Presentation:
Corporate Taxation
Chapter Twelve: Corporate Attributes
Professors Wells
April 15, 2015
Chapter Twelve
Basic Overview
p.552
Fundamental provisions are as follows:
1)  §381 – target corporation’s tax attributes follow its assets in a taxfree reorganization (other than B and E reorganizations) and taxfree liquidations of subsidiaries.
2)  §382 & §383 – restrict the carryforward of NOLs and other other
losses and credits following a change of ownership.
3)  §269 – allows IRS authority to disallow deductions, credits, or
other allowances where target corporation stock or assets are
acquired with a principle purpose of obtaining tax attributes.
2 Section 381
Carryover Rules
p.553
General Rule of §381(a): tax attributes of target carryover to acquierer
in asset reorganizations and tax-free liquidations.
Exception in §381(c)(2): hovering deficit rule. Target’s acquired E&P
deficit cannot be used to offset pre-acquisition positive E&P of
Acquiring.
1.  Target deficit can only offset post-acquisition Accumulated E&P.
2.  Note that post-acquisition current E&P is not offset by
Accumulated E&P and would have nimble dividend.
Shareholder
100x
Loss Co
A Reorg.
E&P Deficit= <$100x>
Profit Co
Pre-Acq. E&P = $100x
3 Section 381
Carryover Rules for NOLs
p.554
§381(c)(1) provides that Loss Target’s NOLs generally carryover to the
Acquiring Corporation.
Exception #1: §381(b)(3) provides that the Acquiring Corporation
cannot carryback Target Corporation’s NOLs to the Acquiring
Corporation’s pre-acquisition years to get a refund of pre-acquisition tax
amounts.
Exception #2: §382 provides that the usage of NOLs are limited after
an ownership change.
4 Problem 1(a)
p.555
Liquidation
P Shares
T stock
P S/Hs
FACTS: P acquires Target assets in a C T S/Hs
reorganization in 2010. P has Acc.
2010: $20,000
E&P of $30,000 and Current E&P of
P Shares
$20,000. T has an E&P Deficit of
P
Exchange
Target
$50,000. P distributes $20,000 cash to
Target Assets
its shareholders in 2010.
T Assets
E&P Deficit=($50,000)
Pre-Acq. Acc. E&P= 30,000
Current E&P=20,000
RESULT:
1.  Dividend out of current E&P of $20,000 (nimble dividend).
2.  In 2011, hovering deficit is still $50,000. This hovering deficit can
only wipe out subsequent additions to accumulated E&P.
5 Problem 1(b)
Liquidation
P Shares
P S/Hs
Target
2011: $20,000
P Shares
Exchange
Target Assets
E&P Deficit=($50,000)
P
T Assets
RESULT: Dividend of $20,000 out
of P’s Acc. E&P. Hovering T deficit
is not allowed to offset preacquisition accumulated E&P of P by
reason of §381(c)(2).
T S/Hs
T stock
FACTS: Same facts as (a) except P
breaks even in 2010 and 2011. P
distributes $20,000 in 2011.
p.555
Pre-Acq. Acc. E&P= 30,000
2010 E&P=0
2011 E&P=0
6 Problem 1(c)
Liquidation
P Shares
P S/Hs
Target
2011: $20,000
P Shares
Exchange
Target Assets
E&P Deficit=($50,000)
P
T Assets
RESULT: Dividend of $20,000 out
of P’s Acc. E&P. P’s 2010 current
E&P deficit reduces its accumulated
E&P to $20,000 but the inherited T
hovering E&P deficit is not allowed
to offset pre-acquisition accumulated
E&P of P by reason of §381(c)(2).
T S/Hs
T stock
FACTS: Same facts (b) except P has
current E&P deficit in 2010 of
$10,000 and and breaks-even in
2011. P distributes $20,000 in 2011.
p.555
Pre-Acq. Acc. E&P= 30,000
2010 E&P Deficit=<10,000>
2011 Acc. E&P 20,000
2011 E&P=0
7 Problem 1(d)
Liquidation
P S/Hs
Target
2011: $20,000
2012: $20,000
P Shares
Exchange
Target Assets
E&P Deficit=($50,000)
P
T Assets
except P has a $10,000 current E&P
deficit in 2012 and makes a $20,000
distribution in 2012. What is the
result of the 2012 distribution?
P Shares
$10,000 of remaining pre-acquisition Acc.
E&P after 2011 distribution of $20,000]
T S/Hs
T stock
FACTS: Same facts (b) [so, P has
p.555
Pre-Acq. Acc. E&P= 30,000
2010 E&P Deficit=0
2011 E&P=0
2012 Acc. E&P=10,000
2012 E&P=<$10,000>
RESULT: The inherited T hovering
E&P deficit is not allowed to offset
pre-acquisition accumulated E&P of
P by reason of §381(c)(2). P has a $10,000 pre-acquisition accumulated
E&P at the beginning of 2012 and a 2012 current year E&P deficit of
$10,000. The current year E&P deficit is prorated per Rev. Rul. 74-164.
Since last day of year, all $10,000 of 2012 current E&P reduces Acc.
E&P to zero.
8 Problem 1(e)
Liquidation
P Shares
P S/Hs
Target
P Shares
Exchange
Target Assets
E&P Deficit=($50,000)
2011: $20,000
2012: $20,000
2013: $20,000
P
T Assets
RESULT: P has a $20,000 current
E&P in 2013 and thus has a nimble
dividend in 2013 by reason of
§316(a)(2).
T S/Hs
T stock
FACTS: Same facts as in (d) except
P has a $20,000 current E&P in 2013
and makes another $20,000
distribution in 2013. What is the
result of the 2013 distribution?
p.555
Pre-Acq. Acc. E&P= 30,000
2010 E&P=0
2011 E&P=0
2012 E&P=<10,000>
2012 Acc. E&P = 0
2013 E&P=20,000
9 Problem 1(f)
Liquidation
2014. P distributes $40,000 in 2014.
What result for the 2014 distribution?
P Shares
distributes $20,000 in 2011 & 2012 but no
distribution in 2013] and breaks-even in
T S/Hs
T stock
FACTS: Same facts as in (e) [P
p.555
Target
P S/Hs
P Shares
Exchange
$20,000
$20,000
0
$40,000
P
T Assets
Target Assets
2011:
2012:
2013:
2014:
RESULT: P finally is going to be able
Acc. E&P= 30,000
to use some of the inherited T hoveringE&P Deficit=($50,000) Pre-Acq.
2010-11 E&P=0
2012 E&P=<10,000>
E&P deficit. The 2013 post-acquisition
2013 Acc. E&P=0
2013 E&P=20,000
E&P of $20,000 is offset by $20,000 of
2014 E&P=0
the T hovering E&P deficit. So, in 2014, there remains $30,000 of
inherited T hovering deficit. In 2014, P has no remaining accumulated
E&P and no 2014 current E&P, so the $40,000 distribution is not a
dividend. It would be return of capital to the extent of basis per §301(c)
(2) and thereafter creates capital gain by reason of §301(c)(3).
10 Problem 2(a)
p.555
Shareholder
FACTS: T merges into P on August
Next Year:
2/3 of Year
31 (2/3rd of year). P has <$30,000>
20x
T
A Reorg.
P
current E&P deficit and T has Acc.
E&P=$30,000. P distributes $20,000
Pre-Acq.
Cur. E&P Deficit
E&P = $30x
next year and breaks-even next year.
<$30x>
RESULT: P has $20,000 of its $30,000 of current E&P deficit that
occurs pre-acquisition. This $20,000 portion of the pre-acquisition E&P
deficit of P cannot be used to reduce T’s pre-acquisition E&P, but the
$10,000 current E&P deficit can be used per §381(c)(2)(B). As of the
beginning of next year, P has Acc. E&P of $20,000 ($30,000 - $10,000
post-acquisition deficit) and P has a hovering deficit of $20,000. The P
distribution is a dividend in full.
rd
11 Problem 2(b)
p.556
Shareholder
FACTS: Same as (a) except P has
Next Year:
2/3 of Year
$30,000 current earnings and profits
20x
T
A Reorg.
P
for the year and T has a $30,000 E&P
deficit at the time of the acquisition.
Pre-Acq. E&P
Current E&P
Deficit = <$30x>
E&P = $30x
P distributes $20,000 next year and
breaks-even next year.
RESULT: Same result under §381(c)(2)(B). The direction of the merger
parties (between loss co and profit co) does not change the result.
rd
12 Problem 2(c)
FACTS: Same as (b) except P
distributes $30,000 on the last day of
the year of the acquisition.
p.556
Shareholder
2/3rd of Year
T
A Reorg.
Pre-Acq. E&P
Deficit = <$30x>
Same Year:
30x
P
Current E&P
E&P = $30x
RESULT: The full $30,000 would be a dividend. T has a prereorganization deficit which is subject to limitation by reason of §381(c)
(2)(B). However, P has $30,000 of current E&P and that alone is
sufficient to fund the dividend per §316(a)(2). As a result, P has a
$30,000 hovering deficit that remains available at the beginning of the
next year.
13 Problem 3(a)
FACTS: T merges into P on Dec. 31, 2010 T S/Hs 51% P
Shares
in an A reorganization. T shareholders
12/31/2010
receive 51% of the outstanding P stock. P
T
A Reorg.
& T had been in existence for two years
Pre-Acq. E&P
with T sustaining a $20,000 loss in 2009
2009: <$20x>
and 2008 and P earning a profit of $30,000 2010: <$20x>
in 2009 and 2008.
p.556
P
Pre-Acq. E&P
2009: $30x
2010: $30x
Question: Can P carryback T’s losses against P’s profits for 2008 and
2009? Answer: No. T may carry back the losses to its own corporate
structure under § 172. Section 381(c)(1)(A) allows only a carryover to P.
14 Problem 3(b)
p.556
FACTS: Determine combined net income T S/Hs
for 2011 assuming loss pattern continues.
51% P
Shares
12/31/2010
Answer: $10,000 per year from 2011
through 2014. T’s pre-acquisition NOL
can be used to offset the taxable income on
carryforward basis.
T
A Reorg.
Pre-Acq. E&P
2009: <$20x>
2010: <$20x>
P
Pre-Acq. E&P
2009: $30x
2010: $30x
15 Problem 3(c)
FACTS: Same as (b) except T is profitable
with net income of $20,000 in each of the
prior and current years but P sustained a
$100,000 loss in 2011 followed by a return
to regular profitability in 2012.
p.556
T S/Hs
51% P
Shares
12/31/2010
T
A Reorg.
Pre-Acq. E&P
2009: $20x
2010: $20x
P
Pre-Acq. E&P
2009: $30x
2010: $30x
2011: <$100x>
RESULTS: P loss can be carried back on P’s prior returns but not for T’s
prior returns because §381(b)(3) precludes carryback to T.
16 Problem 3(d)
FACTS: Same as (c) except T & P
consolidate into new company C. C
sustains $100,000 loss in 2011 and
$50,000 of profits in 2012.
P
A Reorg.
Pre-Acq. E&P
2009: $20x
2010: $20x
p.556
C
A Reorg.
T
Pre-Acq. E&P
2009: $30x
2010: $30x
2011: <$100x>
RESULTS: Now a carryback to both corporations is precluded by §
381(b)(3) because both are transferor corporations. Thus the $100,000
loss carryover would only offset future income, i.e., the
$50,000 of income in 2012 and 2013.
17 Section 382
Limitation on NOL Carryforwards
p.556
Policy Concern: Congress does not want trafficking in Loss Companies
or to have Profitable Companies to be overly motivated to buy the tax
attributes of Loss Companies.
Congressional Response: §382 limits the ongoing usage of net operating
losses if the Loss Company has experienced an Ownership Change.
18 Section 382
Ownership Change
p.560
§382(g) provides that an ownership change occurs if there is either an
“owner shift” involving 5% shareholders or an “equity structure shift.”
A.  Owner Shift of 5% Shareholders: The percentage ownership of a
Loss Corporation by 5% or greater shareholders is increased by 50%
over the lowest percentage of stock of the loss corporation owned by
such shareholders.
1.  Ownership shift can occur by reason of purchase, redemptions,
§351 transfers, issuances of stock, and recapitalizations.
2.  However, owner shifts by reason of gift, death, or divorce are not
counted. See §382(l)(3)(B).
B.  Equity Structure Shift: Includes any reorganization including taxable
acquisitions and public offerings that creates an owner shift See
§382(g)(2) and (4)(B).
19 Section 382
p.563
Garber Industries Holding Co. v. Commissioner
Kenneth & Charles are brothers and so
their stock is not attributed to each other
under §318(a)(1) as they are siblings.
Charles purchase creates an ownership
change because we take his lowest
ownership (19%) in the testing period and
compare it to his highest ownership
(84%). This is more than a 50% owner
shift. Kenneth had a similar 50% owner
shift moving from 65% down to zero.
Kenneth
26%
65%
0%
Charles
68%
July 1996 19%
April 1998 84%
Garber
Industries
20 Section 382
NOL Poison Pill Plan
p.563
If any shareholder acquires 4.9% or more stock without pre-approval by
the board of directors of the company, then all other historic remaining
shareholders have the right to acquire stock at 50% of its FMV to keep
the new shareholder from becoming a 5% shareholder.
Rationale: Prevent risk of creating an ownership change that would cause
a Section 382 limitation on the NOLs of the company.
Notable NOL Right Plans: Citibank, General Motors, Ford, JC Penny,
AIG.
Delaware Court of Chancery decision has upheld such rights plans was a
reasonable means to defend the company’s value. See Selectica, Inc. v.
Versata, Inc., Civ.A. No. 4241, 2010 WL 703062 (Del. Ch. 2010).
21 Problem 1(a)
p.573
Shareholders
FACTS: Loss Co. has 100 shares of
Julie
100% L shares
common stock owned equally by
Shareholders 1 through 25 who are not
Loss
Corp
related to one another. Loss Co. has assets
worth $1,000,000 and an NOL of
$8,000,000. Will the Section 382 loss
limitations apply if all shareholders sell their
stock to J?
RESULT: Ownership change under §382. None of the old L
shareholders have an owner shift, but J increases her ownership from 0%
to 100% and this represents more than a 50% owner shift per §382(g)(2).
J is a 5% shareholder within the meaning of §382(k)(7).
22 Problem 1(b)
FACTS: Same as (a) except only
Shareholders 1-13 sell their shares to Julie.
p.573
S/Hs
S/Hs
(14-25)
(1-13)
Julie
52% shares
Loss
Corp
RESULT: Ownership change under §382. J’s ownership has gone from
zero to 52% and this represents more than a 50% owner shift per §382(g)
(1). J is a 5% shareholder within the meaning of §382(k)(7).
23 Problem 1(c)
FACTS: Same as (a) except only
Shareholders 1-12 sell their shares to Julie.
p.573
S/Hs
S/Hs
(14-25)
(1-12)
Julie
48% shares
Loss
Corp
RESULT: No ownership change under §382. J’s ownership has gone
from zero to 48%. J is a 5% shareholder, but the change in 5%
shareholders is less than the 50% owner shift threshold in §382(g)(1). J
is a 5% shareholder within the meaning of §382(k)(7).
24 Problem 1(d)
FACTS: Same as (c) except Loss Corp
redeems Shareholders 13 & 14 two
years later.
p.573
S/Hs S/Hs S/Hs
(13-14)
(15-25) (1-12)
Julie
48% shares
Loss
Corp
RESULT: Ownership change under §382. . When shareholders 13 and
14 are redeemed, only 92 shares remain outstanding. Since J owns 48 of
the 92 shares, her ownership at this point exceeds 50 percent.
Because the stock purchases by J and the redemptions occurred within a
single three year period, the "testing period" is the three year period
ending on the date of the redemption. § 382(i)(1). Even though the
redemptions of the stock of Shareholders 13 and 14 directly involved
only shareholders who were less than 5-percent shareholders, the
redemptions resulted in an owner shift involving a 5-percent shareholder
under § 382(g)(1).
25 Problem 1(e)
FACTS: Same as (c) except
Shareholders 13 sells her stock to
new Shareholder 26.
S/H
(26)
p.573
S/Hs S/Hs S/Hs
(13)
(14-25) (1-12)
Julie
48% shares
Loss
Corp
RESULT: No ownership change under §382. Both Shareholder 13 and
new Shareholder 26 are less than 5% shareholders. Any stock owned by
them is therefore deemed to be owned by a single 5% shareholder
comprised of the whole group of less than 5% shareholders. See §382(b)
(4)(A).
26 Problem 1(f)
FACTS: Same as (e) except
Shareholders 13 & 14 sell their
stock to new Shareholder 26.
S/H
(26)
p.573
S/Hs S/Hs S/Hs
(13-14) (15-25) (1-12)
Julie
48% shares
Loss
Corp
RESULT: An ownership change under §382. Both Shareholder 13 and
new Shareholder 26 are less than 5% shareholders. Any stock owned by
them is therefore deemed to be owned by a single 5% shareholder
comprised of the whole group of less than 5% shareholders. See §382(b)
(4)(A).
27 Problem 1(g)
FACTS: Suppose Shareholders
1-25 sold their shares to
Shareholders 26-50.
p.573
S/Hs
(1-25)
S/Hs
(26-50)
100% shares
Loss
Corp
RESULT: No ownership change under §382 even though all of the stock
has changed hands in this variation. All of the stock was owned by the
less than 5-percent shareholders, who constitute a single 5-percent
shareholder under § 382(g)(4)(A). After the stock sales, all the stock is
still owned by the single group of less than 5-percent shareholders.
28 Problem 2
Liquidation
L Shares
T S/Hs
G stock
FACTS: Loss Corp distributes 51%
ownership to Gain Corp
shareholders in a C reorganization.
p.573
Gain
Corp
Bill T S/Hs
51%
51%
L Shares
Exchange
Loss
Corp
Gain Corp Assets
RESULT: An ownership change under §382. After the reorganization,
the prior less-than-5-percent shareholders of Gain Co., as a group, own
just over 50% of the stock of Loss Co. Under § 382(g)(4)(A) and (B), the
group of less than 5-percent shareholders of Gain Co. are treated as a
single shareholder and the prior group of less than 5-percent shareholders
of Loss Co. are treated as a separate single shareholder. Reg. §
1.382-2T(j)(2)(iii)(B)(1). The Gain group has increased its ownership
from zero to more than 51% of Loss Co. and an ownership change has
occurred with the result that the § 382 limitations become applicable.
29 Problem 3
p.573
Minnow
S/Hs
FACTS: Whale purchases all of the
stock of Minnow for cash.
Whale
Co.
Minnow
Co.
RESULT: An ownership change under §382. §382(g)(4)(B)(i) provides
that in an equity structure shift the group of less than 5% shareholders of
each corporation is treated as separate 5% shareholders. §382(g)(4)(C)
provides that a rule similar to the segregation rules in § 382(g)(4)(B)
apply to acquisitions by groups of less-than-five-percent shareholders in
this context. Thus, the group of less than 5% shareholders of Whale Co.
would be treated as separate from the group of less than 5% shareholders
of Minnow Co which had its ownership of Minnow go from 0 to 100%.
30 Section 382
Results of an Ownership Change
p.574
Policy Concern: Congress does not want trafficking in Loss Companies
or to have Profitable Companies to be overly motivated to buy the tax
attributes of Loss Companies. But, Congress wanted to allow the
corporation to use its losses to offset the income from its own business.
§382 does this through two limitations:
Continuity of Business Enterprise Limit (§382(c)): Disallows NOLs if
the old loss corporation business is not continued for at least two years
after the ownership change.
§382 Limitation: NOLs can only be used in any “post-change period”
only to the extent of the value of the Loss Corporation multiplied by the
long-term tax-exempt rate.
31 Section 382 Limitation
p.574
Carryforward of Unused Limitation. Just like NOLs can be carried
forward, §382(b) allows unused §382 limitation in the current year to be
carried forward to be added onto the limit in the next year.
Mid-Year Ownership Changes (annual limit is proportionately reduced if
the acquisition happens for part of the year.
Long-Term Rate is published by IRS monthly.
Value of Company is determined by appraisal. There are various “antistuffing rules to prevent artificial inflation of the Loss Corp’s value.
Limit on Built-In Losses. Assets with unrealized built-in losses are also
subject to §382’s limitation. The objective here is to prevent this excess
depreciation from being able to be deducted post-ownership change.
32 Section 382 Limitation
§382(h)’s Built-In Gains & Losses
p.579
Unrealized Built-In Gains (UBIG) that are recognized during the fiveyear recognition period (an RBIG) is allowed to increase the §382
limitation dollar-for-dollar to the extent that the Loss Corp had a net
unrealized built-in loss (a NUBIG).
Note: One would think that there must be an actual recognition of the
built-in gain during the 5-year testing period when one reads the plain
meaning of the statute, but the IRS in Notice 2003-65 provides very
favorable rules for determining the RBIG that arises in the post-change
period. If your client experiences an ownership change, you will want to
review this notice in detail in order to maximize the §382 limitation.
33 Section 382 Limitation
Great Recession Relief
p.579
§382(n) exempted ownership changes resulting from the US Treasury
Department gaining 50% increase in ownership as part of the Emergency
Economic Stabilization Act of 2009. This provision applied to GM to
save its $45 billion of NOLs.
Notice 2008-83 relaxed §382(h) for banks, stating that any deduction
properly allowed after an ownership change to a bank with respect to
losses on loans or bad debts (including any deduction for a reasonable
addition to a reserve for bad debts) shall not be treated as a built-in loss
or a deduction that is attributable to periods before the change date.
1.  After this notice, Wells Fargo Bank bought Wachovia.
2.  Congress enacted legislation to repudiate this notice in 2009. See
American Recovery and Reinvestment Act of 2009, §1261.
34 Other Limitation Regimes
p.579
§383: States that limitation regime of §382 that applies to NOLs should
also apply to limit tax credits.
§269: Applies a subjective test to deny the usage of tax attributes if it is
determined that the the principal purpose of an acquisition of Loss Crop
was ‘‘evasion or avoidance of Federal income tax by acquiring the
benefit of a deduction, credit, or other allowance.’’
§384: Restricts an acquiring corporation from using its preacquisition
losses to offset built-in gains of an acquired corporation. Example: L
has $100,000 NOL and acquires T in an A reorganization. T’s asset is
sold for $100,000 of gain. §384 prevents Loss Corp from using its preacquisition NOL to offset the gain on the T asset that arose preacquisition.
35