Adjusted federal long-term tax-exempt rate for December 2010 is 3.67%
Long-term tax-exempt rate for ownership changes during December 2010 is 3.67%
See Rev. Rul. 2010-29 for more details
Sunday, November 21, 2010
Tuesday, November 9, 2010
New Section Guidance - PLR 201043019
On October 29, the Internal Revenue Service (“IRS”) released Private Letter Ruling 201043019. For a copy of the ruling, please visit our website.
The ruling involved Parent Group, a group of affiliated loss corporations that filed a consolidated return. As of Date 5, Parent Group was owned by two 5-percent shareholders – Company 1 and Company 2. Parent Group had outstanding a single class of Common Stock and two classes of Preferred Stock – Preferred C Stock and Preferred D Stock.
Parent Group requested a ruling regarding the application of Section 382 to a Conversion Transaction.
A summary of Parent Group’s key transactions follows:
Preferred C Transaction: On Date 1, Parent Group issued shares of Preferred C Stock for cash. The Preferred C Stock was non-voting and entitled to quarterly dividends. However, the Preferred C Stock was not convertible into shares of Parent Group’s Common Stock. Parent Group represented that the Preferred C stock was not “stock” within the meaning of Section 1504(a)(4).
Preferred D Transaction: On Date 5, Parent Group issued shares of Preferred D Stock to Company 1 and Company 2 for cash. Unlike the Preferred C Stock, the Preferred D was voting stock and was entitled to daily dividends. In addition, the Preferred D stock was convertible into the shares of Parent Group’s Common Stock.
Conversion Transaction: On Date 11, a Conversion Transaction is contemplated. Specifically, the holders of the outstanding Preferred C and Preferred D stock will exchange their shares for shares of Parent Group Common Stock. Parent Group represented that the Conversion Transaction will be a value-for-value exchange. Parent Group also represented that the terms of the Conversion Transaction will be negotiated in an arm’s-length transaction.
The two issues that the IRS addressed in PLR 201043019 were as follows:
First, what methodology could Parent Group apply for purposes of disregarding stock value fluctuations)in its different classes of stock?
The IRS ruled that Parent Group could use any reasonable method employing the Hold Constant Principle (“HCP”). In reaching this conclusion, the IRS was referring back to Notice 2010-50. Notice 2010-50 is interim guidance which specifically provides that loss corporations may use any reasonable method to employ either the Full Value Methodology or HCP methodology, provided that such methodology is consistently applied.
Second, how should the Conversion Transaction be treated for Section 382 purposes? Specifically, how should the exchange of the Preferred D Stock for Common Stock by Company 1 and 2 be treated? The IRS ruled that to the extent the Conversion Transaction is a value-for-value exchange of stock, it should be disregarded. Company 1 and 2 (the exchanging shareholders) would be deemed to have acquired the Common Stock on Date 5 – the actual date that they acquired the Preferred D stock from Parent because the Conversion Transaction that will occur on Date 11 is to be disregarded. Because Parent Group represented that the Preferred C stock met the requirements under Section 1504(a)(4) it would not be treated as “stock”.
Therefore, only the Common Stock and Preferred D Stock that was issued on Date 5 would be treated as stock in the Conversion Transaction.
The ruling involved Parent Group, a group of affiliated loss corporations that filed a consolidated return. As of Date 5, Parent Group was owned by two 5-percent shareholders – Company 1 and Company 2. Parent Group had outstanding a single class of Common Stock and two classes of Preferred Stock – Preferred C Stock and Preferred D Stock.
Parent Group requested a ruling regarding the application of Section 382 to a Conversion Transaction.
A summary of Parent Group’s key transactions follows:
Preferred C Transaction: On Date 1, Parent Group issued shares of Preferred C Stock for cash. The Preferred C Stock was non-voting and entitled to quarterly dividends. However, the Preferred C Stock was not convertible into shares of Parent Group’s Common Stock. Parent Group represented that the Preferred C stock was not “stock” within the meaning of Section 1504(a)(4).
Preferred D Transaction: On Date 5, Parent Group issued shares of Preferred D Stock to Company 1 and Company 2 for cash. Unlike the Preferred C Stock, the Preferred D was voting stock and was entitled to daily dividends. In addition, the Preferred D stock was convertible into the shares of Parent Group’s Common Stock.
Conversion Transaction: On Date 11, a Conversion Transaction is contemplated. Specifically, the holders of the outstanding Preferred C and Preferred D stock will exchange their shares for shares of Parent Group Common Stock. Parent Group represented that the Conversion Transaction will be a value-for-value exchange. Parent Group also represented that the terms of the Conversion Transaction will be negotiated in an arm’s-length transaction.
The two issues that the IRS addressed in PLR 201043019 were as follows:
First, what methodology could Parent Group apply for purposes of disregarding stock value fluctuations)in its different classes of stock?
The IRS ruled that Parent Group could use any reasonable method employing the Hold Constant Principle (“HCP”). In reaching this conclusion, the IRS was referring back to Notice 2010-50. Notice 2010-50 is interim guidance which specifically provides that loss corporations may use any reasonable method to employ either the Full Value Methodology or HCP methodology, provided that such methodology is consistently applied.
Second, how should the Conversion Transaction be treated for Section 382 purposes? Specifically, how should the exchange of the Preferred D Stock for Common Stock by Company 1 and 2 be treated? The IRS ruled that to the extent the Conversion Transaction is a value-for-value exchange of stock, it should be disregarded. Company 1 and 2 (the exchanging shareholders) would be deemed to have acquired the Common Stock on Date 5 – the actual date that they acquired the Preferred D stock from Parent because the Conversion Transaction that will occur on Date 11 is to be disregarded. Because Parent Group represented that the Preferred C stock met the requirements under Section 1504(a)(4) it would not be treated as “stock”.
Therefore, only the Common Stock and Preferred D Stock that was issued on Date 5 would be treated as stock in the Conversion Transaction.
Thursday, October 21, 2010
Section 382 Rates for November 2010
Adjusted federal long-term tax-exempt rate for November 2010 is 3.54%
Long-term tax-exempt rate for ownership changes during November 2010 is 3.86%
See Rev. Rul. 2010-26 for more details
Long-term tax-exempt rate for ownership changes during November 2010 is 3.86%
See Rev. Rul. 2010-26 for more details
Wednesday, October 20, 2010
New Section Guidance - PLR 201039013
On October 1, the Internal Revenue Service (“IRS”) released Private Letter Ruling 201039013. For a copy of the ruling, please visit our website.
The ruling involved Taxpayer, a publicly traded loss corporation. Taxpayer was the common parent of an affiliated group of corporations that filed a consolidated return. Taxpayer had outstanding a single class of Common Stock and multiple classes of Preferred Stock that it issued and/or exchanged in various equity transactions. Taxpayer requested a ruling regarding the application of Section 382.
A summary of Taxpayer’s transactions follows:
Private Offering Transaction: Taxpayer issued Series 1 Preferred Stock to Group A in a private offering transaction. Group A consisted of two individuals. The Series 1 Preferred Stock was convertible into an equal number of shares of Common Stock. Taxpayer applied the cash issuance exception under Treas. Reg. § 1.382-3(j)(3) to this transaction.
Issuance to Public Groups: Taxpayer issued Series 2 Preferred Stock to its direct public groups. The Series 2 Preferred Stock was also convertible into Common Stock of Taxpayer at a set conversion price. Taxpayer applied the cash issuance exception to this transaction.
Reset Transaction: Pursuant to the terms of the investor agreement, the conversion price of the Series 1 Preferred Stock was reset. Taxpayer treated the transaction as a tax-free reorganization under Section 368(a)(1)(E).
Exchange Transaction: Taxpayer exchanged the Series 1 Preferred Stock held by Group A for an equal number of shares of New Series 1 Preferred Stock. Taxpayer treated the transaction as a tax-free reorganization under Section 368(a)(1)((E).
Series 1 Preferred Exchange Transaction: Taxpayer issued Security A (a new security instrument) and a warrant for shares of its Common Stock in exchange for all of the New Series 1 Preferred Stock that was owned by Group A. Taxpayer treated the transaction as a tax-free reorganization under Section 368(a)(1)((E).
Series 2 Preferred Exchange Transaction: Taxpayer issued Common Stock in exchange for shares of its Series 2 Preferred Stock and certain other preferred stock. Taxpayer treated the transaction as a tax-free reorganization under Section 368(a)(1)((E).
Warrant Transaction: The warrant that Taxpayer issued in connection with the Series 1 Preferred Exchange Transaction was cancelled. This occurred because a majority of the Common Stockholders agreed to increase the number of authorized shares of Common Stock.
Conversion Transaction: Group A, the holders of Security A converted the instrument into shares of Common Stock. Taxpayer treated the transaction as a tax-free reorganization under Section 368(a)(1)((E).
PLR 201039013 raised several interesting questions.
First, how should the Reset, the Series 1 and Series 2 Preferred Exchange, and the Conversion Transactions be treated for Section 382 purposes? The answer appears to have been based largely on the Taxpayer’s representations. Specifically, Taxpayer represented that each such transaction constituted a value-for-value exchange for purposes of Section 368(a)(1)((E). Thus, based on this representation, the IRS ruled that the stock Taxpayer issued in exchange for shares in the Reset, the Series 1 and Series 2 Preferred Exchange, and the Conversion Transactions would be allocated to its direct public groups. In other words, each of the preexisting direct public groups would be treated as receiving an amount of stock that was proportionate to the amount of stock they surrendered in the transactions. Interestingly, this is consistent with the rule described in Treas. Reg. § 1.382-3(j)(5), which provides that for purposes of applying both the small issuance and cash issuance exceptions, the loss corporation’s preexisting direct public groups receive a proportionate acquisition of exempted stock.
Next, how else to apply the HCP methodology? The IRS ruled that the HCP may be applied to identify 5-percent shareholders for all purposes of Section 382 (emphasis added), and in so doing clarified just how broad and expansive the HCP methodology could be.
Finally, what type of representations should similarly situated loss corporations consider making? PLR 201039013 gives some insight on this question. Here, Taxpayer made two specific representations. The first representation pertained to the Hold Constant Principle (“HCP”), as described in Notice 2010-50. Taxpayer represented that it did not have an “ownership change” during the relevant period (Date 1 through the date of the letter ruling). Why does this matter? Remember that Notice 2010-50 requires that a loss corporation satisfy certain consistency requirements. One such requirement is that a loss corporation must continue to use the HCP methodology through the first testing date that resulted in an “ownership change”. As applied here, Taxpayer’s representation appears to have satisfied this consistency requirement. The second representation pertained to the treatment of the Reset, the Series 1 and Series 2 Preferred Exchange, and the Conversion Transactions. As previously discussed, this representation appears to have been critical to the IRS’ determination that the stock be allocated to Taxpayer’s direct public groups. What would the outcome have been if the Taxpayer had not represented that the transactions were value-for-value exchanges?
The ruling involved Taxpayer, a publicly traded loss corporation. Taxpayer was the common parent of an affiliated group of corporations that filed a consolidated return. Taxpayer had outstanding a single class of Common Stock and multiple classes of Preferred Stock that it issued and/or exchanged in various equity transactions. Taxpayer requested a ruling regarding the application of Section 382.
A summary of Taxpayer’s transactions follows:
Private Offering Transaction: Taxpayer issued Series 1 Preferred Stock to Group A in a private offering transaction. Group A consisted of two individuals. The Series 1 Preferred Stock was convertible into an equal number of shares of Common Stock. Taxpayer applied the cash issuance exception under Treas. Reg. § 1.382-3(j)(3) to this transaction.
Issuance to Public Groups: Taxpayer issued Series 2 Preferred Stock to its direct public groups. The Series 2 Preferred Stock was also convertible into Common Stock of Taxpayer at a set conversion price. Taxpayer applied the cash issuance exception to this transaction.
Reset Transaction: Pursuant to the terms of the investor agreement, the conversion price of the Series 1 Preferred Stock was reset. Taxpayer treated the transaction as a tax-free reorganization under Section 368(a)(1)(E).
Exchange Transaction: Taxpayer exchanged the Series 1 Preferred Stock held by Group A for an equal number of shares of New Series 1 Preferred Stock. Taxpayer treated the transaction as a tax-free reorganization under Section 368(a)(1)((E).
Series 1 Preferred Exchange Transaction: Taxpayer issued Security A (a new security instrument) and a warrant for shares of its Common Stock in exchange for all of the New Series 1 Preferred Stock that was owned by Group A. Taxpayer treated the transaction as a tax-free reorganization under Section 368(a)(1)((E).
Series 2 Preferred Exchange Transaction: Taxpayer issued Common Stock in exchange for shares of its Series 2 Preferred Stock and certain other preferred stock. Taxpayer treated the transaction as a tax-free reorganization under Section 368(a)(1)((E).
Warrant Transaction: The warrant that Taxpayer issued in connection with the Series 1 Preferred Exchange Transaction was cancelled. This occurred because a majority of the Common Stockholders agreed to increase the number of authorized shares of Common Stock.
Conversion Transaction: Group A, the holders of Security A converted the instrument into shares of Common Stock. Taxpayer treated the transaction as a tax-free reorganization under Section 368(a)(1)((E).
PLR 201039013 raised several interesting questions.
First, how should the Reset, the Series 1 and Series 2 Preferred Exchange, and the Conversion Transactions be treated for Section 382 purposes? The answer appears to have been based largely on the Taxpayer’s representations. Specifically, Taxpayer represented that each such transaction constituted a value-for-value exchange for purposes of Section 368(a)(1)((E). Thus, based on this representation, the IRS ruled that the stock Taxpayer issued in exchange for shares in the Reset, the Series 1 and Series 2 Preferred Exchange, and the Conversion Transactions would be allocated to its direct public groups. In other words, each of the preexisting direct public groups would be treated as receiving an amount of stock that was proportionate to the amount of stock they surrendered in the transactions. Interestingly, this is consistent with the rule described in Treas. Reg. § 1.382-3(j)(5), which provides that for purposes of applying both the small issuance and cash issuance exceptions, the loss corporation’s preexisting direct public groups receive a proportionate acquisition of exempted stock.
Next, how else to apply the HCP methodology? The IRS ruled that the HCP may be applied to identify 5-percent shareholders for all purposes of Section 382 (emphasis added), and in so doing clarified just how broad and expansive the HCP methodology could be.
Finally, what type of representations should similarly situated loss corporations consider making? PLR 201039013 gives some insight on this question. Here, Taxpayer made two specific representations. The first representation pertained to the Hold Constant Principle (“HCP”), as described in Notice 2010-50. Taxpayer represented that it did not have an “ownership change” during the relevant period (Date 1 through the date of the letter ruling). Why does this matter? Remember that Notice 2010-50 requires that a loss corporation satisfy certain consistency requirements. One such requirement is that a loss corporation must continue to use the HCP methodology through the first testing date that resulted in an “ownership change”. As applied here, Taxpayer’s representation appears to have satisfied this consistency requirement. The second representation pertained to the treatment of the Reset, the Series 1 and Series 2 Preferred Exchange, and the Conversion Transactions. As previously discussed, this representation appears to have been critical to the IRS’ determination that the stock be allocated to Taxpayer’s direct public groups. What would the outcome have been if the Taxpayer had not represented that the transactions were value-for-value exchanges?
Tuesday, September 21, 2010
Section 382 Rates for October 2010
Adjusted federal long-term tax-exempt rate for October 2010 is 3.45%
Long-term tax-exempt rate for ownership changes during October 2010 is 3.98%
See Rev. Rul. 2010-24 for more details
Long-term tax-exempt rate for ownership changes during October 2010 is 3.98%
See Rev. Rul. 2010-24 for more details
Wednesday, September 15, 2010
Tax Benefit Preservation Plans...
Companies making news...
Leap Wireless International, Inc., a publicly traded wireless communications company, recently adopted a plan to preserve its $1.7 billion of NOLs. For more details about the Leap Wireless plan, click here.
Similarly, Triad Guaranty, Inc. announced that its Baord of Directors adopted a similar plan. For more details about the plan of Triad Guaranty, click here.
Leap Wireless International, Inc., a publicly traded wireless communications company, recently adopted a plan to preserve its $1.7 billion of NOLs. For more details about the Leap Wireless plan, click here.
Similarly, Triad Guaranty, Inc. announced that its Baord of Directors adopted a similar plan. For more details about the plan of Triad Guaranty, click here.
Monday, September 6, 2010
Section 382 Rates for September 2010
Adjusted federal long-term tax-exempt rate for September 2010 is 3.86%
Long-term tax-exempt rate for ownership changes during September 2010 is 3.99%
See Rev. Rul. 2010-20 for more details
Long-term tax-exempt rate for ownership changes during September 2010 is 3.99%
See Rev. Rul. 2010-20 for more details
Section 382 Update - PLR 201032032
On August 13, the IRS released Private Letter Ruling 201032032. For a copy of the ruling, please visit our website
The ruling involved Parent, a publicly traded loss corporation that filed a consolidated return with various entities. On Date 1, Parent had a single class of outstanding Common Stock, all of which was owned by public shareholders, Company 1, and 5 identified shareholders.
On Date 2, Parent issued a new class of stock (Series A Redeemable Convertible Preferred) to Company 2, a new shareholder. The Series A Preferred was convertible into an equal number of shares of Common Stock, participated in dividends on the same basis as the Common stock and had a liquidation preference over the Common Stock. The Series A Preferred was mandatorily redeemable upon either the 10th anniversary of its issuance of a “change of control” event.
On Date 3, Parent redeemed all of the Series A Preferred from Company 2 in exchange for cash, warrants for Common Stock, and shares of a new class of stock – Series B Redeemable Preferred. Unlike the Series A Preferred, the Series B Preferred was not convertible into any other class of Parent stock. However, as the holder of the Series B Preferred, Company 2 held certain voting rights.
PLR 201032032 raised two questions. Specifically, what methodology could Parent, a loss corporation with multiple classes of outstanding stock, use to measure owner shifts for purposes of Section 382(l)(3)(C)? The answer: Parent could use a methodology that employed the Hold Constant Principle (“HCP”). However, in so doing, the IRS ruled that Parent had to meet two consistency requirements. First, Parent’s tax return position must be consistent with its return for the taxable year that it used the HCP methodology. Second, Parent must continue to use the HCP methodology through the first testing date in which it resulted in an “ownership change”.
If anything, this aspect of PLR 201032032 makes clear that taxpayers who use the HCP methodology will have to satisfy certain consistency requirements. Apparently, the IRS is concerned about a taxpayer’s ability to “pick and choose” different methodologies and the ruling clearly precludes that.
The second question in PLR 201032032 involved the transactions occurring on Dates 2 and 3. Specifically, how should the recapitalization of the Series A and Series B Preferred Stock be treated for Section 382 purposes? The answer: It depends. Specifically, it depends on whether the recapitalization is a value-for-value exchange of stock. Without directly addressing the taxpayer’s transaction on Dates 2 and 3, the IRS ruled that when a transaction qualifies as a value-for-value recapitalization, it should be disregarded for Section 382 purposes. In other words, it’s as if the transaction never happened. Therefore, as applied to the facts of PLR 201032032, Company 2 (the exchanging shareholder) would be deemed to have acquired the Series B Preferred Stock on Date 2 – the actual date it acquired the Series A Preferred stock from Parent because the transaction on Date 3 is to be disregarded.
The ruling involved Parent, a publicly traded loss corporation that filed a consolidated return with various entities. On Date 1, Parent had a single class of outstanding Common Stock, all of which was owned by public shareholders, Company 1, and 5 identified shareholders.
On Date 2, Parent issued a new class of stock (Series A Redeemable Convertible Preferred) to Company 2, a new shareholder. The Series A Preferred was convertible into an equal number of shares of Common Stock, participated in dividends on the same basis as the Common stock and had a liquidation preference over the Common Stock. The Series A Preferred was mandatorily redeemable upon either the 10th anniversary of its issuance of a “change of control” event.
On Date 3, Parent redeemed all of the Series A Preferred from Company 2 in exchange for cash, warrants for Common Stock, and shares of a new class of stock – Series B Redeemable Preferred. Unlike the Series A Preferred, the Series B Preferred was not convertible into any other class of Parent stock. However, as the holder of the Series B Preferred, Company 2 held certain voting rights.
PLR 201032032 raised two questions. Specifically, what methodology could Parent, a loss corporation with multiple classes of outstanding stock, use to measure owner shifts for purposes of Section 382(l)(3)(C)? The answer: Parent could use a methodology that employed the Hold Constant Principle (“HCP”). However, in so doing, the IRS ruled that Parent had to meet two consistency requirements. First, Parent’s tax return position must be consistent with its return for the taxable year that it used the HCP methodology. Second, Parent must continue to use the HCP methodology through the first testing date in which it resulted in an “ownership change”.
If anything, this aspect of PLR 201032032 makes clear that taxpayers who use the HCP methodology will have to satisfy certain consistency requirements. Apparently, the IRS is concerned about a taxpayer’s ability to “pick and choose” different methodologies and the ruling clearly precludes that.
The second question in PLR 201032032 involved the transactions occurring on Dates 2 and 3. Specifically, how should the recapitalization of the Series A and Series B Preferred Stock be treated for Section 382 purposes? The answer: It depends. Specifically, it depends on whether the recapitalization is a value-for-value exchange of stock. Without directly addressing the taxpayer’s transaction on Dates 2 and 3, the IRS ruled that when a transaction qualifies as a value-for-value recapitalization, it should be disregarded for Section 382 purposes. In other words, it’s as if the transaction never happened. Therefore, as applied to the facts of PLR 201032032, Company 2 (the exchanging shareholder) would be deemed to have acquired the Series B Preferred Stock on Date 2 – the actual date it acquired the Series A Preferred stock from Parent because the transaction on Date 3 is to be disregarded.
Monday, August 16, 2010
Yet Another Tax Benefits Preservation Plan
PMI Group, a company that provides various credit products for the residential home mortgage market, recently announced that its Board adopted a "Tax Benefits Preservation Plan". PMI joins the growing list of companies that have recently adopted similar plans, the purpose of which is to, preserve tax losses that may otherwise be substantially limited if a company triggers Section 382.
For more details about PMI's plan, click here
For more details about PMI's plan, click here
Thursday, August 12, 2010
The "Sticky" Side of a Section 382 Rights Plan
A company's adoption of a Section 382 Rights Plan can be a bit more complicated than it appears. In theory, a Rights Plan is nothing more than a means to an end -- a measure to reduce the likelihood that a company's use of certain tax attributes will be limited under Section 382. Thus, the Rights Plan will impose limits on trading activity, effectively prohibiting certain shareholders from increasing their ownership stake.
But what if you're one of those shareholders? What might you think of this?
Interestingly, this is exactly what's happening with Extreme Networks, Inc. and Ramius Value and Opportunity Investors ("Ramius"). In early July, the Board of Extreme Networks adopted a Rights Plan that prohibits certain persons from acquiring greater than 4.95% of its outstanding common stock. Ramius, which already owns 9.9%, is obviously prohibited from acquiring additional stock of Ramius -- unless a waiver is granted.
Ramius outlined its objections to the Board's plan in a letter dated August 4. The Board responded in a letter dated August 9.
But what if you're one of those shareholders? What might you think of this?
Interestingly, this is exactly what's happening with Extreme Networks, Inc. and Ramius Value and Opportunity Investors ("Ramius"). In early July, the Board of Extreme Networks adopted a Rights Plan that prohibits certain persons from acquiring greater than 4.95% of its outstanding common stock. Ramius, which already owns 9.9%, is obviously prohibited from acquiring additional stock of Ramius -- unless a waiver is granted.
Ramius outlined its objections to the Board's plan in a letter dated August 4. The Board responded in a letter dated August 9.
Wednesday, July 28, 2010
Update - Built-In Gains and Losses Under Section 382(h)
The IRS and Treasury Department recently released final regulations under Section 382(h). These regulations became effective on June 11, 2010 and provide guidance about the treatment of prepaid income -- a thorny issue for loss corporations that have triggered Section 382.
Why? Under the temporary regulations, the IRS and Treasury took the position that prepaid income was not considered attributable to the period before a loss corporation triggered Section 382. Therefore, it was not considered recognized built-in gain or (RBIG). Conversely, a loss corporation with prepaid income that triggered Section 382 would take the opposite view, as such income would increase the Section 382 Limitation.
The temporary regulations are now final. Thus, the issue appears to be settled for loss corporations that have ownership changes on or after June 11, 2010. A copy of the final regulations is available here.
Apparently, a few errors were made when the final regulations were published in June. Specifically, the errors are with regard to the headings of paragraph (h)(4)(vii)(A) and paragraph (h)(4)(x)(J) under paragraph 2 of Section 1.382-2T.
Today, the IRS and Treasury issued a correction. A copy of the corrections to the final regulations is available here.
Why? Under the temporary regulations, the IRS and Treasury took the position that prepaid income was not considered attributable to the period before a loss corporation triggered Section 382. Therefore, it was not considered recognized built-in gain or (RBIG). Conversely, a loss corporation with prepaid income that triggered Section 382 would take the opposite view, as such income would increase the Section 382 Limitation.
The temporary regulations are now final. Thus, the issue appears to be settled for loss corporations that have ownership changes on or after June 11, 2010. A copy of the final regulations is available here.
Apparently, a few errors were made when the final regulations were published in June. Specifically, the errors are with regard to the headings of paragraph (h)(4)(vii)(A) and paragraph (h)(4)(x)(J) under paragraph 2 of Section 1.382-2T.
Today, the IRS and Treasury issued a correction. A copy of the corrections to the final regulations is available here.
Monday, July 26, 2010
NOL Protective Measures Gaining Momentum
Increasingly, companies are adopting Stockholder Rights Plans or NOL Protective Amendments to protect and preserve their NOLs. In fact, last week, both LiveWire Mobile, Inc. and TMNG Global announced plans to adopt and amend their plans, respectively.
This trend is quite interesting. It also presents a range of issues to consider, from both the company's and the shareholder's perspective.
Certainly, from the company's perspective, the bigger issue is the ability to protect NOLs that would otherwise be impaired, if Section 382 were triggered. Thus, a plan is put in place to prevent that from happening. Conversely, from the shareholder's perspective, the issues range from concerns about how such measures impact stock price, offers from potential acquirers, the duration of the plan, etc...
In fact, CMC Master Fund LP, a significant shareholder in Heska Corporation described its opposition to the company's plan. Read more!
This trend is quite interesting. It also presents a range of issues to consider, from both the company's and the shareholder's perspective.
Certainly, from the company's perspective, the bigger issue is the ability to protect NOLs that would otherwise be impaired, if Section 382 were triggered. Thus, a plan is put in place to prevent that from happening. Conversely, from the shareholder's perspective, the issues range from concerns about how such measures impact stock price, offers from potential acquirers, the duration of the plan, etc...
In fact, CMC Master Fund LP, a significant shareholder in Heska Corporation described its opposition to the company's plan. Read more!
Tuesday, July 20, 2010
Section 382 Rates for August 2010
Adjusted federal long-term tax-exempt rate for August 2010 is 3.98%
Long-term tax-exempt rate for ownership changes during August is 4.01%
See Rev. Rul. 2010-19 for more details
Long-term tax-exempt rate for ownership changes during August is 4.01%
See Rev. Rul. 2010-19 for more details
Wednesday, July 14, 2010
To Protect and Preserve
Extreme Networks, Inc. recently joined the growing list of public companies that have adopted Tax Benefit Preservation Plans. On July 1, the company's Board of Directors adopted a plan to protect its $260M of net operating losses. Similar to other plans, the Extreme Networks plan prevents certain shareholders ("Acquiring Persons") from acquiring 4.95% of the company's outstanding stock.
Why? Management must have reason to believe the company is within a gnat's eyelash of triggering Section 382. Stated another way, future acquisitions, when combined with market activity and other equity transactions, would likely result in an ownership change, which would limit the company's use of its tax assets.
Thus, a Tax Benefit Preservation Plan puts an end to the Section 382 anxiety -- at least temporarily. The plan of Extreme Networks expires on April 27, 2011.
Why? Management must have reason to believe the company is within a gnat's eyelash of triggering Section 382. Stated another way, future acquisitions, when combined with market activity and other equity transactions, would likely result in an ownership change, which would limit the company's use of its tax assets.
Thus, a Tax Benefit Preservation Plan puts an end to the Section 382 anxiety -- at least temporarily. The plan of Extreme Networks expires on April 27, 2011.
Tuesday, July 13, 2010
What's up with Section 382?
Unless you've been hiding under a rock, you are well aware that there's been a lot of activity regarding Section 382 over the past several months.
In addition to 6 Written Determinations, IRS and Treasury have issued 3 Notices. For the most part, this guidance pertains to Section 382(l)(3)(C) and the litany of questions raised by the provision.
So what does this mean? For starters, it does mean that for the time being, there is more clarity in determining how to apply Section 382 to loss corporations that have multiple classes of stock.
Specifically, in Notice 2010-50, the IRS provides two acceptable methodologies for applying Section 382(l)(3)(C) -- Full Value Methodology and Hold Constant Principle.
However, there is still more work to be done. Notice 2010-50 is interim guidance. And until the comment period expires, it is unclear what, if anything, will change.
What else does it mean?
More companies are likely to review and maybe even redo their Section 382 Studies. Because of Notice 2010-50, companies now know there are 2 methodologies to use for determining whether they have triggered Section 382. I don't know about you, but I think a comparative analysis is certainly worth considering. How else do you truly know where your company stands?
In addition to 6 Written Determinations, IRS and Treasury have issued 3 Notices. For the most part, this guidance pertains to Section 382(l)(3)(C) and the litany of questions raised by the provision.
So what does this mean? For starters, it does mean that for the time being, there is more clarity in determining how to apply Section 382 to loss corporations that have multiple classes of stock.
Specifically, in Notice 2010-50, the IRS provides two acceptable methodologies for applying Section 382(l)(3)(C) -- Full Value Methodology and Hold Constant Principle.
However, there is still more work to be done. Notice 2010-50 is interim guidance. And until the comment period expires, it is unclear what, if anything, will change.
What else does it mean?
More companies are likely to review and maybe even redo their Section 382 Studies. Because of Notice 2010-50, companies now know there are 2 methodologies to use for determining whether they have triggered Section 382. I don't know about you, but I think a comparative analysis is certainly worth considering. How else do you truly know where your company stands?
Subscribe to:
Posts (Atom)