[Federal Register Volume 59, Number 53 (Friday, March 18, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-6085]


[[Page Unknown]]

[Federal Register: March 18, 1994]


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DEPARTMENT OF THE TREASURY
26 CFR Parts 1 and 602

[TD 8529]
RIN 1545-AR91

 

Limitations on Corporate Net Operating Loss Carryforwards

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations.

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SUMMARY: This document contains final income tax regulations relating 
to the determination of whether stock of a loss corporation is owned as 
a result of being a qualified creditor for purposes of section 
382(l)(5)(E) of the Internal Revenue Code of 1986, as amended. These 
rules will help a loss corporation determine whether it is eligible for 
the special rules of section 382(l)(5).

DATES: These regulations are effective as of March 18, 1994.
    For dates of applicability of these regulations, see the 
``Effective date'' paragraph in the SUPPLEMENTARY INFORMATION portion 
of the preamble.

FOR FURTHER INFORMATION CONTACT: Diana MacKeen Fulton of the Office of 
Assistant Chief Counsel (Corporate), Office of Chief Counsel, Internal 
Revenue Service, 1111 Constitution Avenue NW., Washington, DC 20224 
(Attention: CC:DOM:CORP:5) or telephone 202-622-7550 (not a toll-free 
number).

SUPPLEMENTARY INFORMATION:

Paperwork Reduction Act

    The collections of information contained in these final regulations 
have been reviewed and approved by the Office of Management and Budget 
in accordance with the Paperwork Reduction Act (44 U.S.C. 3504(h)) 
under control number 1545-1275. The estimated annual burden per 
respondent with respect to the Secs. 1.382-9(d)(2)(iii) and (d)(4)(iv) 
statements varies from 10 minutes to 1 hour, depending on individual 
circumstances, with an estimated average of 15 minutes. The estimated 
annual burden per respondent with respect to the Sec. 1.382-9(d)(6)(ii) 
elections varies from 10 minutes to 2 hours, depending on individual 
circumstances, with an estimated average of 1 hour.
    These estimates are approximations of the average time expected to 
be necessary for a collection of information. They are based on such 
information as is available to the Internal Revenue Service. Individual 
respondents or recordkeepers may require more or less time, depending 
on their particular circumstances.
    Comments concerning the accuracy of these burden estimates and 
suggestions for reducing these burdens should be directed to the 
Internal Revenue Service, Attn: IRS Reports Clearance Officer, PC:FP, 
Washington, DC 20224, and to the Office of Management and Budget, 
Attention: Desk Officer for the Department of the Treasury, Office of 
Information and Regulatory Affairs, Washington, DC 20503.
    This document also amends the table of control numbers in 
Sec. 602.101 by restoring a control number (1545-1281) for Sec. 1.382-3 
that was removed by T.D. 8490 (58 FR 51571 (1993)).

Background

    This document contains final regulations to be added to the Income 
Tax Regulations (26 CFR part 1) under section 382 of the Internal 
Revenue Code (Code). The final regulations provide rules relating to 
the determination of whether stock of a loss corporation is owned as a 
result of being a qualified creditor for purposes of section 
382(l)(5)(E) of the Code.
    Proposed regulations on this subject were set forth in a notice of 
proposed rulemaking published in the Federal Register on May 10, 1993. 
See 58 FR 27498 (1993). (That document also withdrew earlier proposed 
regulations on this subject that had been published in the Federal 
Register on September 23, 1991 (56 FR 47921 (1991))). The IRS received 
comments on the proposed regulations and held a public hearing on July 
16, 1993. Having considered the comments and the statements made at the 
hearing, the IRS and the Treasury Department adopt the proposed 
regulations as revised by this Treasury decision.

Explanation of Provisions

    Section 382(l)(5) of the Code provides special rules for ownership 
changes resulting from bankruptcy proceedings. A loss corporation that 
qualifies for the special rules can use its loss carryforwards, after 
certain reductions, against its post-change income without limitation 
by section 382(a). A loss corporation qualifies only if its pre-change 
shareholders and creditors own at least 50 percent of its stock after 
the ownership change. Section 382(l)(5)(E) provides that stock issued 
in exchange for indebtedness counts toward the 50 percent threshold of 
section 382(l)(5) only if the indebtedness (1) was held by the creditor 
at least 18 months before the bankruptcy filing, or (2) arose in the 
ordinary course of the trade or business of the loss corporation and 
was held at all times by the same beneficial owner. The proposed 
regulations published in the Federal Register on May 10, 1993, contain 
rules for determining if stock received by creditors counts toward the 
50 percent threshold of section 382(l)(5).
    The final regulations adopt the proposed regulations with several 
changes to respond to comments. The changes, as well as certain 
comments that were not adopted in the final regulations, are discussed 
below.

A. Treatment of Certain Indebtedness As Continuously Owned by the Same 
Owner

    The proposed regulations include a de minimis rule that allows a 
loss corporation to treat indebtedness as always having been owned by 
the beneficial owner of the indebtedness immediately before the 
ownership change if the beneficial owner is not, immediately after the 
ownership change, either a 5-percent shareholder or an entity through 
which a 5-percent shareholder owns an indirect ownership interest in 
the loss corporation (a 5-percent entity). The de minimis rule does not 
apply to indebtedness owned by a person whose participation in 
formulating a plan of reorganization makes evident to the loss 
corporation that the person has not owned the indebtedness for the 
requisite period. This exception applies regardless of whether the 
participant exchanges the indebtedness for stock pursuant to the plan 
or transfers the indebtedness to other persons prior to the effective 
date of the plan.
    One commentator recommended that the exception to the de minimis 
rule be deleted because it is unclear and unlikely to work well in 
practice. The commentator suggested that the speculative investors who 
are the target of the rule are likely to sell their debt prior to the 
effective date of the plan. Unless the loss corporation could identify 
the purchasers of the debt, it would have difficulty applying the 
exception.
    The final regulations retain the exception to the de minimis rule. 
The loss corporation should not be able to disregard the fact that a 
creditor has not held its debt for the period required by section 
382(l)(5)(E) if that fact is made evident by the creditor's 
participation in the formulation of the plan of reorganization. The 
need for the requirement that the loss corporation take these facts 
into account outweighs any potential difficulty the loss corporation 
may have in applying the requirement if the creditor that participates 
in formulating the plan transfers its debt prior to the effective date 
of the plan.

B. Tacking Rules

    The proposed regulations allow the tacking of the ownership periods 
of a transferee and transferor of debt in certain circumstances for the 
purpose of determining whether the debt meets the continuous ownership 
requirement of section 382(l)(5)(E).
    The proposed regulations include a rule which permits tacking for a 
transfer pursuant to a subrogation in which a bank or insurance company 
acquires a claim against a loss corporation by reason of a payment to 
the claimant under a letter of credit or insurance policy. Commentators 
recommended that the rule be expanded to cover transfers pursuant to 
security arrangements regardless of whether the transferee is a bank or 
the arrangement is evidenced by a letter of credit. The final 
regulations adopt this recommendation.
    Commentators also recommended that a tacking rule be added to cover 
factoring transactions. Corporations in certain industries customarily 
sell (or ``factor'') their accounts receivable as a means of financing 
their operations. In response to this recommendation, an additional 
tacking rule has been added to the final regulations. This rule applies 
to a transfer of an account receivable in a customary commercial 
factoring transaction made within 30 days after the account arose to a 
transferee that regularly engages in such transactions.

C. Treatment of Accrued Interest on Qualified Indebtedness

    The proposed (and final) regulations generally provide that stock 
received by a creditor counts toward the 50 percent threshold of 
section 382(l)(5) only to the extent that the creditor receives the 
stock in full or partial satisfaction of qualifying indebtedness held 
for the requisite period. In response to a comment, the final 
regulations clarify that such indebtedness held by a creditor includes 
interest accrued thereon.

D. Effective Date

    The proposed regulations were to apply to ownership changes 
occurring on or after the date the Treasury decision adopting the 
regulations was filed with the Federal Register. The preamble to the 
proposed regulations expressed an intent that taxpayers not be 
disadvantaged by the withdrawal of the earlier proposed regulations and 
requested comments on ways to achieve that result.
    The final regulations apply to ownership changes occurring on or 
after the date the Treasury decision adopting the proposed regulations 
is filed with the Federal Register. As commentators recommended, 
however, the final regulations allow elective retroactive application 
of the rules of the regulations to ownership changes that occurred on 
or after January 1, 1987. If the loss corporation elects retroactive 
application, it may also revoke any prior election made under section 
382(l)(5)(H) to not have section 382(l)(5) apply.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. It 
has also been determined that section 553(b) of the Administrative 
Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act 
(5 U.S.C. chapter 6) do not apply to these regulations, and therefore, 
a Regulatory Flexibility Analysis is not required. Pursuant to section 
7805(f) of the Code, the notice of proposed rulemaking was submitted to 
the Chief Counsel for Advocacy of the Small Business Administration for 
comment on its impact on small business.

Drafting Information

    The principal author of these regulations is Diana MacKeen Fulton, 
Office of Assistant Chief Counsel (Corporate), Internal Revenue 
Service. However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects

26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

    Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR parts 1 and 602 are amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *.

    Section 1.382-9 also issued under 26 U.S.C. 382(l)(1)(B), 
(l)(3), and (m).
* * * * *
    Par. 2. In Sec. 1.382-1, the table of contents is amended by:
    1. Continuing to reserve the entry for 1.382-9, paragraph (c).
    2. Adding entries for paragraphs (d) through (d)(6)(ii)(C).
    3. The additions read as follows:


Sec. 1.382-1  Table of contents.

* * * * *

Sec. 1.382-9  Special rules under section 382 for corporations 
under the jurisdiction of a court in a title 11 or similar case.

* * * * *
    (c) [Reserved]
    (d) Rules for determining whether stock of the loss corporation 
is owned as a result of being a qualified creditor.
    (1) Qualified creditor.
    (2) General rules for determining whether indebtedness is 
qualified indebtedness.
    (i) Definition.
    (ii) Determination of beneficial ownership.
    (iii) Duty of inquiry.
    (iv) Ordinary course indebtedness.
    (3) Treatment of certain indebtedness as continuously owned by 
the same owner.
    (i) In general.
    (ii) Operating rules.
    (iii) Indebtedness owned by beneficial owner who becomes a 5-
percent shareholder or 5-percent entity.
    (iv) Example.
    (4) Special rule if indebtedness is a large portion of 
creditor's assets.
    (i) In general.
    (ii) Applicable period.
    (iii) Determination of ownership change.
    (iv) Reliance on statement.
    (5) Tacking of ownership periods.
    (i) Transferee treated as owning indebtedness for period owned 
by transferor.
    (ii) Qualified transfer.
    (iii) Exception.
    (iv) Debt-for-debt exchanges.
    (6) Effective date.
    (i) In general.
    (ii) Elections and amended returns.
    (A) Election to apply this paragraph (d) retroactively.
    (B) Election to revoke section 382(l)(5)(H) election.
    (C) Amended returns.
* * * * *
    Par. 3. Section 1.382-9 is amended by:
    1. Revising the last sentence of paragraph (a).
    2. Adding paragraph (d).
    3. Revising the second sentence of paragraph (e)(1).
    4. The revisions and additions read as follows:


Sec. 1.382-9  Special rules under section 382 for corporations under 
the jurisdiction of a court in a title 11 or similar case.

    (a) * * * Terms and nomenclature used in this section, and not 
otherwise defined herein (including the nomenclature and assumptions in 
Sec. 1.382-2T(b) relating to the examples) have the same respective 
meanings as in section 382 and the regulations thereunder.
* * * * *
    (d) Rules for determining whether stock of the loss corporation is 
owned as a result of being a qualified creditor--(1) Qualified 
creditor. A qualified creditor is the beneficial owner, immediately 
before the ownership change, of qualified indebtedness of the loss 
corporation. A qualified creditor owns stock of the new loss 
corporation (or a controlling corporation) as a result of being a 
qualified creditor only to the extent that the qualified creditor 
receives stock in full or partial satisfaction of qualified 
indebtedness (including interest accrued on such indebtedness) in a 
transaction that is ordered by the court or is pursuant to a plan 
approved by the court in a title 11 or similar case. For purposes of 
this paragraph (d)(1), ownership of stock after the ownership change is 
determined without applying the attribution rules generally applicable 
under section 382(l)(3)(A) or Sec. 1.382-2T(h).
    (2) General rules for determining whether indebtedness is qualified 
indebtedness--(i) Definition. Indebtedness of the loss corporation is 
qualified indebtedness if it--
    (A) Has been owned by the same beneficial owner since the date that 
is 18 months before the date of the filing of the title 11 or similar 
case; or
    (B) Arose in the ordinary course of the trade or business of the 
loss corporation and has been owned at all times by the same beneficial 
owner.
    (ii) Determination of beneficial ownership. For purposes of 
paragraph (d)(2)(i) of this section, beneficial ownership of 
indebtedness is determined without applying attribution rules.
    (iii) Duty of inquiry. The loss corporation must determine that 
indebtedness that the loss corporation treats as qualified 
indebtedness, other than indebtedness to which paragraph (d)(3)(i) of 
this section applies, has been owned for the requisite period by the 
beneficial owner who owns the indebtedness immediately before the 
ownership change. The loss corporation may rely on a statement, signed 
under penalties of perjury, by a beneficial owner regarding the amount 
of indebtedness the beneficial owner owns and the length of time that 
the beneficial owner has owned the indebtedness.
    (iv) Ordinary course indebtedness. For purposes of this paragraph 
(d)(2), indebtedness arises in the ordinary course of the loss 
corporation's trade or business only if the indebtedness is incurred by 
the loss corporation in connection with the normal, usual, or customary 
conduct of business, determined without regard to whether the 
indebtedness funds ordinary or capital expenditures of the loss 
corporation. For example, indebtedness (other than indebtedness 
acquired for a principal purpose of being exchanged for stock) arises 
in the ordinary course of the loss corporation's trade or business if 
it is trade debt; a tax liability; a liability arising from a past or 
present employment relationship, a past or present business 
relationship with a supplier, customer, or competitor of the loss 
corporation, a tort, a breach of warranty, or a breach of statutory 
duty; or indebtedness incurred to pay an expense deductible under 
section 162 or included in the cost of goods sold. A claim that arises 
upon the rejection of a burdensome contract or lease pursuant to the 
title 11 or similar case is treated as arising in the ordinary course 
of the loss corporation's trade or business if the contract or lease so 
arose.
    (3) Treatment of certain indebtedness as continuously owned by the 
same owner--(i) In general. For purposes of paragraph (d)(2) of this 
section, a loss corporation may treat indebtedness as always having 
been owned by the beneficial owner of the indebtedness immediately 
before the ownership change if the beneficial owner is not, immediately 
after the ownership change, either a 5-percent shareholder or an entity 
through which a 5-percent shareholder owns an indirect ownership 
interest in the loss corporation (a 5-percent entity). This paragraph 
(d)(3)(i) does not apply to indebtedness beneficially owned by a person 
whose participation in formulating a plan of reorganization makes 
evident to the loss corporation (whether or not the loss corporation 
had previous knowledge) that the person has not owned the indebtedness 
for the requisite period.
    (ii) Operating rules. For purposes of paragraph (d)(3)(i) of this 
section: (A) If a loss corporation has actual knowledge of a 
coordinated acquisition of its indebtedness by a group of persons, 
through a formal or informal understanding among themselves, for a 
principal purpose of exchanging the indebtedness for stock, the 
indebtedness (and any stock received in exchange therefor) is treated 
as owned by an entity. A principal element in determining if an 
understanding exists among members of a group is whether the investment 
decision of each member is based upon the investment decision of one or 
more other members.
    (B) If the loss corporation has actual knowledge regarding stock 
ownership described in Sec. 1.382-2T(k)(2), the loss corporation must 
take that ownership into account in determining which beneficial owners 
of indebtedness are, immediately after the ownership change, 5-percent 
shareholders or 5-percent entities. The loss corporation is not 
required to take into account an ownership interest described in 
Sec. 1.382-2T(k)(4) unless the loss corporation has actual knowledge of 
the ownership interest.
    (C) The term 5-percent shareholder includes any person who is a 5-
percent shareholder of the loss corporation within the meaning of 
Sec. 1.382-2T(g), without regard to the option attribution rules of 
section 382(l)(3)(A) or Sec. 1.382-4(d) (or, if applicable, Sec. 1.382-
2T(h)(4)).
    (D) Paragraph (d)(3)(i) of this section does not apply to 
indebtedness if the loss corporation has actual knowledge immediately 
after the ownership change that the exercise of an option to acquire or 
dispose of stock of the loss corporation would cause the beneficial 
owner of the indebtedness immediately before the ownership change to 
be, after the ownership change, either a 5-percent shareholder or a 5-
percent entity. An interest that is treated as an option under 
Sec. 1.382-4(d)(9) (or Sec. 1.382-2T(h)(4)(v) if applicable) is treated 
as an option for purposes of this paragraph (d)(3)(ii)(D).
    (iii) Indebtedness owned by beneficial owner who becomes a 5-
percent shareholder or 5-percent entity. If the beneficial owner of 
indebtedness immediately before the ownership change is a 5-percent 
shareholder or 5-percent entity immediately after the ownership change, 
the general rules of paragraph (d)(2) of this section apply to 
determine whether the indebtedness has been owned for the requisite 
period by the beneficial owner.
    (iv) Example. The following example illustrates paragraph (d)(3) of 
this section.


    (A)(1) L is a loss corporation in a title 11 case. The plan of 
reorganization of L approved by the bankruptcy court provides for 
the satisfaction of claims by the issuance of new L common stock to 
its creditors as follows:

A--2 percent
B--7.5 percent
C--2.5 percent
P1--3 percent
P2--10 percent
P3--4.9 percent
P4--4.9 percent
P5--4.9 percent

    (2) P2 is owned by Public P2. B owns 10 percent of the stock of 
P1 and L has no actual knowledge of this ownership. L has actual 
knowledge that D owns P3, P4 and P5. In addition, L has actual 
knowledge, immediately after the ownership change, that C owns an 
option to acquire newly-issued stock of L that, if exercised, would 
increase C's percentage ownership of L stock from 2.5 percent to 8 
percent. An ownership change of L occurs on the date the plan 
becomes effective.
    (B) Under paragraph (d)(3)(i) of this section, L may treat the 
indebtedness owned by A and P1 immediately before the ownership 
change as always having been owned by A and P1. Neither A nor P1 is 
a 5-percent shareholder immediately after the ownership change. 
Further, because P1 owns less than 5 percent of the L stock (and L 
has no actual knowledge of B's ownership interest in P1), P1 is 
treated as an individual, and the L stock owned by P1 is not 
attributed to any other person, including B. See Sec. 1.382-
2T(h)(2)(iii). Therefore, P1 is not a 5-percent entity.
    (C) Paragraph (d)(3)(i) of this section does not apply to the 
indebtedness owned by B, C, P2, P3, P4, or P5. B is a 5-percent 
shareholder immediately after the ownership change. L has actual 
knowledge immediately after the ownership change that the exercise 
of C's option would cause C to be a 5-percent shareholder 
immediately after the ownership change. (L does not take into 
account the effect of the exercise of the option, however, in 
determining the percentage stock ownership of any person other than 
C because the deemed exercise would not cause any other person to be 
a 5-percent shareholder or a 5-percent entity after the ownership 
change.) P2 is a 5-percent entity, because Public P2, a 5-percent 
shareholder, owns an indirect ownership interest in L through P2. 
P3, P4, and P5 are 5-percent entities because D, a 5-percent 
shareholder, owns an indirect ownership interest in L through P3, 
P4, and P5. Because L has actual knowledge that D would be a 5-
percent shareholder but for the application of Sec. 1.382-
2T(h)(2)(iii), that section does not apply to P3, P4, or P5. See 
Sec. 1.382-2T(k)(2). Thus, under Sec. 1.382-2T(h)(2)(i), the L stock 
owned by P3, P4, and P5 is attributed to D, and D is a 5-percent 
shareholder. Because paragraph (d)(3)(i) of this section does not 
apply to the indebtedness owned by B, C, P2, P3, P4, and P5, L may 
treat as qualified indebtedness only indebtedness that it determines 
had been owned by such persons for the requisite period. See 
paragraph (d)(2)(iii) of this section.


    (4) Special rule if indebtedness is a large portion of creditor's 
assets--(i) In general. Indebtedness is not qualified indebtedness if--
    (A) The beneficial owner of the indebtedness is a corporation or 
other entity that had an ownership change on any day during the 
applicable period;
    (B) The indebtedness represents more than 25 percent of the fair 
market value of the total gross assets (excluding cash or cash 
equivalents) of the beneficial owner on its change date; and
    (C) The beneficial owner is a 5-percent entity immediately after 
the ownership change of the loss corporation (determined by applying 
the rules of paragraph (d)(3) of this section).
    (ii) Applicable period. For purposes of paragraph (d)(4)(i) of this 
section, the term applicable period means the period beginning on the 
day 18 months before the filing of the title 11 or similar case (or the 
day on which the beneficial owner acquired the indebtedness, if later) 
and ending with the change date of the loss corporation.
    (iii) Determination of ownership change. For purposes of paragraph 
(d)(4)(i) of this section, the determination whether a beneficial owner 
of indebtedness has an ownership change is made under the principles of 
section 382 and the regulations thereunder, without regard to whether 
the beneficial owner is a loss corporation and by beginning the testing 
period no earlier than the latest of the day three years before the 
change date, the day 18 months before the filing of the title 11 or 
similar case, or the day on which the beneficial owner acquired the 
indebtedness.
    (iv) Reliance on statement. Paragraph (d)(4)(i) of this section 
does not apply to indebtedness if the loss corporation obtains a 
statement, signed under penalties of perjury, by the beneficial owner 
of the indebtedness that states that paragraph (d)(4)(i) of this 
section does not apply to the indebtedness.
    (5) Tacking of ownership periods--(i) Transferee treated as owning 
indebtedness for period owned by transferor. To determine whether 
indebtedness transferred in a qualified transfer is qualified 
indebtedness, the transferee is treated as having owned the 
indebtedness for the period that it was owned by the transferor.
    (ii) Qualified transfer. For purposes of paragraph (d)(5)(i) of 
this section, a transfer of indebtedness is a qualified transfer if--
    (A) The transfer is between parties who bear a relationship to each 
other described in section 267(b) or 707(b) (substituting at least 80 
percent for more than 50 percent each place it appears in section 
267(b) (and section 267(f)(1)) or 707(b));
    (B) The transfer is a transfer of a loan within 90 days after its 
origination, pursuant to a customary syndication transaction;
    (C) The transfer is a transfer of newly incurred indebtedness by an 
underwriter that owned the indebtedness for a transitory period 
pursuant to an underwriting;
    (D) The transferee's basis in the indebtedness is determined under 
section 1014 or 1015 or with reference to the transferor's basis in the 
indebtedness;
    (E) The transfer is in satisfaction of a right to receive a 
pecuniary bequest;
    (F) The transfer is pursuant to any divorce or separation 
instrument (within the meaning of section 71(b)(2));
    (G) The transfer is pursuant to a subrogation in which the 
transferee acquires a claim against the loss corporation by reason of a 
payment to the claimant pursuant to an insurance policy or a guarantee, 
letter of credit or similar security arrangement; or
    (H) The transfer is a transfer of an account receivable in a 
customary commercial factoring transaction made within 30 days after 
the account arose to a transferee that regularly engages in such 
transactions.
    (iii) Exception. A transfer of indebtedness is not a qualified 
transfer for purposes of paragraph (d)(5)(i) of this section if the 
transferee acquired the indebtedness for a principal purpose of 
benefiting from the losses of the loss corporation by--
     (A) Exchanging the indebtedness for stock of the loss corporation 
pursuant to the title 11 or similar case; or
    (B) Selling the indebtedness at a profit that reflects the 
expectation that, by reason of section 382(l)(5), section 382(a) will 
not apply to any ownership change resulting from the title 11 or 
similar case.
    (iv) Debt-for-debt exchanges. If the loss corporation satisfies its 
indebtedness with new indebtedness, either through an exchange of new 
indebtedness for old indebtedness or a change in the terms of 
indebtedness that results in an exchange under section 1001--
    (A) The owner of the new indebtedness is treated as having owned 
that indebtedness for the period that it owned the old indebtedness; 
and
    (B) The new indebtedness is treated as having arisen in the 
ordinary course of the trade or business of the loss corporation if the 
old indebtedness so arose.
    (6) Effective date--(i) In general. This paragraph (d) applies to 
ownership changes occurring on or after March 17, 1994.
    (ii) Elections and amended returns--(A) Election to apply this 
paragraph (d) retroactively. A loss corporation may elect to apply this 
paragraph (d) to an ownership change occurring prior to March 17, 1994. 
This election must be made by the later of the due date (including any 
extensions of time) of the loss corporation's tax return for the 
taxable year which includes the change date or the date that the loss 
corporation files its first tax return after May 16, 1994. The election 
is made by attaching the following statement to the return: ``This is 
an Election to Apply Sec. 1.382-9(d) Retroactively with Respect to the 
Ownership Change on [Insert Date of Ownership Change] That Occurred in 
Connection with the Title 11 or Similar Case filed on [Insert Date of 
Filing].'' This statement must be accompanied by the amended returns 
described in paragraph (d)(6)(ii)(C) of this section. An election under 
this paragraph (d)(6) is irrevocable.
    (B) Election to revoke section 382(l)(5)(H) election. A loss 
corporation may elect to revoke a prior election made under section 
382(l)(5)(H) with respect to an ownership change occurring before March 
17, 1994 by including the following statement with its election to 
apply Sec. 1.382-9(d) retroactively: ``This is an Election to Revoke a 
Prior Election Made Under Section 382(l)(5)(H) With Respect to the 
Ownership Change on [Insert Date of Ownership Change] That Occurred in 
Connection With the Title 11 or Similar Case Filed on [Insert Date of 
Filing].''
    (C) Amended returns. If the retroactive application of this 
paragraph (d) affects the amount of taxable income or loss for a prior 
taxable year, then, except as precluded by the applicable statute of 
limitations, the loss corporation (or the common parent of any 
consolidated group of which the loss corporation was a member for the 
year) must file an amended return for the year that reflects the 
effects of the retroactive application of the rules of this paragraph 
(d). If the statute of limitations precludes the filing of an amended 
return for one or more such prior taxable years, the loss corporation 
(or the common parent) must make appropriate adjustments under the 
principles of section 382(l)(2)(A) in subsequent taxable years to 
reflect the difference between the losses and credits actually used in 
such prior taxable years and the amount that would have been used in 
those years applying the rules of this paragraph (d).
    (e) Option attribution for purposes of determining stock ownership 
under section 382(l)(5)(A)(ii)--(1) In general. * * * An option that is 
owned as a result of being a pre-change shareholder or qualified 
creditor and that, if exercised, would result in the ownership of stock 
by a pre-change shareholder or qualified creditor is not treated as 
exercised under this paragraph (e). * * *
* * * * *

PART 602--OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

    Par. 4. The authority citation for part 602 continues to read as 
follows:

    Authority: 26 U.S.C. 7805.

    Par. 5. Section 602.101(c) is amended by revising the entries for 
1.382-3 and 1.382-9 to read as follows:


Sec. 602.101   OMB Control numbers.

* * * * *
    (c) * * *

------------------------------------------------------------------------
                                                             Current OMB
     CFR part or section where identified and described      control No.
------------------------------------------------------------------------
                                                                        
                                  *****                                 
1.382-3....................................................    1545-1281
                                                               1545-1345
                                                                        
                                  *****                                 
1.382-9....................................................    1545-1260
                                                               1545-1120
                                                               1545-1275
                                                               1545-1324
                                  *****                                 
------------------------------------------------------------------------

Margaret Milner Richardson,
Commissioner of Internal Revenue.

    Approved: February 24, 1994.
Leslie Samuels,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 94-6085 Filed 3-17-94; 8:45 am]
BILLING CODE 4830-01-U