Daily Tax Update - October 21, 2013: Treasury and IRS Issue Final Section 382 Regulations on Segregation Rules

Treasury and IRS Issue Final Section 382 Regulations on Segregation Rules:  Today, Treasury and the IRS issued final regulations regarding the application of the segregation rules to public groups of shareholders in determining owner shifts and ownership changes under section 382.  The final regulations closely follow the approach outlined in proposed regulations issued in November 2011 with a few modifications. 

The proposed regulations contain a clarification of the application of the secondary transfer segregation rule in Treas. Reg. § 1.382-2T(j)(3).  Although the final regulations do not include a stand-alone rule clarifying the operation of the secondary transfer segregation rule, the final regulations do incorporate the clarification in Prop. Treas. Reg. § 1.382-3(i) and confirm that the segregation rules and the secondary transfer exception apply to secondary transfers of stock of a loss corporation or a 5 percent entity if the transferor indirectly owns 5 percent of the loss corporation.  The final regulations also state that the IRS will not challenge an application of this provision of Prop. Treas. Reg. § 1.382-3(i) to transfers occurring before October 22, 2013.

The final regulations extend the small redemption exception to exempt redemptions of the stock of 5 percent entities from the segregation rules.  In addition, the final regulations provide that the 10 percent limitation of the small redemption exception should be measured by reference to the value of the stock of the entity that is engaging in the redemption.  Similarly, the 10 percent limitation for the application of the small issuance exception to issuances of stock by a 5 percent entity is calculated by reference to the value of the stock of the issuing entity.

The final regulations replace the asset threshold test of the general exception to the segregation rules with an anti-avoidance rule.  The new anti-avoidance rule provides that the general exception to the segregation rules does not apply to a transaction involving an ownership interest in a 5 percent entity if the loss corporation, directly or through one or more persons, has participated in planning or structuring the transaction with a view to avoid the application of the segregation rules.

The final regulations are effective on October 22, 2013.  The final regulations do, however, permit taxpayers to apply the provisions of the final regulations in their entirety to all testing dates that are included in a testing period beginning before and ending on or after October 22, 2013, subject to the limitations that (1) the final regulations may not be applied to any date on or before the date of any ownership change that occurred on a date before October 22, 2013 under the regulations in effect before October 22, 2013, and (2) they may not be applied if their 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.

Miscellaneous Guidance:
Revenue Ruling 2013-22 provides various prescribed rates for income tax purposes for November 2013.