Category: Corporations; Deductions & Credits
Subject: Section 382
Title: Application of Section 382, Rescission of Stock Sale
IRC Sections: 382
Filename: 1283.html
Date Produced: 10/95

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Background
Taxpayer (TP), the sole shareholder of a C corporation, sold all his stock to a single buyer in 1983. Pending completion of all the payments called for in the contract of sale, the stock was held by TP's attorney under the terms of a pledge agreement. There is no question that a sale occurred and the buyer became both the legal and equitable owner of the stock.

The buyer never made any of payments required under the contract of sale; pursuant to the pledge agreement TP regained ownership of the shares some eleven years after the sale.

During the period of time over which the buyer owned the shares, the corporation incurred significant net operating losses. TP now intends to sell the business and has contemplated a sale of corporate assets. TP wants to use the net operating losses incurred during the period of the buyer's stock ownership against the gain triggered by the sale. Section 382 seems to preclude utilization of most (if not all) the NOL's incurred prior to TP's reacquisition of the stock against the income generated by the asset sale.

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Commentary
In the interest of avoiding an exhaustive discussion, it will suffice to say generally that the limitations of Section 382 come into play if the stock holdings of major shareholders collectively increase by more than 50 percentage points within a three-year window of time. If the limitations apply, NOL's incurred prior to the change can offset income generated after the change on an annual basis only to the extent of the value of the corporation at the date of change multiplied by the federal long-term tax exempt rate.

1. If one accepts the following assumptions, then plainly the requisite numerical threshold has been met. Clearly, a 100% change of ownership has occurred.

A) Eleven years ago a single seller made a valid transfer of stock to a single buyer.

B) The original seller reacquired the same shares from the same buyer under the terms of a pledge agreement executed in conjunction with the original sale.

2. Section 382 makes itself applicable to the broadest possible range of transactions including not only stock sales but also a variety of tax-free changes affecting ownership of corporate equity interests. There are a few types of transactions explicitly excluded; however, none apply to the circumstances at hand. It is clear, therefore, that the type of transaction at hand is covered by Section 382 and no special exceptions exist for reacquisition of previously-held shares.

3. Special rules do exist for stock acquired in the context of bankruptcy or similar cases in federal or state court. The phrase "similar cases" includes foreclosures, but it is clear that the debtor must be the corporation in order for these special rules [Section 382(l)(5)] to apply. In this case, the debtor is the original buyer individually, not the corporation. Incidentally, Section 382(l)(5) seems to be inapplicable for a host of other reasons as well.

Conclusion
There is every indication that Section 382 applies to the circumstances set forth above. I see no support whatsoever for a contrary position.