanenbaum

Edward Tanenbaum is co-chair of the firm’s Federal & International Tax Group and a member of the firm’s Global Resources & Strategies Committee. Mr. Tanenbaum’s practice consists primarily of planning and structuring tax efficient solutions for cross-border business transactions and investments by foreign multinational corporations and high-net-worth individuals.

[Read Bio]

Primary Sidebar

As a service of Alston & Bird’s Tax groups, this blog focuses on current issues and events in international, federal, state and local tax and wealth planning of interest to business.

Subscribe

Receive email notifications when new posts are added.

Check your inbox or spam folder to confirm your subscription.

Tags

401(k) ACA Affordable Care Act audit BEAT CARES Act CFC Corporate Tax Planning covid-19 Delaware ERISA Escheat FATCA FDII Gift cards GILTI international tax IRA IRAs IRS Kelmar New York nexus OECD qualified plans Quill RUUPA SCOTUS Section 351 Section 355 Section 367 Section 385 section 482 section 965 State legislation Subpart F Supreme Court Tax Court Tax Cuts and Jobs Act tax reform TCJA Treasury Unclaimed property UP Wayfair

Secondary Sidebar

Categories

Recent Posts

  • Borrowers Beware: Short Sales of Distressed Assets May Have Unfavorable Tax Consequences
  • Top Unclaimed Property Regulatory and Enforcement Challenges in 2021
  • If at First You Don’t Succeed, Try, Try Again to Enact the Nation’s First Digital Advertising Services Tax
  • Digital Services Taxes and Nexus for Foreign Tax Credit Purposes
  • FAQs on Unclaimed Property Aspects of Retirement Assets

Archives

Copyright © 2021 · Alston & Bird · All Rights Reserved. Privacy.