Stock buybacks aggregate by open trading window under § 382

Plain-English summary

A domestic corporation was wholly owned by a publicly traded foreign parent whose shareholder changes were attributed to the corporation for § 382 purposes. The parent regularly repurchased shares during short open trading windows and also entered Rule 10b5-1 agreements during those windows for repurchases completed in the following closed periods. The IRS ruled that completed open-window repurchases and contracted repurchases tied to the same window must be aggregated as a single redemption when applying the small-redemption limitation. Repurchases attributed to different open trading windows are not treated as occurring at approximately the same time under the same plan or arrangement. The IRS did not decide whether separate repurchases might still be combined because a principal purpose was to minimize or avoid an owner shift.

Ruling snapshot

• Question: Which of the foreign parent's recurring share repurchases must be aggregated as a single redemption under the § 382 segregation rules?
• Outcome: Repurchases tied to one open trading window aggregate, while repurchases tied to different windows do not under the specified rule
• Key authorities: IRC § 382; Treas. Reg. §§ 1.382-2T and 1.382-3(j)(14)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201451015 Third Party Communication: None
Release Date: 12/19/2014 Date of Communication: Not Applicable
Index Number: 382.07-05
Person To Contact:
------------------------- --------------------------, ID No. ----------------
------------------------------------- -----------------
------------------------------------------------------------ Telephone Number:
------ ----------------------
--------------------------------- Refer Reply To:
--------------------------------- CC:CORP:BO1
In Re: PLR-112673-14
--------------------------------------------------- Date:
------ September 17, 2014

LEGEND:

Taxpayer = ----------------------------------------------------------

Foreign Parent = -------------------------------------

State X = --------------

Country Y = ----------

Date a = --------------------

b = ----

A = -------------------------------------------

B = ------------------------------

Year c = ------------------------------

Year d = ------------------------------

Year e = ------------------------------

Year f = -------------------------------
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Year g = ------------------------------

Year h = ------------------------------

Year i = ------------------------------

Year j = ------------------------------

Year k = ------------------------------

M = ------

N = --------

O = --------

P = --

Q = ------

R = --------

S = --------

T = --------

U = --------

V = ------

W = ----

Consulting Firm = -------------------------------------------

Stock Exchange = ---------------------------------------

Dear ---------------:

   This letter responds to a letter from Taxpayer dated March 19, 2014, requesting

a ruling under Section 382 of the Internal Revenue Code. Taxpayer furnished additional
information in submissions dated July 22, July 28, August 18, and September 17, 2014.
The information submitted is summarized below.
PLR-112673-14 3

                               Summary of Facts

   Taxpayer is a State X corporation whose stock is wholly owned by Foreign

Parent, a Country Y corporation. Foreign Parent has one class of stock, which is
publicly traded on a United States stock exchange. As of Date a, approximately b
percent (a majority) of Foreign Parent stock was owned by one or more public groups
(as defined in Treas. Reg. § 1.382-2T(f)(13)); the remaining stock was held by
shareholders A and B. Foreign Parent is a “first-tier entity” of Taxpayer under Treas.
Reg. § 1.382-2T(f)(9), and owner shifts involving 5-percent shareholders (including
public groups) of Foreign Parent are attributed to Taxpayer. See generally § 1.382-
2T(g).

    Since Year c, Foreign Parent and its predecessor parent corporation has

repurchased its stock from its shareholders in all of its years except for one year. Most
of that stock has been repurchased on the open market from members of its public
group or groups. In Year j, Foreign Parent purchased approximately V percent of its
stock from shareholder A, and in Year k, Foreign Parent repurchased approximately W
percent of its stock from shareholder B.

    Foreign Parent repurchased the following percentages of its stock in its fiscal

years ending in the years indicated below: Year c, M percent, year d, N percent, year e,
O percent, Year f, P percent, Year g, Q percent, and Year h, R percent. Foreign
Parent’s repurchases increased markedly in its fiscal year i, to S percent, but then
dropped in year j (T percent, and Year k (U percent). During Year i, Foreign Parent
received a report from Consulting Firm that recommended that its payments to its
shareholders should be primarily distributions on its stock and a lesser proportion by
stock buybacks, although it stated that the company could make additional
“opportunistic” stock buybacks. However, Foreign Parent in each of Years i, j, and k
made significantly more payments to shareholders in the form of stock buybacks than
distributions.

   Foreign Parent’s repurchases were authorized by resolutions by its Board of

Directors that specify how much stock may be repurchased (either by a dollar amount or
an amount that will offset dilution from certain stock issuances). The resolutions do not
require Foreign Parent to repurchase all of the stock authorized, and grant authority to
the Chief Executive Officer or Chief Financial Officer to decide how much stock to
repurchase at any one time, and the prices to be paid.

   Foreign Parent is subject to regulation under the Securities and Exchange

Commission and Country Y securities regulators, both of which impose limitations on
the transferability of Foreign Parent shares. In relevant part, these restrictions
materially limit Foreign Parent’s ability to repurchase shares on the stock market. Due
to these regulatory restrictions, Foreign Parent’s management must repurchase
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Foreign Parent stock through the following three methods: (a) open market share
repurchases during the “Open Trading Window”, (b) open market share repurchases
pursuant to agreements entered into during an Open Trading Window but completed
during the period after that Open Trading Window but before the beginning of the next
Open Trading Window (the “Closed Trading Period”), and (c) share repurchases
through private transactions.

    According to Foreign Parent’s Securities Trading Policy, the Open Trading

Window begins with the third trading day on Stock Exchange following the date on
which Foreign Parent makes a public news release of its earnings for the prior fiscal
quarter. That window closes on the last day of the second calendar month of the
current fiscal quarter. Generally the Open Trading Window is approximately one month.
During the Open Trading Window, the amount of shares that Foreign Parent may
repurchase on a given day may be limited to an amount based on the volume-weighted
average price (“VWAP”) for the last four weeks of trading prior to the repurchase.
VWAP measures the average price of a stock traded over a certain trading period.
Also, Foreign Parent’s stock repurchases during the Open Trading Window are subject
to Rule 10b-18 of the Securities Exchange Act of 1934, which provides a “safe harbor”
guideline for repurchasing shares on the stock market provided certain requirements
regarding stock trading are satisfied.

    If Foreign Parent is interested in repurchasing shares during the Closed Trading

Period, it is subject to Rule 10b5-1 of the Securities Exchange Act of 1934. Generally, if
all the terms of Rule 10b5-1 are satisfied in a plan, Foreign Parent enters into an
agreement during the Open Trading Window to repurchase a predetermined number of
shares at a specific stock price or at market price which can be executed during the
Closed Trading Period. The maximum amount of shares that can be repurchased on
any given day is also subject to a daily limit based on VWAP for the last four weeks.

   Separately, Foreign Parent may repurchase shares by entering into a share

purchase agreement directly with one or more of its major shareholders (shareholders
that own 5 percent or more of the stock of Foreign Parent) to purchase its shares at a
specific redemption price in a private transaction. This method was used in the
repurchases in Year j from shareholder A and in year k from shareholder B.

   Foreign Parent executes a majority of its stock repurchases during the Open

Trading Window. The amount of stock repurchased varies daily and varies month to
month depending on market conditions, Foreign Parent stock price, capital
requirements, and available cash. After considering these factors, Foreign Parent’s
management determines the share repurchase amount and places a repurchase order
with a broker.

                                Representation

PLR-112673-14 5

   Taxpayer has provided the following representation:

  During the relevant period, dating back to Year c, Taxpayer did not experience

an ownership change, as defined under section 382.

                                      Rulings

  Based solely on the information submitted and the representation set forth

above, we rule as follows:

(1) Foreign Parent’s repurchases of its stock completed during a given Open Trading
Window (“Completed Repurchases”) and repurchases of its stock made pursuant
to an agreement complying with Rule 10b5-1 entered into during the same Open
Trading Window referred to above but completed after that Open Trading
Window but before the beginning of the next Open Trading Window
(“Contracted Repurchases”’) will be aggregated and together will be considered
to occur “at approximately the same time pursuant to the same plan or
arrangement” for purposes of § 1.382-3(j)(14)(v)(A), and will therefore be
considered a single redemption for purposes of determining whether that single
redemption exceeds the small redemption limitation under § 1.382-3(j)(14)(iii)(A).

(2) Completed Repurchases and Contracted Repurchases by Foreign Parent of its
stock that are attributed to different Open Trading Windows will not be
considered to occur “at approximately the same time pursuant to the same plan
or arrangement” for purposes of § 1.382-3(j)(14)(v)(A).

                                      Caveats

    We express no opinion on whether any of Foreign Parent’s stock repurchases

will be treated as a single redemption on the ground that “a principal purpose of
redeeming the stock in separate redemptions rather than a single redemption is to
minimize or avoid an owner shift” under Treas .Reg. § 1.382-3(j)(14)(v)(B). We also
express no opinion on the tax treatment of the transactions described above under any
other provisions of the Code or Treasury Regulations, or the tax treatment of any
conditions existing at the time of, or effects resulting from, the transactions that are not
specifically covered by the above rulings.

                             Procedural Statements

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of

the Code provides that it may not be used or cited as precedent.

  A copy of this letter must be attached to any income tax return to which it is

relevant. Alternatively, taxpayers filing their returns electronically may satisfy this
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requirement by attaching a statement to their return that provides the date and control
number of the letter ruling.

   In accordance with a power of attorney on file with this office, copies of this letter

are being sent to two of your authorized representatives.

                                               Sincerely,



                                               __________________________
                                               Mark S. Jennings
                                               Chief, Branch 1
                                               Office of Associate Chief Counsel
                                               (Corporate-)