[Federal Register Volume 80, Number 108 (Friday, June 5, 2015)]
[Rules and Regulations]
[Pages 31996-31998]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-13711]



Internal Revenue Service

26 CFR Part 1

[TD 9721]
RIN 1545-BM17

Segregation Rule Effective Date

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.


SUMMARY: This document contains final regulations under section 382 of 
the Internal Revenue Code (Code) that modify the effective date 
provision of recently published regulations. These regulations affect 
corporations whose stock is or was acquired by the Department of the 
Treasury (Treasury) pursuant to certain programs under the Emergency 
Economic Stabilization Act of 2008 (EESA).

DATES: Effective Date: These regulations are effective on June 5, 2015.
    Applicability Date: For dates of applicability, see Sec.  1.382-

FOR FURTHER INFORMATION CONTACT: Stephen R. Cleary, (202) 317-5353 (not 
a toll-free number).


Background and Explanation of Provisions

Section 382

    Section 382 of the Code provides that the taxable income of a loss 
corporation for a year following an ownership change may be offset by 
pre-change losses only to the extent of 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. A testing date is any date on which occurs any change in the 
ownership of loss corporation stock that affects the percentage of 
stock owned by any 5-percent shareholder (owner shift).
    Pursuant to section 382(g)(4)(A), shareholders who own less than 
five percent of a loss corporation are aggregated and treated as a 
single 5-percent shareholder (a public group). In addition, new public 
groups may be created as a result of certain transactions under the 
segregation rules in the section 382 regulations. Any new public group 
is tracked separately from, and in addition to, the public group or 
groups that existed previously and is treated as a new 5-percent 
shareholder that increases its ownership interest in the loss 
    One particular segregation rule, which was imposed by Sec.  1.382-
2T(j)(3)(i) of the Temporary Income Tax Regulations until it was 
superseded, required segregation when an individual or entity that 
owned five percent or more of the loss corporation transferred an 
interest in the loss corporation to public shareholders. After the 
sale, stock owned by a public group that existed immediately before the 
sale was treated separately from the stock owned by the public group 
that acquired stock from the seller. This separate public group was 
treated as a new 5-percent shareholder. However, this rule was rendered 
inoperative by Sec.  1.382-3(j)(13), part of a set of regulations 
published in TD 9638 [78 FR 62418] on October 22, 2013. Under the new 
regulation, no new public group is created on the transfer of stock to 
the public shareholders; instead, the transferred stock is treated as 
acquired proportionately by the public groups existing at the time of 
the transfer.
    Notice 2010-2 (2010-2 IRB 251 (December 16, 2009)) (see Sec.  
601.601(d)(2)(ii)(b) of this chapter) provides guidance regarding the 
application of section 382 and other provisions of law to corporations 
whose instruments are acquired and disposed of by the Treasury pursuant 
to EESA. Notice 2010-2 relates to instruments acquired by Treasury 
pursuant to the following EESA programs: (i) The Capital Purchase 
Program for publicly-traded issuers; (ii) the Capital Purchase Program 
for private issuers; (iii) the Capital Purchase Program for S 
corporations; (iv) the Targeted Investment Program; (v) the Asset 
Guarantee Program; (vi) the Systemically Significant Failing 
Institutions Program; (vii) the Automotive Industry Financing Program; 
and (viii) the Capital Assistance Program for publicly-traded issuers. 
(These programs are collectively referred to as ``Programs'' in that 
Notice and in this preamble.)
    Under Section III(G) of Notice 2010-2, a ``Covered Instrument'' is 
an instrument that is acquired by Treasury in exchange for an 
instrument that was issued to Treasury under the Programs, or is 
acquired by Treasury in exchange for another Covered Instrument. For 
most purposes of that Notice, a Covered Instrument is treated as though 
it had been issued directly to Treasury under the Programs.
    Section III(E) of Notice 2010-2 provides the following rule to 
govern the sale by Treasury of stock of a corporation to public 

    Section 382 treatment of stock sold by Treasury to public 
shareholders. If Treasury sells stock that was issued to it pursuant 
to the Programs (either directly or upon the exercise of a warrant) 
and the sale creates a public group (``New Public Group''), the New 
Public Group's ownership in the issuing corporation shall not be 
considered to have increased solely as a result of such a sale. A 
New Public Group's ownership shall be treated as having increased to 
the extent the New Public Group increases its ownership pursuant to 
any transaction other than a sale of stock by Treasury, including 
pursuant to a stock issuance described in Sec.  1.382-3(j)(2) or a 
redemption (see Sec.  1.382-2T(j)(2)(iii)(C)).

[[Page 31997]]

Such stock is considered outstanding for purposes of determining the 
percentage of stock owned by other 5-percent shareholders on any 
testing date, and section 382 (and the regulations thereunder) shall 
otherwise apply to the New Public Group in the same manner as with 
respect to other public groups.

This rule was created to prevent a loss corporation from experiencing 
an owner shift when Treasury sells stock to public shareholders. By its 
terms, the rule relies on the assumption that the stock sale ``creates 
a public group.'' As explained earlier in this preamble, Sec.  1.382-
2T(j)(3)(i), before it was superseded, required creation of a new 
public group when a 5-percent shareholder sold stock in a loss 
corporation to public shareholders. However, under Sec.  1.382-3(j)(13) 
as now in effect, such a transfer does not create a new public group.
    The Treasury Department and the IRS became concerned that the 
elimination of the segregation rule described earlier in this preamble 
may have unintentionally rendered inoperative the rule in Notice 2010-2 
that protects a loss corporation from an owner shift when Treasury 
sells stock that it held pursuant to the Programs to public 

The Temporary Regulations

    On July 31, 2014, the Treasury Department and the IRS published 
final and temporary regulations (TD 9685) in the Federal Register (79 
FR 44280). The temporary regulations modified the effective/
applicability date rule of TD 9638 to except from the changes to the 
segregation rules in those regulations the sale by the Treasury 
Department to public shareholders of any ``Program Instrument'' (an 
instrument issued pursuant to a Program or a Covered Instrument). As a 
result, under the temporary regulations, a sale of stock by Treasury to 
the public creates a public group, and the rule of Section III(E) of 
Notice 2010-2 continues to apply as intended. This provision only 
affects the sale of a Program Instrument by the Treasury Department and 
does not affect the application of the segregation rule changes in TD 
9638 to any other transactions involving stock of the corporations that 
participated in the Programs.
    A notice of proposed rulemaking (REG-105067-14) cross-referencing 
the temporary regulations and incorporating the text of the temporary 
regulations was also published in the Federal Register (79 FR 44324) on 
July 31, 2014. No written comments were received in response to the 
notice of proposed rulemaking. No requests for a public hearing were 
received, and accordingly no hearing was held.

The Final Regulations

    This Treasury Decision adopts the text of the temporary and 
proposed regulations without substantive change. As a result, the 
effective date modification provided in the temporary regulations is 
now a part of the permanent section 382 regulations, and the temporary 
regulations are removed.

Special Analyses

    It has been determined that this final regulation is not a 
significant regulatory action as defined in Executive Order 12866, as 
supplemented by Executive Order 13563. Therefore, a regulatory 
assessment is not required. It is hereby certified that these 
regulations will not have a significant economic impact on a 
substantial number of small entities. This certification is based on 
the fact that, if the regulations apply to any small entities, the 
effect will not be to increase their tax liability, but to prevent a 
potential increase in tax liability that might otherwise occur. 
Therefore, a Regulatory Flexibility Analysis under the Regulatory 
Flexibility Act (5 U.S.C. chapter 6) is not required. Pursuant to 
section 7805(f) of the Code, the notice of proposed rulemaking 
preceding these regulations was submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on their 
impact on small business, and no such comments were received.

Drafting Information

    The principal author of these regulations is Stephen R. Cleary of 
the Office of Associate Chief Counsel (Corporate). However, other 
personnel from the Treasury Department and the IRS participated in 
their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:


Paragraph 1. The authority citation for part 1 is amended by revising 
the entry for Sec.  1.382-3 to read in part as follows:

    Authority:  26 U.S.C. 7805 * * *
    Section 1.382-3 also issued under 26 U.S.C. 382(g)(4)(C) and 26 
U.S.C. 382(m).
* * * * *

Par. 2. Section 1.382-3 is amended by revising paragraph (j)(17) to 
read as follows:

Sec.  1.382-3  Definitions and rules relating to a 5-percent 

* * * * *
    (j) * * *
    (17) Effective/applicability date. This paragraph (j) generally 
applies to issuances or deemed issuances of stock in taxable years 
beginning on or after November 4, 1992. However, paragraphs (j)(11)(ii) 
and (j)(13) through (15) of this section and Examples 5 through 13 of 
paragraph (j)(16) of this section apply to testing dates occurring on 
or after October 22, 2013, other than with respect to the sale of a 
Program Instrument by the Treasury Department. For purposes of this 
paragraph (j)(17), a Program Instrument is an instrument issued 
pursuant to a Program, as defined in Internal Revenue Service Notice 
2010-2 (2010-2 IRB 251 (December 16, 2009)) (see Sec.  
601.601(a)(2)(ii)(b) of this chapter), or a Covered Instrument, as 
defined in that Notice. Taxpayers may apply paragraphs (j)(11)(ii) and 
(j)(13) through (15) of this section and Examples 5 through 13 of 
paragraph (j)(16) of this section in their entirety (other than with 
respect to a sale of a Program Instrument by the Treasury Department) 
to all testing dates that are included in a testing period beginning 
before and ending on or after October 22, 2013. However, the provisions 
described in the preceding sentence may not be applied to any date on 
or before the date of any ownership change that occurred before October 
22, 2013, under the regulations in effect before October 22, 2013, and 
they may not be applied as described in the preceding sentence if such 
application would result in an ownership change occurring on a date 
before October 22, 2013, that did not occur under the regulations in 
effect before October 22, 2013. See Sec.  1.382-3(j)(14)(ii) and (iii), 
as contained in 26 CFR part 1 revised as of April 1, 1994 for the 
application of paragraph (j)(10) of this section to stock issued on the 
exercise of certain options exercised on or after November 4, 1992, and 
for an election to apply paragraphs (j)(1) through (12) of this section 
retroactively to certain issuances and deemed issuances of stock 
occurring in taxable years prior to November 4, 1992.
* * * * *

[[Page 31998]]

Sec.  1.382-3T  (Removed)

Par. 3. Section 1.382-3T is removed.

John M. Dalrymple,
Deputy Commissioner for Services and Enforcement.
    Approved: May 13, 2015.
Mark J. Mazur,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2015-13711 Filed 6-4-15; 8:45 am]