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American Bar Association Section of Taxation Corporate Tax Committee September 13, 2003 Chicago, Illinois. Whither Section 382? Moderator: Robert J. Mason Ernst & Young LLP Washington, DC. Mark S. Jennings Office of the Associate Chief Counsel (Corporate) Internal Revenue Service
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American Bar AssociationSection of TaxationCorporate Tax CommitteeSeptember 13, 2003Chicago, Illinois Whither Section 382? Moderator: Robert J. Mason Ernst & Young LLP Washington, DC Mark S. Jennings Office of the Associate Chief Counsel (Corporate) Internal Revenue Service Washington, DC Timothy C. Sherck Mayer, Brown, Rowe & Maw LLP Chicago, IL Daniel C. White Bryan Cave LLP St. Louis, MO Lisa Joire Ernst & Young LLP Washington, DC
Example 1 Pursuant to a merger on 1/1/2000, the former L shareholders receive 42% of the P stock plus rights to additional consideration under an earn-out arrangement Former L Shareholders Public P ESOP 12% 46% 42% P L <NOL> Merger 1/1/2000 • Treas. Reg. § 1.382-2T(j)(2)(iii)(B) • Section 382(e) • 1994 FSA Lexis 212 (Aug. 18, 1994)
Example 2 ESOP Participants On 2/1/2001, P ESOP distributes P stock to plan participants; The distributed shares had been acquired by P ESOP on 1/1/1995 Former L Shareholders Public P ESOP 46% 42% 12% P • Treas. Reg. § 1.382-2T(h)(2)(iii)(B) • Treas. Reg. § 1.382-2T(j)(3)(i) • Treas. Reg. § 1.382-10T • Treas. Reg. § 1.382-3(j)
Example 3 Former L Shareholders Public P ESOP Mutual Funds Investment Advisor to Mutual Funds files a Schedule 13G on 2/1/2003, reporting ownership of 9% of the outstanding P stock 9% P • Treas. Reg. § 1.382-2T(k)(1)(i), (k)(2) • Treas. Reg. § 1.382-3(a)(1)(i) • PLR 9533024 (May 19, 1995); PLR 9610012 (Dec. 5, 1995); PLR 9725039 (June 20, 1997)
Example 4 Former L Shareholders Public P ESOP New Shareholder P NUBIG On 2/1/2001, the acquisition of P stock by New Shareholder results in ownership change of P Above market lease 50% interest in Partnership FMV: $15M 100% CFC stock CFC • Section 382(e) • Adjustments to value: • Section 382(l)(1) • Section 382(l)(4) • Section 382(m)(5); Treas. Reg. § 1.382-8 • Section 382(h)(6)
Example 5a A B C 33.3% / 0% 33.3% 33.3% / 66.6% Venture Assets: $250M FMV A, B, and C form Venture by each contributing $335M for Venture common stock, and Venture borrows $650M from Lender At a time when the fair market value of the Venture assets is $250, C acquires all of the Venture stock owned by B Lender $650M Loan • Section 382(k)(6) • Treas. Reg. § 1.382-2T(f)(18)(iii); FSA 199910009 (Dec. 2, 1998), PLR 9441036 (Jul. 14, 1994), PLR 8945055 (Aug.16, 1989) • Treas. Reg. § 1.1001-3
Example 5b A B C Lender CPS CS CS CS (Testing date value ≈ 100%) Same facts as Example 5a, except Lender holds $650M Venture convertible preferred stock (and not Venture debt) Venture Assets: $250M FMV • Treas. Reg. § 1.382-2T(c)(1) • Section 382(l)(3)(C) and Treas. Reg. § 1.382-2T(l)
Example 6a A B C Venture realizes $400M COD income upon the issuance of stock in cancellation of its debt pursuant to a title 11 proceeding; Venture reduces its NOL by $400M ------Stock extinguished------ Venture NOL $1B Assets: $655M basis $250M FMV Lender Stock in cancellation of debt • Section 108(a)(1)(A), (b)(1) and (e)(8) • Section 382(b)(3)(A), (h)(3)(A)(i), (h)(6)(A) and (h)(7) • Notice 87-79; PLR 9226026 (Mar. 26, 1992); PLR 9328021 (Apr. 16, 1993); PLR 8923021 (Mar. 10, 1989)
Example 6b A B C ------Stock extinguished------ Same facts as Example 6a, except Venture elects under Section 108(b)(5) to reduces basis in its assets by $400M Venture NOL $1B Assets: $655M basis $250M FMV Lender Stock in cancellation of debt • Section 108(b)(1) • Section 382(h)(3)(B) • PLR 9226064 (Mar. 31, 1992); PLR 9409037 (Dec. 7, 1993)
