The IRS and Treasury issued temporary regulations (T.D. 9685) on July 30 that try to resolve an unintended glitch in the prior, final regulations ( T.D. 9638). The glitch could have resulted in inadvertent ownership changes under Section 382.
In the aftermath of the financial crisis of 2008, the U.S. government instituted the Troubled Asset Relief Program (TARP) to assist various companies. Under TARP, certain recipients received money from the U.S. Treasury Department in exchange for issuing stock to Treasury. Typically, such an exchange could result in an ownership change under Section 382, but the IRS provided relief for TARP recipients in Notice 2010-2, which said that Treasury effectively couldn't contribute to an ownership change, including if Treasury sold such stock to other people. The sold stock was deemed sold to a new, direct public group that didn't have an increase in ownership from such a sale.
For example, if Treasury owned 10% of the stock of a TARP recipient and sold the stock to small shareholders who also purchased an additional 5% on the open market, the increased ownership shift would be only the 5% purchase, with the Treasury transaction effectively ignored.
Final regulations under Section 382, issued in October 2013, included a provision to ameliorate the effects of a 5% shareholder's sale of stock to "small shareholders." Before the regulation, the sale of shares was segregated into a new, direct "public group" of small shareholders that was separate and distinct from other small shareholders. As such, Section 382 ownership changes often occurred because of no more than routine acquisitions and dispositions of stock in transactions that, separately or in the aggregate, didn't appear to be transactions in which a change in control occurred.
The final regulations changed that treatment from segregation of the buying small shareholders into a new group to absorption of these small shareholders by the historic direct public group(s). However, the final regulations also led to the unintended consequence that sales of TARP recipient stock by Treasury could inadvertently trigger an ownership change, as the final regulations had some potential, elective retroactive application.
The new, temporary regulations modify the effective date provision so that the mechanics of Notice 2010-2 remain in effect.
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