IRS reaffirms treatment of stock owned by investment advisors under Section 382

Tax Hot Topics newsletterThe IRS has issued a private letter ruling (PLR 201902022) holding that, in testing for an ownership change under Section 382(l)(5) (pertaining to ownership changes after bankruptcy), a taxpayer was not required to aggregate the ownership of multiple funds held by one investment advisor in determining the 5% beneficial owners of the taxpayer’s stock.

This ruling is similar to and reaffirms the position that the IRS has previously taken in PLR 200747016 and PLR 200902007. In PLR 200747016, the IRS held that where an SEC filing reported beneficial ownership of two or more economic owners aggregating over 5%, but did not affirm that a group existed, the company was entitled to rely thereon in determining that the economic owners were not members of a group that constituted an entity under Treas. Reg. 1.382-3(a)(1)(i), and therefore did not need to treat them as single 5% owner. In PLR 200902007 the IRS held that a company, in the absence of actual knowledge, could rely on the information reported on SEC Schedules 13D and 13G to determine economic owners for purposes of ownership change under Section 382, and the company was entitled to rely on the absence of such document where appropriate.

The most recent PLR affirms the approach taken by practitioners to not treat an investment advisor that holds ownership in several different funds as the economic owner for purposes of Section 382. The IRS rules that even though the investment advisors had the power to vote and/or dispose of the stock, the investment advisors were not economic owners of the stock for purposes of Section 382. In addition, the IRS held that the funds overseen by an investment advisor did not constitute an entity within the meaning of Treas. Reg. 1.382-3(a)(1)(i). This additional piece of guidance gives more support for relying on Schedule 13Gs and 13Ds for determination of economic owners for purposes of Section 382 and more support for the position that stock owned in multiple funds of the same investment advisor do not need to be aggregated when determining 5% shareholders under Section 382.

Joshua Brady
Principal, Washington National Tax Office
T +1 202 521 1563

Jeff Borghino
Partner, Washington National Tax Office
T +1 202 521 1532

Bryan Keith
Managing Director, Washington National Tax Office
T +1 202 861 4116

Greg Fairbanks
Managing Director, Washington National Tax Office
T +1 202 521 1503

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