Academic journal article Journal of Accountancy

Related Parties and NOLs

Academic journal article Journal of Accountancy

Related Parties and NOLs

Article excerpt

IRC section 382 limits the use of NOL carryforwards following an ownership change. Recently the Tax Court, in a case of first impression, had to decide how the family attribution rules applied in a section 382 context.

When they formed Garber Industries Holding Co. Inc., Charles M. Garber Sr. owned 68% and his brother Kenneth R. Garber Sr. owned 19%. In 1996 the corporation underwent a "D" reorganization that reduced Charles' ownership to 19% and increased Kenneth's to 65%. In 1998 Kenneth sold his shares of the stock to Charles, giving him a total of 84%. On its 1998 tax return following the sale, Garber Industries used an NOL carryforward to offset current income. The IRS objected on the grounds that the NOL should be reduced pursuant to section 382 because of the deemed ownership change.

Result. For the IRS. Section 382 defines an ownership change as a more than 50% increase in ownership by 5% owners during a three-year period. (A 5% owner is an individual who owns at least 5% of the corporation's stock either directly or indirectly.)

In determining ownership, section 382 requires the use of the section 318 stock attribution rules, under which a person is deemed to own the stock of his or her family members. Siblings are not considered family, but parents, children and grandchildren are. Section 382 modifies these family attribution rules to treat all family members as one shareholder rather than separate shareholders. Garber Industries Holding Co. argued that although siblings are not related under code section 318(a)(1), they should be treated as a single shareholder headed by their parents or grandparents. The IRS argued that since neither the parents nor grandparents of the taxpayers were alive, the brothers were not one family. …

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