Interpreting SEC Schedules 13D and 13G for Sec. 382 Purposes

By Greg A. Fairbanks, J.D., LL.M., Washington, DC

Editor: Greg A. Fairbanks, J.D., LL.M.

Sec. 382 requires a taxpayer corporation to track the ownership shifts among “5% shareholders.” If the positive shifts among such shareholders should exceed 50% over the lowest percentage of stock held by such shareholders within the applicable testing period, the result is an ownership change that will limit the taxpayer’s ability to use its net operating losses (NOLs) and other attributes after that ownership change. The determination of what constitutes a 5% shareholder and how they are tracked is governed by a complex set of Treasury regulations. For Sec. 382 purposes, the 5% ownership threshold for tracking is concerned with economic ownership (which person holds the rights to dividends, proceeds on liquidation, etc.).

Public Versus Privately Held Corporations

The regulations under Sec. 382 provide a number of simplifying con ventions and assumptions to enable taxpayers to comply with the man dates of Sec. 382 without the process becoming exceedingly cumbersome. However, there is a natural difference between a privately held corporation and one that is publicly traded. In the case of a privately held corporation, the taxpayer ought to have actual knowledge of all shareholders on all testing dates when Sec. 382 consequences need to be determined. This knowledge will typically be in the form of a stock registry or stock ledger. Thus, when determining 5% shareholders of a privately held corporation, the taxpayer will typically be able to rely on actual knowledge, and the simplifying conventions and assumptions are available mostly to further help the taxpayer.

However, in the case of a publicly traded corporation, the taxpayer will likely not have that information. If the taxpayer is an SEC registrant, the SEC filing rules generally will require any person who acquires more than 5% of the beneficial ownership of stock to file an SEC Schedule 13D, Statement of Beneficial Ownership, or 13G, Short Form Statement of Beneficial Ownership, as appropriate. Temp. Regs. Sec. 1.382-2T(k)(1) allows a taxpayer to rely on the existence or absence of the Schedule 13D and 13G filings on testing dates to establish those persons who have a direct ownership interest of 5% or more. This provision ostensibly simplifies the pro cess for the taxpayer, who can turn to an established source for information on the company’s ownership. However, the SEC filings are concerned with beneficial ownership, while Sec. 382 tracks changes in economic ownership. Although these interests can be co-extensive, they are not necessarily the same. This becomes especially problematic with SEC filings by investment advisers.

The Investment Adviser SEC Filing Conundrum

Section 202(a)(11) of the Investment Advisers Act of 1940 defines an investment adviser as

any person who . . . engages in the business of advising others . . . as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities.

An investment adviser within the meaning of the Investment Advisers Act who has beneficial ownership of more than 5% of a corporation’s stock must file a Schedule 13D or 13G, the same as an individual or corporation with a direct beneficial and economic ownership interest. However, the investment adviser may well not be the true economic owner of the stock it reports as beneficially owning.

Example: L Co. is an SEC registrant with 1,000 shares of common stock issued and outstanding on date 1. X, an individual, files on date 1 reporting a 10% beneficial ownership interest of 100 shares. Y, Inc., a corporation, also files on date 1 and reports a 20% beneficial ownership interest of 200 shares. Z, LP, an investment adviser, also files on date 1 and reports a 6% beneficial ownership interest of 60 shares. There are no other SEC filings that shed further light on the other 640 shares on date 1.

In the case of X and Y, it is reasonable to conclude that their beneficial interests of 10% and 20%, respectively, are equal to their economic interests. Thus, for Sec. 382 purposes, the taxpayer would report X and Y as owning economic interests of 10% and 20%, respectively. (The prudent practitioner should also note that Y is a “first-tier entity” and should perform a lookthrough analysis to make sure there are no indirect owners who need to be separately tracked as 5% shareholders.)

Z presents the problem. If Z were an investment adviser to a single person who had economic ownership of all 60 shares, then the proper treatment would be to track that person as a 5% shareholder (subject to possible lookthrough rules if the person were a first-tier entity and not an individual) and the remaining 640 shares would be treated as owned by a direct public group (due to the absence of more SEC filings). However, if Z were investment adviser to a group of unrelated persons, none of whom economically owned at least 50 shares, then the proper treatment would be to add the 60 shares to the direct public group of L for a total of 700 shares in the direct public group as of date 1.

This creates the issue of how a practitioner should interpret information in SEC Schedules 13D and 13G, especially when the filer is an investment adviser. Ordinarily, a practitioner would look to Item 6 on the filing (“Ownership of more than 5 percent on behalf of another person”) or to ward the end of the filing, or even perhaps an attached statement, to see if there are further details on the persons advised by the investment adviser who have economic ownership. However, often there is no additional information, or the answers provided are ambiguous.

Letter Ruling 200747016

There had been no additional guidance on the issue of how to address this aspect of SEC filings until the Service issued Letter Ruling 200747016. The lengthy ruling addressed 12 different SEC Schedule 13G filing scenarios and ruled on the proper interpretation of such forms for Sec. 382 purposes. Although a letter ruling is not precedential authority, this is the first published material addressing this frequently encountered issue, and the general method in which the IRS chose to analyze the 12 filers merits scrutiny. In general, the 12 different filers fell into one of three classes discussed in more detail below.

SEC Filers Who Provide No Additional Information and Taxpayer Has No Actual Knowledge

Assume, from the above example, that the SEC Schedule 13G for Z lists beneficial ownership of 60 shares, but there is no further detail in either Item 6 of the filing (which states “not appli cable”) or any attached schedule, or elsewhere in other SEC filings, from which to determine true economic ownership. In addition, L has no actual knowledge in its own records and has not made any further inquiries with Z.

This situation is similar to that of Filers 2, 4, and 5 in Letter Ruling 200747016. The IRS ruled that in such circumstances, because the SEC filer failed to indicate that it had no economic ownership, the filing must be taken into account. In other words, the assumption is that the beneficial ownership is, in fact, economic ownership in the absence of additional evidence to rebut the assumption.

SEC Filers Who Provide Additional Information

Assume, from the above example, that the SEC Schedule 13G for Z lists beneficial ownership of 60 shares and, for Item 6 of the filing, Z reports that clients advised by Z own the 60 shares and no one client owns over 5% of such stock.

This situation is analogous to that of Filers 1, 3, 9, and 12 in Letter Ruling 200747016. The Service ruled that with respect to those filers, there was evidence of “sufficient weight and probity” in the SEC filings to show that there was no 5% economic owner. In other words, if there is additional information in an SEC filing, it must be examined to determine if there is sufficient evidence to reasonably conclude that there is no 5% economic ownership interest. If that threshold is met, then the beneficially held shares are treated as owned by members of the direct public for Sec. 382 purposes (and not the investment adviser).

SEC Filers Who Provide No Additional Information but Taxpayer Has Actual Knowledge

Assume, from the above example, that the SEC Schedule 13G for Z lists beneficial ownership of 60 shares and there is no further detail in either Item 6 of the filing (which states “not appli cable”) or any attached schedule, or elsewhere in other SEC filings, from which to determine true economic ownership. L, however, sends an e-mail to Z and gets written confirmation that it is only an adviser and that its clients, none of whom owns 5% or more of such stock, have economic ownership.

This situation is analogous to that of Filers 6, 7, 8, and 11 in Letter Ruling 200747016. The taxpayer was initially faced with SEC filings that contained no additional information with respect to the amounts reported as beneficially owned by the investment adviser filing the Schedule 13G. However, via either e-mail, e-mail plus telephone calls, or an internet search, the taxpayer obtained information that there were no economic owners who held a 5% or greater interest. The IRS ruled that this additional information for those filers was of “sufficient weight and probity” to establish that the filers were not the economic owners of the stock for which they were reporting beneficial ownership.


The letter ruling does not provide more detail on the SEC filings, so it is difficult to match the many different manifestations of an SEC filing with the select, redacted group of filers addressed in the ruling. However, there appears to be an overall theme with respect to how the Service treats filers who are investment advisers. If there is no additional information in the filing or additional actual knowledge, then the letter ruling appears to stand for the proposition that beneficial ownership will be treated as economic ownership for Sec. 382 purposes, notwithstanding the fact that the filer is an investment adviser. However, any additional information in an SEC filing should be scrutinized to determine if the information is of sufficient weight and probity to conclude how the economic ownership should be presented for Sec. 382 purposes. Also, even if there is no additional information in the SEC filings, a taxpayer can ask beneficial owners for additional information (and document it) about economic ownership. The weight and probity of that additional information can then be determined to reach similar conclusions on economic ownership for Sec. 382 purposes.


Greg A. Fairbanks, J.D., LL.M., works for Grant Thornton LLPWashington, DC

Unless otherwise indicated, contributors are members of or associated with Grant Thornton LLP.

If you would like additional information about these items, contact Mr. Fairbanks at (202) 521-1503 or

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