Loss company may use shareholder questionnaires to measure overlapping public ownership after a merger under Section 382

Plain-English summary

A publicly traded corporation with large net operating loss (NOL) carryforwards acquired another public company in a tax-free stock-for-stock reorganization. Section 382 limits how much of its NOLs a loss corporation can use after an "ownership change," and measuring that change requires knowing how much the two companies' public shareholders overlapped, because shares held by the same investors before and after the deal are not really a change in ownership. The company proposed to establish its "actual knowledge" of that overlap using public SEC filings plus written questionnaires sent to shareholders. The IRS ruled that this method is an acceptable way to determine actual knowledge under Treasury Regulation section 1.382-2T(k)(2); that the company may treat the overlapping public group as an additional direct public group and turn off a presumption in the segregation rules that would otherwise apply; and it fixed how to measure that group's increase in ownership. It matters because it gives loss corporations an IRS-blessed, practical way to avoid overstating an ownership shift, and thus over-restricting their valuable NOLs, after a public merger.

Ruling snapshot

• Question: May a loss corporation use SEC filings and shareholder questionnaires to establish "actual knowledge" of overlapping public ownership when measuring a section 382 ownership change?
• Outcome: Approved (method accepted; overlapping group treated as an additional direct public group; ownership-increase measure fixed)
• Key authorities: IRC § 382; Treas. Reg. § 1.382-2T(j)(2), (k)(2)

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 202146003 Third Party Communication: None
Release Date: 11/19/2021 Date of Communication: Not Applicable
Index Number: 382.00-00
Person To Contact:
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------------------------------------------------- ID No. -----------------
--------------------------- Telephone Number:
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---------------------------------------- Refer Reply To:
CC:CORP:5
PLR-105229-21
Date:
August 25, 2021

                                                 LEGEND

Acquiring = ---------------------------
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Merger Sub = --------------------------------
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Target = ---------------------------------------
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Business A = ------------------------------------------------------------

Business B = ---------------------------------------------------------------------------------
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Date 1 = ---------------------

Shareholder X = ----------------------------------------------

State A = -------------

a = -----------------

b = ---------------

c = --------

d = ------
PLR-105229-21 2

e = ------

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

This letter responds to your authorized representatives’ letter dated March 5, 2021,
requesting rulings on certain federal income tax consequences of a completed
transaction (the “Acquisition,” as defined below). The information provided in that letter
and in subsequent correspondence is summarized below.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalties of perjury statement
executed by an appropriate party. While this office has not verified any of the material
submitted in support of the request for rulings, it is subject to verification on
examination.

                                 SUMMARY OF FACTS

Acquiring is a widely held, publicly traded corporation and is the common parent of an
affiliated group of corporations that files a consolidated U.S. federal income tax return
(the “Acquiring Group”). The Acquiring Group is engaged in Business A and has
significant net operating loss carryforwards. As of the close of business on the day
immediately preceding the Acquisition, Acquiring’s capital stock consisted of a
outstanding shares of its single class of common equity. There were no shares of
Acquiring preferred stock outstanding.

Based on filings with the U.S. Securities and Exchange Commission (“SEC”) for the
period of time immediately before the Acquisition, the only shareholder (other than a
direct public group) that Acquiring was aware of that owned five percent or more of its
outstanding stock was Shareholder X, which owned b shares of Acquiring’s outstanding
stock. Acquiring determined that its remaining stock was owned by less than 5-percent
shareholders within the meaning of section 382. Accordingly, for purposes of section
382, all the remaining stock of Acquiring was treated as being owned by one or more
public groups (collectively, the “Acquiring Public Groups”).

Prior to the Acquisition, Target was a widely held, publicly traded corporation and was
the common parent of an affiliated group of corporations that filed a consolidated U.S.
federal income tax return (the “Target Group”). The Target Group is engaged in
Business B, which is in the same industry as Business A. Target’s capital stock
consisted of a single class of common equity. As of the close of business on day
immediately preceding the Acquisition, Target determined that it did not have any 5-
percent shareholders within the meaning of section 382. Accordingly, for purposes of
section 382, all of Target’s stock is treated as being owned by one or more public
groups (collectively, the “Target Public Groups”).
PLR-105229-21 3

                                  ACQUISITION

In anticipation of the Acquisition, Acquiring formed Merger Sub. On Date 1, pursuant to
an Agreement and Plan of Merger among Acquiring, Target, and Merger Sub (the
“Merger Agreement”), Merger Sub merged with and into Target pursuant to State A law
(the “Acquisition”), with Target surviving. As a result of the Acquisition, Target became a
direct, wholly owned subsidiary of Acquiring. Under the Merger Agreement, each share
of Target common stock outstanding immediately prior to the effective time of the
Acquisition (other than Target restricted shares, any shares of Target common stock
owned directly or indirectly by Target, Acquiring, or Merger Sub (in each case, not held
on behalf of third parties), which were all canceled upon completion of the Acquisition)
was converted into the right to receive c shares of Acquiring common stock.
Immediately after the Acquisition, shareholders of Acquiring continued to own
approximately d percent of Acquiring’s outstanding common stock, while former
shareholders of Target owned the remaining e percent of the Acquiring’s outstanding
common stock.

Acquiring’s management understands that certain shareholders, each of which held less
than 5 percent of the stock of Acquiring, also owned less than 5 percent of the stock of
Target (the “Overlapping Public Group”). Management’s understanding is founded on
the fact that Acquiring and Target are in related industries, and so their stock was likely
held by several of the same market-segment funds with an industry investment strategy.
Acquiring has developed a list of shareholders that are potentially included in the
Overlapping Public Group. Such shareholders have been identified through inquiries
with the investor relations department at Acquiring and a review of applicable public
filings with the SEC (including, for example, Form 13Fs). Having determined a list of the
potential Overlapping Public Group shareholders, Acquiring has sent written requests
for information (the “Written Questionnaires”) regarding such overlapping ownership to
confirm the number of shares of each of Acquiring and Target stock that members of
the Overlapping Public Group economically owned immediately before the Acquisition.
Acquiring may also engage in follow-up correspondence with shareholders to confirm
and clarify responses to the Written Questionnaires, as necessary. Such follow-up
correspondence may be in either written, digital, or telephonic form.

                              REPRESENTATIONS

Acquiring makes the following representations with respect to the Acquisition:

1) Acquiring is a loss corporation as defined in section 382(k)(1).

2) Acquiring’s only class of outstanding stock during the relevant testing period is its
common stock described herein.
PLR-105229-21 4

3) Acquiring has no other outstanding interests or obligations that would be treated
as stock for purposes of section 382.

4) Acquiring has no actual knowledge regarding the members of the Overlapping
Public Group other than the knowledge obtained through: (a) the corporate
records of Acquiring and Target; (b) a survey of the relevant SEC filings to
determine whether Acquiring and Target had any 5-percent shareholders; and (c)
additional information that will be obtained through the Written Questionnaires.

5) The Acquisition qualified as a tax-free reorganization within the meaning of
section 368(a) that is an equity structure shift that also is described in section
381(a)(2) and in which Acquiring is a party to the reorganization.

                                    RULINGS

Based solely on the information submitted and the representations set forth above, we
rule as follows:

1) The additional information regarding the stock ownership of the Overlapping
Public Group obtained by Acquiring through public documents and responses to
the Written Questionnaires (including any follow-up communications) is an
acceptable method of determining actual knowledge within the meaning of Treas.
Reg. § 1.382-2T(k)(2) (the “Actual Knowledge”).

2) For purposes of determining the amount of the owner shift of Acquiring from the
Acquisition (including whether such owner shift results in an ownership change)
and the amount of any subsequent owner shifts of Acquiring, Acquiring is
permitted to use the Actual Knowledge to treat the Overlapping Public Group as
an additional direct public group of Acquiring for purposes of applying the
segregation rules of Treas. Reg. § 1.382-2T(j)(2), and the presumption described
in Treas. Reg. § 1.382-2T(j)(2)(iii)(B)(1) will not apply.

3) For purposes of section 382, the increase in the Overlapping Public Group’s
percentage ownership of Acquiring as a result of the Acquisition will be equal to
the amount by which its percentage ownership of Acquiring immediately after the
Acquisition exceeds its percentage ownership of Acquiring immediately before
the Acquisition.

                                    CAVEATS

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax treatment of the Acquisition under other provisions of the Code or regulations or the
tax treatment of any condition existing at the time of, or effects resulting from, the
Acquisition that is not specifically addressed by this letter.
PLR-105229-21 5

                          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 federal income tax return to which it is
relevant. Alternatively, taxpayers filing their returns electronically may satisfy this
requirement by attaching a statement to their return that provides the date and control
number (PLR-105229-21) of this letter ruling.

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

                                   Sincerely,



                                   Richard K. Passales
                                   Senior Counsel, Branch 4
                                   Office of Associate Chief Counsel (Corporate)

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