IRS Notice 2008-100 Applies IRC 382 to Loss Corporations Whose Instruments are Acquired under Capital Purchase Program of Emergency Economic Stabilization Act

The IRS has issued Notice 2008-100 apply IRC §382 to loss corporations whose instruments are acquired under the Capital Purchase Program of the Emergency Economic Stabilization Act. Section 382 sets the limit as to how much net operation losses an organization that has just undergone an ownership change can deduct from its income.

Section 382(a) provides that the taxable income of a loss corporation for a year following an ownership change that may be offset by pre-change losses cannot exceed the section 382 limitation for such year. An ownership change occurs with respect to a corporation if it is a loss corporation on a testing date and, immediately after the close of the testing date, the percentage of stock of the corporation owned by one or more 5-percent shareholders has increased by more than 50 percentage points over the lowest percentage of stock of such corporation owned by such shareholders at any time during the testing period.

With respect to any shares of stock of a loss corporation acquired by Treasury pursuant to the CPP, either directly or upon the exercise of an option, the ownership represented by such shares on any date on which they are held by Treasury shall not be considered to have caused Treasury’s ownership in the loss corporation to have increased over its lowest percentage owned on any earlier date.

With two exceptions, such shares are considered outstanding for purposes of determining the percentage of loss corporation stock owned by other 5-percent shareholders on a testing date. The first exception is redemptions of stock owned by Treasury. For purposes of measuring shifts in ownership by any 5-percent shareholder on any testing date occurring on or after the date on which the loss corporation redeems shares of its stock held by Treasury that were acquired pursuant to the CPP, the shares so redeemed must be treated as if they had never been outstanding.

The second exception is the treatment of preferred stock acquired by Treasury pursuant to the CPP. For all Federal income tax purposes, any preferred stock of a loss corporation acquired by Treasury pursuant to the CPP, whether owned by Treasury or another person, must be treated as stock described in section 1504(a)(4) of the Code.

In addition, Notice 2008-100 provides that, for all federal income tax purposes, any warrant to purchase stock of a loss corporation that is acquired by Treasury pursuant to the CPP, whether held by Treasury or another person, must be treated as an option (and not as stock).