The IRS has updated its guidance on how corporate tax benefits are affected by Treasury Department acquisitions under the Emergency Economic Stabilization Act of 2008 (EESA). Notice 2009-38 applies to the Internal Revenue Code's Section 382, which covers net operating loss carryforwards (NOLs) and other tax benefits.

Notice 2009-38, released April 13, addresses corporate instruments acquired under

  1. the Capital Purchase Program for publicly traded issuers (Public CPP);
  2. the Capital Purchase Program for private issuers (Private CPP);
  3. the Capital Purchase Program for S corporations (S Corp CPP);
  4. the Targeted Investment Program (TARP TIP);
  5. the Automotive Industry Financing Program (TARP Auto);
  6. the Asset Guarantee Program;
  7. the Systemically Significant Failing Institutions Program;
  8. and the Capital Assistance Program for publicly traded issuers (TARP CAP).

Instruments acquired under the latter three programs were not covered under prior IRS guidance, in Notice 2009-14.

Key points under the IRS guidance, as updated:

  • Any instrument (other than a warrant) issued to the Treasury under these programs, except TARP CAP, will be treated as debt if denominated as indebtedness and as stock described in Section 1504(a)(4) if denominated as preferred stock. This treatment extends to subsequent periods in which the instruments are held by others than the Treasury. Because instruments issued under these programs have status as debt or Section 1504(a)(4) stock, their issuance and any subsequent transfer will not be taken into account in determining whether an ownership change has occurred under Section 382 that would limit the issuer’s utilization of tax benefits.
  • When an instrument is issued to the Treasury pursuant to TARP CAP, its classification as debt or Section 1504(a)(4) stock will be determined by applying general principles of federal tax law.
  • Any warrant to purchase stock issued to the Treasury under the programs, except under Private CPP and S Corp CPP, will be treated as an option (and not as stock) in the hands of the Treasury and subsequent holders. While held by the Treasury, these warrants will not be deemed exercised under Section 382 and thus will not be taken into account in determining whether an ownership change has occurred.
  • Any warrant to purchase stock issued to the Treasury pursuant to the Private CPP will be treated as an ownership interest in preferred stock described in Section 1504(a)(4) and thus will not be taken into account in determining whether an ownership change under Section 382 has occurred.
  • Any warrant issued to the Treasury pursuant to the S Corp CPP will be treated as an ownership interest in the underlying indebtedness and thus will not be taken into account in determining whether an ownership change under Section 382 has occurred.
  • Any amount received by an issuer for instruments issued to the Treasury under the programs will be treated entirely as consideration for such instruments. Thus, if preferred stock and warrants are issued as an investment package (instead of as convertible preferred stock), the total value of the consideration paid will be attributed to Section 1504(a)(4) stock but will count as part of the corporate equity value in determining any Section 382 limitation if a future ownership change occurs.
  • Any common stock issued to the Treasury pursuant to the programs (either directly or upon the exercise of a warrant) will not be taken into account in determining an "owner shift" (that is, whether the Treasury's percentage ownership in the issuing corporation has increased over its lowest percentage on any earlier date within the Section 382 testing period) but will be taken into account in determining the equity percentage of other shareholders as long as the stock remains outstanding.  
  • In measuring owner shifts on a testing date on or after the date on which an issuing corporation redeems stock from the Treasury that was issued pursuant to the programs (either directly or upon the exercise of a warrant), the redeemed stock will be treated as if it had never been outstanding. Therefore, the redemption will not contribute to the amount of the owner shift.
  • Capital contributions made by the Treasury pursuant to the programs will not be considered to have been made as part of a plan whose principal purpose was to avoid or increase any Section 382 limitation and thus will augment the amount of allowable tax benefits if the program participant experiences an ownership change.

The Tax Group of Ballard Spahr Andrews & Ingersoll, LLP is able to advise corporate participants in EESA programs on the cumulative Section 382 effects of changes in their share ownership and on measures to preserve their NOLs and other tax attributes. For additional information and assistance, please contact Wayne R. Strasbaugh at 215.864.8328 or strasbaugh@ballardspahr.com.


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