Section 382: Recent Developments And The New Poison Pill
Firms that sustain net operating losses (NOL) over several consecutive years often have little chance of generating profits in the future that can be used to offset these losses. Without the Code's anti-avoidance provisions, such as Section 382, investors could pursue an aggressive tax planning strategy of investing in a loss company solely to avoid taxes by exploiting the company's NOL carry forward. The recent government bailouts of ailing firms prompted the IRS to issue notices explaining how Section 382 applies in situations where the US government becomes an owner of loss companies. This article discusses the current and future implications of the IRS notices, the recently enacted Section 382(n), and the new 5% Poison pill. These developments, along with the growing prevalence of 5% poison pills and how to account for fluctuations in fair market value, will increase corporate scrutiny of tax positions having Section 382 implications.