IRS Issues Guidance on Sec. 382 for Corporations in the Capital Purchase Program

By Marc D. Levy, CPA, New York, NY

Editor: David J. Kautter, CPA

The IRS has issued guidance (Notice 2008-100) on the application of Sec. 382 to loss corporations whose instruments Treasury acquires pursuant to the Capital Purchase Program (CPP) under the Emergency Economic Stabilization Act of 2008, P.L. 110-343. The IRS intends to issue regulations on the application of Sec. 382 under the CPP, but taxpayers may rely on the guidance in Notice 2008-100 until further guidance is issued. Any contrary guidance will be prospective only.

Sec. 382 limits the amount of a corporation’s taxable income in a postchange year that may be offset by prechange losses. The event separating a prechange year from a postchange year is known as an ownership change. An ownership change occurs for a loss corporation on a testing date if, immediately after the close of the testing date, the percentage of the corporation’s stock owned by one or more 5% shareholders has increased by more than 50 percentage points over the lowest percentage of the corporation’s stock owned by such shareholder(s) at any time during the testing period (Temp. Regs. Sec. 1.382-2T(a)(1)).

For purposes of the ownership change test, Notice 2008-100 provides that if Treasury acquires shares of a loss corporation’s stock under the CPP, the ownership represented by those shares on any date on which they are held by Treasury will not cause any increase in Treasury’s ownership in the loss corporation for purposes of Sec. 382.

However, for purposes of determining the percentage of loss corporation stock owned by other 5% shareholders on a testing date, the shares held by Treasury generally are considered outstanding.

A special rule for redemptions provides that when shifts in ownership by a 5% shareholder are measured on a testing date occurring after the loss corporation redeems shares of its stock held by Treasury that were acquired under the CPP, the redeemed shares are treated as if they had never been outstanding.

Preferred stock of a loss corporation acquired by Treasury is treated as stock described in Sec. 1504(a)(4) for all federal income tax purposes.

Warrants to purchase stock of a loss corporation acquired by Treasury under the CPP (whether held by Treasury or another person) are treated as options for all income tax purposes. Options held by Treasury will not be deemed exercised under Reg. Sec. 1.382-4(d)(2). In addition, Notice 2008-100 provides that capital contributions made by Treasury to a loss corporation under the CPP will not be considered to have been made as part of a plan with a principal purpose of avoiding or increasing any Sec. 382 limitation.


Notice 2008-100 is the most recent in a series of notices dealing with Sec. 382 consequences for corporations involved in the federal efforts to rescue the economy. The notice provides more detailed rules regarding ownership changes for corporations in the CPP program. The earlier Notice 2008-76 addressed the takeover of Fannie Mae and Freddie Mac with a very simple provision that a “testing date” under Sec. 382 would not include any date on or after which the United States (or any agency or instrumentality thereof) acquired stock or options in those corporations.

Notice 2008-84, issued later in September, provided a similar result aimed at AIG, by providing that the term “testing date” will not include any date as of the close of which the United States directly or indirectly owns a more-than-50% interest in a loss corporation. Notice 2008- 83 provided special treatment allowing the recognition of built-in losses and bad debt deductions for assets held by banks, for which the losses might otherwise have been limited by Sec. 382(h).


David Kautter is a partner with Ernst & Young LLP in Washington, DC.

Contributors are members of or associated with Ernst & Young LLP.

For additional information about these items, contact Mr. Kautter at (202) 327-8878 or

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