It seems the government wants to be very clear about tax issues related to the bailout. To that end, the Internal Revenue Service has issued another clarification with respect to loss corporations, and the potential tax benefits that await loss corporations that participate in its rescue programs.
Indeed, in releasing its second clarification on the subject, the IRS issued Notice 2009-14 in late January to address the limitations on net operating losses (NOLs) that may arise from the Treasury Department’s purchase of preferred stock from failing companies. In general, a loss company uses NOLs to offset current taxable income – thereby lowering its corporate tax bill.
But the IRS substantially limits the amount of NOLs that can be used when there is a change of ownership. In that way, the government prevents companies from trafficking in NOLs; essentially buying loss companies just get hold of their NOLs and the attendant tax benefits. The NOL limitation rule is found in Section 382 of the tax code, which provides a definition of change of ownership for this purpose, as well as how the NOL limitation works.
The new IRS notice offers guidance on these issues with respect to the Treasury Department’s Trouble Asset Relief Program (TARP), in particular its capital purchase program (CPP) and target investment (TIP) program. All of these programs are part of the larger Emergency Economic Stabilization Act of 2008, which was signed into law late last year.
The CPP and TIP programs aim to infuse failing banks and other select companies – particularly auto companies – with cash by permitting the Treasury Department to buy preferred stock in the companies. In some cases, such a purchase would have constituted a change in ownership under Section 382, thereby triggering NOL limitations. But the government has made an exception for companies in need of TARP money.
To be sure, the new IRS notice makes it abundantly clear that a corporate issuer participating in one or more of these programs will not – no matter how extensive the government’s investment in the securities of the issuer – experience an “ownership change” as it is defined by Section 382(g) of the tax code.
Under the tax code, an ownership change usually occurs if immediately after the close of the “testing date” the percentage of stock owned by one or more 5-percent shareholders is increased by more than 50 percentage points. The testing period is generally a 3-year period. (See Regulation Section 1.382-2T(a)(1).) As a result, Section 382 states that the taxable income of a loss corporation following an ownership change that may be offset by pre-change losses cannot exceed the “Section 382 limitation” for the year.
However, Notice 2009-14 expands on the original TARP guidance issued in Notice 2008-100 to clarify its guidance on TARP acquisitions. The highlights of the IRS notice are listed here: