IRS ADDS TRANSITIONAL RELIEF TO PROPOSED STOCK OWNERSHIP SEGREGATION REGS.

Notice 92-54

This document contains information regarding Notice of Proposed Rulemaking CO-99-91, which was filed on November 4, 1992, and published in the Federal Register on November 5, 1992 (57 FR 52738) (the "proposed regulations"). The proposed regulations, which were issued under section 382 of the Internal Revenue Code, modify existing rules that require segregation of public groups following stock issuances for purposes of determining whether an ownership change has occurred. The proposed regulations will be modified to provide transitional relief from the rule relating to the issuance of stock pursuant to the exercise of certain options.

Section 382 of the Code limits the use of a loss corporation's pre-change loss following an ownership change. An ownership change generally is a more than 50 percentage point increase in stock ownership by 5-percent shareholders over a three-year period. Individuals and entities separately owning less than 5 percent of its stock ("less-than-5-percent shareholders") are aggregated into public groups that are treated as 5-percent shareholders. Section 1.382- 2T(j) provides rules for segregating public groups following equity structure shifts and certain other transactions, including any issuance of stock to which section 1032 applies. Under the temporary regulations, a loss corporation issuing stock generally must treat less-than-5-percent shareholders acquiring stock in the issuance as a separate public group from any public groups existing before the issuance.

The proposed regulations modify the segregation rules of the temporary regulations by providing special rules for small issuances of stock and issuances of stock for cash. The proposed regulations provide equal treatment for stock offerings and pro rata distributions of transferable stock rights to shareholders for purposes of determining whether the loss corporation has an ownership change. Under the proposed regulations, the small issuance and cash issuance rules may apply to the issuance of stock on the exercise of an option, such as a stock right. However, section 1.382-3(j)(5) (ii)(B) of the proposed regulations requires the loss corporation to take subsequent transfers of any option into account in applying the actual knowledge exception to the segregation rules upon the exercise of the option (including transfers described in section 1.382- 2T(h)(4)(xi)). Therefore, even if transferable options are distributed pro rata to members of an existing public group, the actual knowledge exception applies only to the extent that the loss corporation knows that the persons acquiring stock on exercise of the options actually are members of a pre-existing public group. Section 1.382-3(j)(13)(iii) provides that section 1.382-3(j)(5)(ii)(B) does not apply to the exercise of an option issued before November 4, 1992.

The Internal Revenue Service has determined that transitional relief is warranted with respect to proposed section 1.382- 3(j)(5)(ii)(B). Accordingly, proposed section 1.382-3(j)(13)(iii) will be modified to add the following:

Section 1.382-3(j)(5)(ii)(B) does not apply to the issuance of stock on the exercise of an option, if --

(i) the issuer, on or before November 4, 1992, filed a registration statement with the Securities and Exchange Commission (or comparable document with a State agency regulating securities) for the specific purpose of such issuance; and

(ii) the option is issued before May 4, 1993.

The principal author of this notice is Roberta F. Mann, Office of the Assistant Chief Counsel (Corporate), Internal Revenue Service. However, other personnel from the Service and Treasury Department participated in its development. For further information regarding this notice contact Roberta F. Mann on 202-622-7550 (not a toll-free number).