Final Regs on NOL Option Attribution Rules for Bankrupt Firms

 [4830-01]

 ACTION: Final and temporary regulations.

 SUMMARY: This document contains final regulations under section 382 of the Internal Revenue Code of 1986. The regulations concern option attribution rules for purposes of identifying stock ownership in order to determine whether certain transactions in title 11 or similar cases qualify under section 382(l)(5). The rules are necessary to limit relief under section 382(l)(5) to ownership changes in which pre-change shareholders and qualified creditors maintain a substantial continuing interest in the loss corporation following the title 11 or similar case. The regulations also generally suspend the application of the deemed exercise rule of section 1.382-2T(h)(4)(i) of the temporary Income Tax Regulations for options created by or under a plan of reorganization confirmed in a title 11 or similar case, but only until the time the plan becomes effective. As a result of the suspension, any ownership change of a loss corporation resulting from a reorganization in a title 11 or similar case will ordinarily occur when the plan of reorganization becomes effective.

 EFFECTIVE DATE: April 8, 1992

 FOR FURTHER INFORMATION CONTACT: Diana C. MacKeen of the Office of Assistant Chief Counsel (Corporate), Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Ave., N.W., Washington, D.C. 20224 (Attention CC:CORP:T:R), or telephone (202) 566-3544 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

PAPERWORK REDUCTION ACT

The collections of information contained in these regulations have been reviewed and, pending receipt and evaluation of public comments, approved by the Office of Management and Budget under control number 1545-1260.

 Comments concerning the collections of information and the accuracy of estimated average annual burden, and suggestions for reducing this burden should be directed to the office of Management and Budget, Attention: Desk Officer for the Department of the Treasury, Office of Information and Regulatory Affairs, Washington, D.C. 20503, with copies to the Internal Revenue Service, Attention: IRS Reports Clearance Officer, T:FP, Washington, D.C. 20224.

 The collections of information in these regulations are in section 1.382-3(o). The information serves as evidence of an election to apply the rule suspending the application of the deemed exercise rule of section 1.382-2T(h)(4)(i) for certain options to testing dates before September 5, 1990, and an election to not apply the same rule to testing dates on or after September 5, 1990, to April 8, 1992. It is required by the Service to assure that the proper amount of carryover attributes are used by a loss corporation following those types of ownership changes.

 These estimates are an approximation of the average time expected to be necessary for completing one of the elections. They are based on such information as is available to the Service. Individual respondents may require more or less time, depending on their individual circumstances.

 Estimated total reporting burden: 32 hours.

 The estimated burden per respondent varies from 5 to 15 minutes, with an estimated average of 12 minutes.

 Estimated number of respondents: 160.

 Estimated frequency of response: once.

BACKGROUND

 This document contains final regulations to be added to parts 1 and 602 of title 26 of the Code of Federal Regulations (CFR) under section 382 of the Internal Revenue Code. The Service published proposed amendments to the regulations under section 382 in the Federal Register on September 6, 1990 (55 FR 36657). See also 1990-41 I.R.B. 23 (October 9, 1990). Written comments were received, but no public hearing was held as none was requested.

EXPLANATION OF PROVISIONS

 Section 382(l)(5) of the Code provides that the limitation imposed by section 382(a) does not apply after an ownership change of a loss corporation if (1) the corporation is under the jurisdiction of a court in a title 11 or similar case immediately before the ownership change, and (2) the corporation's prechange shareholders and qualified creditors (determined immediately before the ownership change) own at least 50 percent of the value and voting power of the loss corporation's stock (or stock of a controlling corporation if also in bankruptcy) immediately after the ownership change and as a result of being pre-change shareholders or qualified creditors immediately before the ownership change (the 50 percent test). Section 382(l)(5) applies only to a transaction that is ordered by a court or is pursuant to a plan approved by a court. See H.R. Rep. 841, 99th Cong., 2d Sess. II-192 (1986), 1986-3 C.B. (Vol. 4) 192. Although the limitation imposed by section 382(a) does not apply, the loss corporation may be required to reduce a portion of its pre- change losses and credits following a transaction qualifying under section 382(l)(5).

THE PROPOSED REGULATIONS.

The Service determined that the application of option attribution rules was necessary to limit relief under section 382(l)(5) to ownership changes in which prechange shareholders and qualified creditors do, in fact, maintain a substantial continuing interest in the loss corporation. The proposed regulations therefore provided option attribution rules that apply for purposes of determining whether the stock ownership requirements of section 382(l)(5) of the Code are satisfied. Under these rules, options (and similar interests) are generally deemed exercised if their exercise would cause the prechange shareholders and qualified creditors to own less than the requisite amount of stock (that is, if the deemed exercise causes a failure of the 50 percent test).

 Options created pursuant to the plan of reorganization in a title 11 or similar case are subject to the deemed exercise rule of section 1.382-2T(h)(4)(i) of the temporary regulations upon confirmation of the plan by the court. The proposed regulations, however, proposed to add new section 1.382-2T(h)(4)(x)(J) to suspend the application of the deemed exercise rule to an option created by the confirmation of a plan of reorganization in a title 11 or similar case (including an option created under the plan) until the time that the plan of reorganization becomes effective. The amendments to section 1.382-2T were proposed to apply for any testing date occurring on or after September 5, 1990.

THE FINAL REGULATIONS.

1. Deemed and actual exercise of options by prechange shareholders and qualified creditors.

 The proposed regulations treat stock as acquired pursuant to an option only if the deemed exercise of the option causes prechange shareholders and qualified creditors to own less than the requisite amount of stock immediately after the ownership change.

 One commentator suggested that qualification for section 382(l)(5) be determined by (1) treating as exercised all options except those options that have no significant likelihood of exercise at the time of issuance, or (2) permitting the loss corporation to satisfy retroactively the stock ownership requirements by taking into account options that are owned by pre-change shareholders or qualified creditors if the options are actually exercised.

 The Service continues to believe that whether an option is deemed exercised should depend on the status of the holder rather than on the likelihood of exercise. A rule that focuses on the status of the holder is more easily administered by taxpayers and the Service and better assures that the pre-change shareholders and qualified creditors maintain a substantial continuing interest in the loss corporation.

 The final regulations provide relief from the general rule through two special rules that may affect the determination of whether an ownership change resulting from a plan of reorganization satisfies the 50 percent test of section 382(l)(5)(A)(ii). Under the first rule, a loss corporation generally may treat an option that lapses or is irrevocably forfeited as if it had never been issued. Under the second rule, a loss corporation may take into account stock acquired by a prechange shareholder or qualified creditor pursuant to the exercise of an option received under the plan of reorganization provided that the option was acquired as a result of being a prechange shareholder or qualified creditor immediately before the ownership change and the exercise occurs within three years of the date of the ownership change that arises from the reorganization. In either case, failure to satisfy the 50 percent test under the general rule precludes qualification under section 382(l)(5) until the time the loss corporation establishes that, by applying one or both of the special rules, it has satisfied the test. A loss corporation that satisfies the 50 percent test may file amended returns for the relevant taxable years, provided that such years are open under the applicable statute of limitations.

 The final regulations extend the application of the deemed exercise rule to the right to receive stock as interest or dividends on postpetition debt or stock. This extension conforms to a similar rule regarding the right to receive stock on the maturity of certain post-petition debt.

 One commentator requested clarification about whether options received by a creditor in a bankruptcy reorganization are considered owned as a result of being a qualified creditor if the creditor also held pre-change options. The Service is considering the treatment of these options for purposes of section 382(l)(5) and intends to issue further guidance in this regard.

 2.Option attribution and a plan of reorganization in bankruptcy.

 For purposes of determining if a loss corporation has an ownership change, the proposed regulations suspend the application of the deemed exercise rule to an option created by the confirmation of a plan of reorganization in a title 11 or similar case until the time that the plan of reorganization becomes effective. The final regulations adopt the proposed rule as section 1.382-3(o) with the modifications discussed below. As indicated in the Notice of Proposed Rulemaking published on September 23, 1991, relating to the treatment of widely-held indebtedness (56 FR 47921), the Service is considering whether additional rules concerning the determination of the change date in bankruptcy are appropriate for loss corporations with such indebtedness outstanding.

 The Service received inquiries regarding the application of section 382 and the proposed rule in cases in which there has been prepetition solicitation of acceptances for a reorganization plan. Prepetition solicitation may be used to expedite bankruptcy proceedings in cases in which there is substantial agreement among the creditors and the corporation and its shareholders regarding the reorganization plan. Under the Bankruptcy Code, acceptances solicited in compliance with 11 U.S.C. 1126(b) (commonly called prepackaged plans) may satisfy a prerequisite to plan confirmation. Acceptances of a plan may also be solicited through informal procedures in the process of negotiating financial restructurings (commonly called pre- negotiated plans). Although these acceptances may not satisfy a prerequisite to plan confirmation, they may, as a practical matter, bind the party informally agreeing to the plan to vote for acceptance of the plan in bankruptcy.

 For section 382 purposes the solicitation of acceptances to a plan of reorganization may create an option and, if that option is deemed exercised, may result in an ownership change before the loss corporation files its petition. If an ownership change occurs outside of the bankruptcy case, section 382(l)(5) benefits are not available.

 The final regulations extend the application of the proposed rule to the option created by the solicitation or receipt of acceptances to a plan of reorganization, if the plan is later confirmed in a title 11 or similar case. If the plan is not confirmed, the option created by the solicitation or receipt of acceptances to the plan of reorganization will ordinarily be treated as having lapsed. This special rule applies without regard to whether the solicitation is made in compliance with section 1126(b) of the Bankruptcy Code.

 Under the final regulations, however, section 1.382-3(o) does not apply if, in connection with the reorganization, the loss corporation issues stock (including stock described in section 1504(a)(4)) or otherwise receives a capital contribution prior to the effective date of the plan of reorganization for a principal purpose of using before that date losses that otherwise would be limited or eliminated.

 The Service received requests that loss corporations be permitted to elect to have the proposed rule (making the effective date the change date) apply to testing dates prior to September 5, 1990. The Service also received requests that loss corporations be permitted to elect to continue to apply the existing rule for testing dates on or after September 5, 1990, to April 8, 1992 with the Federal Register]. Both elections are permitted under the final regulations.

SPECIAL ANALYSES

 It has been determined that these final regulations are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and therefore, a final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code (as then in effect), the Notice of Proposed Rulemaking for these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

 The principal author of these regulations is Diana C. MacKeen, Office of Assistant Chief Counsel (Corporate), Office of Chief Counsel, Internal Revenue Service. Personnel from other offices of the Service and the Treasury Department participated in developing the regulations, in matters of both substance and style.

LIST OF SUBJECTS

26 CFR 1.381(a)-1 through 1.383-3

 Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

 Reporting and recordkeeping requirements.

Treasury Decision 8407

proposed amendments to the regulations under section 382 in the Federal Register on September 6, 1990 (55 FR 36657). See also 1990-41 I.R.B. 23 (October 9, 1990). Written comments were received, but no public hearing was held as none was requested.

EXPLANATION OF PROVISIONS

Section 382(l)(5) of the Code provides that the limitation imposed by section 382(a) does not apply after an ownership change of a loss corporation if (1) the corporation is under the jurisdiction of a court in a title 11 or similar case immediately before the ownership change, and (2) the corporation's prechange shareholders and qualified creditors (determined immediately before the ownership change) own at least 50 percent of the value and voting power of the loss corporation's stock (or stock of a controlling corporation if also in bankruptcy) immediately after the ownership change and as a result of being pre-change shareholders or qualified creditors immediately before the ownership change (the 50 percent test). Section 382(l)(5) applies only to a transaction that is ordered by a court or is pursuant to a plan approved by a court. See H.R. Rep. 841, 99th Cong., 2d Sess. II-192 (1986), 1986-3 C.B. (Vol. 4) 192. Although the limitation imposed by section 382(a) does not apply, the loss corporation may be required to reduce a portion of its pre- change losses and credits following a transaction qualifying under section 382(l)(5).

THE PROPOSED REGULATIONS.

The Service determined that the application of option attribution rules was necessary to limit relief under section 382(l)(5) to ownership changes in which prechange shareholders and qualified creditors do, in fact, maintain a substantial continuing interest in the loss corporation. The proposed regulations therefore provided option attribution rules that apply for purposes of determining whether the stock ownership requirements of section 382(l)(5) of the Code are satisfied. Under these rules, options (and similar interests) are generally deemed exercised if their exercise would cause the prechange shareholders and qualified creditors to own less than the requisite amount of stock (that is, if the deemed exercise causes a failure of the 50 percent test).

Options created pursuant to the plan of reorganization in a title 11 or similar case are subject to the deemed exercise rule of section 1.382-2T(h)(4)(i) of the temporary regulations upon confirmation of the plan by the court. The proposed regulations, however, proposed to add new section 1.382-2T(h)(4)(x)(J) to suspend the application of the deemed exercise rule to an option created by the confirmation of a plan of reorganization in a title 11 or similar case (including an option created under the plan) until the time that the plan of reorganization becomes effective. The amendments to section 1.382-2T were proposed to apply for any testing date occurring on or after September 5, 1990.

THE FINAL REGULATIONS.

1. Deemed and actual exercise of options by prechange shareholders and qualified creditors.

The proposed regulations treat stock as acquired pursuant to an option only if the deemed exercise of the option causes prechange shareholders and qualified creditors to own less than the requisite amount of stock immediately after the ownership change.

One commentator suggested that qualification for section 382(l)(5) be determined by (1) treating as exercised all options except those options that have no significant likelihood of exercise at the time of issuance, or (2) permitting the loss corporation to satisfy retroactively the stock ownership requirements by taking into account options that are owned by pre-change shareholders or qualified creditors if the options are actually exercised.

The Service continues to believe that whether an option is deemed exercised should depend on the status of the holder rather than on the likelihood of exercise. A rule that focuses on the status of the holder is more easily administered by taxpayers and the Service and better assures that the pre-change shareholders and qualified creditors maintain a substantial continuing interest in the loss corporation.

The final regulations provide relief from the general rule through two special rules that may affect the determination of whether an ownership change resulting from a plan of reorganization satisfies the 50 percent test of section 382(l)(5)(A)(ii). Under the first rule, a loss corporation generally may treat an option that lapses or is irrevocably forfeited as if it had never been issued. Under the second rule, a loss corporation may take into account stock acquired by a prechange shareholder or qualified creditor pursuant to the exercise of an option received under the plan of reorganization provided that the option was acquired as a result of being a prechange shareholder or qualified creditor immediately before the ownership change and the exercise occurs within three years of the date of the ownership change that arises from the reorganization. In either case, failure to satisfy the 50 percent test under the general rule precludes qualification under section 382(l)(5) until the time the loss corporation establishes that, by applying one or both of the special rules, it has satisfied the test. A loss corporation that satisfies the 50 percent test may file amended returns for the relevant taxable years, provided that such years are open under the applicable statute of limitations.

The final regulations extend the application of the deemed exercise rule to the right to receive stock as interest or dividends on postpetition debt or stock. This extension conforms to a similar rule regarding the right to receive stock on the maturity of certain post-petition debt.

One commentator requested clarification about whether options received by a creditor in a bankruptcy reorganization are considered owned as a result of being a qualified creditor if the creditor also held pre-change options. The Service is considering the treatment of these options for purposes of section 382(l)(5) and intends to issue further guidance in this regard.

2. Option attribution and a plan of reorganization in bankruptcy.

For purposes of determining if a loss corporation has an ownership change, the proposed regulations suspend the application of the deemed exercise rule to an option created by the confirmation of a plan of reorganization in a title 11 or similar case until the time that the plan of reorganization becomes effective. The final regulations adopt the proposed rule as section 1.382-3(o) with the modifications discussed below. As indicated in the Notice of Proposed Rulemaking published on September 23, 1991, relating to the treatment of widely-held indebtedness (56 FR 47921), the Service is considering whether additional rules concerning the determination of the change date in bankruptcy are appropriate for loss corporations with such indebtedness outstanding.

The Service received inquiries regarding the application of section 382 and the proposed rule in cases in which there has been prepetition solicitation of acceptances for a reorganization plan. Prepetition solicitation may be used to expedite bankruptcy proceedings in cases in which there is substantial agreement among the creditors and the corporation and its shareholders regarding the reorganization plan. Under the Bankruptcy Code, acceptances solicited in compliance with 11 U.S.C. 1126(b) (commonly called prepackaged plans) may satisfy a prerequisite to plan confirmation. Acceptances of a plan may also be solicited through informal procedures in the process of negotiating financial restructurings (commonly called pre- negotiated plans). Although these acceptances may not satisfy a prerequisite to plan confirmation, they may, as a practical matter, bind the party informally agreeing to the plan to vote for acceptance of the plan in bankruptcy.

For section 382 purposes the solicitation of acceptances to a plan of reorganization may create an option and, if that option is deemed exercised, may result in an ownership change before the loss corporation files its petition. If an ownership change occurs outside of the bankruptcy case, section 382(l)(5) benefits are not available.

The final regulations extend the application of the proposed rule to the option created by the solicitation or receipt of acceptances to a plan of reorganization, if the plan is later confirmed in a title 11 or similar case. If the plan is not confirmed, the option created by the solicitation or receipt of acceptances to the plan of reorganization will ordinarily be treated as having lapsed. This special rule applies without regard to whether the solicitation is made in compliance with section 1126(b) of the Bankruptcy Code.

Under the final regulations, however, section 1.382-3(o) does not apply if, in connection with the reorganization, the loss corporation issues stock (including stock described in section 1504(a)(4)) or otherwise receives a capital contribution prior to the effective date of the plan of reorganization for a principal purpose of using before that date losses that otherwise would be limited or eliminated.

The Service received requests that loss corporations be permitted to elect to have the proposed rule (making the effective date the change date) apply to testing dates prior to September 5, 1990. The Service also received requests that loss corporations be permitted to elect to continue to apply the existing rule for testing dates on or after September 5, 1990, to April 8, 1992 with the Federal Register]. Both elections are permitted under the final regulations.

SPECIAL ANALYSES

It has been determined that these final regulations are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and therefore, a final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code (as then in effect), the Notice of Proposed Rulemaking for these regulations was submitted to the Chief Counsel for Advocacy of the Small Business Administration for comment on their impact on small business.

DRAFTING INFORMATION

The principal author of these regulations is Diana C. MacKeen, Office of Assistant Chief Counsel (Corporate), Office of Chief Counsel, Internal Revenue Service. Personnel from other offices of the Service and the Treasury Department participated in developing the regulations, in matters of both substance and style.

LIST OF SUBJECTS

26 CFR 1.381(a)-1 through 1.383-3

Income taxes, Reporting and recordkeeping requirements.

26 CFR Part 602

Reporting and recordkeeping requirements.

ADOPTION OF AMENDMENTS TO THE REGULATIONS

Accordingly, 26 CFR parts 1 and 602 are amended as follows:

Paragraph 1. The authority citation for part 1 is amended by adding the following citation:

Authority: Sec. 7805, 68A Stat. 917; 26 U.S.C. 7805 * * * Section 1.382-3 is also issued under 26 U.S.C. 382(l)(3)(A) and 382(m). * * *

Par. 2. A new section 1.382-2T(h)(4)(x)(J) is added to read as follows:

SECTION 1.382-2T DEFINITION OF OWNERSHIP CHANGE UNDER SECTION 382, AS AMENDED BY THE TAX REFORM ACT OF 1986 (TEMPORARY)

* * * * *

(h) * * *

(4) * * *

(x) * * *

(J) TITLE 11 OR SIMILAR CASE. See section 1.382-3(o) which excepts certain options created by or under a plan of reorganization in a title 11 or similar case from the operation of paragraph (h)(4)(i) of this section.

* * * * *

Par. 3. section 1.382-3(e) and (o) are added to read as follows:

SECTION 1.382-3 SPECIAL RULES UNDER SECTION 382 FOR CORPORATIONS UNDER THE JURISDICTION OF A COURT IN TITLE 11 OR SIMILAR CASE.

* * * * *

(e) OPTION ATTRIBUTION FOR PURPOSES OF DETERMINING STOCK OWNERSHIP UNDER SECTION 382(l)(5)(A)(ii) -- (1) IN GENERAL. Solely for purposes of determining whether the stock ownership requirements of section 382(l)(5)(A)(ii) are satisfied at the time of an ownership change, stock of the loss corporation (or of a controlling corporation if also in bankruptcy) that is subject to an option is treated as acquired at that time, pursuant to an exercise of the option by its owner, if such deemed exercise would cause the pre- change shareholders and qualified creditors of the loss corporation to own (after such ownership change and as a result of being pre-change shareholders or qualified creditors immediately before such change) less than an amount of such stock sufficient to satisfy the ownership requirements of section 382(l)(5)(A)(ii). An option that is owned as a result of being a pre-change shareholder or qualified creditor and that, if exercised, would result in the ownership of stock by a pre-change shareholder or qualified creditor will not be treated as exercised under this section. For purposes of this paragraph (e)(1), rules similar to those option attribution rules under section 1.382-2T(h)(4)(iii), (iv), (v), (vii), and (x)(A), (B) (except with respect to a debt instrument that was issued after the filing of the petition in the title 11 or similar case), (D), (E) (except with respect to a right to receive or obligation to issue stock as interest or dividends on a debt instrument or stock that was issued after the filing of the petition in the title 11 or similar case), (G), (H), and (Z), apply.

(2) SPECIAL RULES -- (i) LAPSE OR FORFEITURE OF OPTIONS DEEMED EXERCISED. A loss corporation may apply rules similar to the rules of section 1.382-2T(h)(4)(viii) with respect to an option except to the extent any person owning the option at any time on or after the change date acquires additional stock or an option to acquire additional stock during the period of time on or after the ownership change and on or before the lapse or forfeiture of the option.

(ii) ACTUAL EXERCISE OF OPTIONS NOT DEEMED EXERCISED. In determining whether the ownership change pursuant to the plan of reorganization qualifies under section 382(l)(5), a loss corporation may take into account stock acquired pursuant to the actual exercise of an option issued pursuant to the plan of reorganization if that option was not deemed exercised under paragraph (e)(1) of this section. However, this paragraph (e)(2)(ii) applies only if the option is actually exercised within the 3 years of the ownership change by the 5-percent shareholder who, as a result of being a pre-change shareholder or qualified creditor, acquired the option under the plan.

(iii) AMENDED RETURNS. A loss corporation may file an amended return for a prior taxable year (subject to any applicable statute of limitations) if it determines that section 382(l)(5) applies to an ownership change as a result of the operation of paragraph (e)(2)(i) or (ii) of this section, but only if the loss corporation makes corresponding adjustments on amended returns for all affected taxable years (subject to any applicable statute of limitations).

(3) EXAMPLES. In each of the examples in this paragraph (e)(3), assume that there is an ownership change of loss corporation L on the date the plan of reorganization is effective.

EXAMPLE 1. L is a loss corporation in a title 11 case. The plan of reorganization of L approved by the bankruptcy court provides for the cancellation of all existing L stock, the issuance of 100 shares of new L common stock to qualified creditors, and the issuance of an option to a new investor to acquire, at any time during the next 3 years, 90 shares of new L common stock from L at its fair market value on the date the plan becomes effective. Under paragraph (e)(1) of this section, on the date the plan becomes effective, the option held by the new investor is deemed exercised if the exercise would cause the qualified creditors of L to own less than 50 percent of the total voting power or value of the L stock after the ownership change. Because the qualified creditors would receive at least 50 percent of the voting power and value of the new L common stock even if the option were deemed exercised, the stock ownership requirements of section 382(l)(5)(A)(ii) are satisfied.

EXAMPLE 2. The facts are the same as in Example 1, except that L issues an option to the new investor to acquire 110 shares of new L common stock. This option is deemed exercised under paragraph (e)(1) of this section on the date the plan becomes effective, because, as a result of the deemed exercise, the qualified creditors would own only 100 of 210 shares of the new L common stock (approximately 48 percent) after the ownership change. Accordingly, the stock ownership requirements of section 382(l)(5)(A)(ii) are not satisfied and section 382(a) applies to the ownership change.

EXAMPLE 3. (a) L is a loss corporation in a title 11 case. The plan of reorganization of L approved by the bankruptcy court provides for the cancellation of all existing L stock, the issuance of new L common stock and 5-year options to acquire L common stock as follows:

(i) To qualified creditors -- 100 shares of stock an options to acquire 50 shares;

(ii) To a new investor -- options to acquire 110 shares.

(b) Under paragraph (e)(1) of this section, the option held by the new investor is deemed exercised on the date the plan becomes effective because the exercise would cause the qualified creditors of L to own less than 50 percent of the total voting power and value of the L stock after the ownership change (100 of 210 shares or approximately 48 percent). Accordingly, the stock ownership requirements of section 382(l)(5)(A)(ii) are not satisfied initially and section 382(a) applies to the ownership change.

(c) Assume, however, that the qualified creditors actually exercise enough options that were acquired pursuant to the plan of reorganization to purchase 30 additional shares during the 3 year period after the plan becomes effective. Under paragraph (e)(2)(ii) of this section, L may take into account the 30 shares purchased by the qualified creditors by the exercise of the options in determining whether the stock ownership requirements of section 382(l)(5)(A)(ii) were satisfied on the date the plan of reorganization became effective. If L takes such purchases into account, the qualified creditors of L are deemed to own as of the date of the ownership change more than 50 percent of the total voting power or value of the L stock after the ownership change (130 of 240 shares or approximately 54 percent), with the result that the stock ownership requirements of section 382(l)(5)(A)(ii) are satisfied and section 382(l)(5) applies to the ownership change as of the effective date of the plan.

(d) Assume instead that the qualified creditors acquire 30 additional shares by exercise of options more than 3 years after the plan becomes effective. Such exercise is not taken into account under paragraph (e)(2)(ii) of this section for purposes of determining whether the stock ownership requirements of section 382(l)(5)(A)(ii) are satisfied as of the effective date of the plan. Thus, the qualified creditors are deemed to own less than 50 percent of the total voting power and value of the L stock after the ownership change (100 of 210 shares) and section 382(l)(5) does not apply to the ownership change.

(e) Assume instead that, during the 3 year period after the plan becomes effective, the new investor exercises part of his option and purchases 105 shares of stock. The exercise causes a lapse of the rights to acquire the remaining 5 shares of stock. Also during that time, the qualified creditors exercise part of their options and acquire 6 additional shares of stock. Under paragraph (e)(2)(i) of this section, L may treat the lapse of that part of the new investor's option to acquire 5 shares of stock as if that part of the option had never been issued for purposes of determining whether the stock ownership requirements of section 382(l)(5)(A)(ii) are satisfied as of the effective date of the plan. Also, under paragraph (e)(2)(ii) of this section, L may take into account the 6 shares purchased by the qualified creditors by the exercise of the options in determining whether the stock ownership requirements of section 382(l)(5)(A)(ii) are satisfied as of the effective date of the plan. If L takes all of this information into account, the qualified creditors are deemed to own more than 50 percent of the total voting power or value of the L stock after the ownership change (106 of 211 shares or approximately 50.2 percent) and section 382(l)(5) applies to the ownership change as of the effective date of the plan.

(4) EFFECTIVE DATES -- (i) IN GENERAL. This paragraph (e) applies to ownership changes occurring on or after September 5, 1990.

(ii) SPECIAL RULE FOR INTEREST OR DIVIDENDS. Rules similar to the rules of section 1.382-2T(h)(4)(x)(E) (relating to option attribution for purposes of determining whether an ownership change occurs) apply to a right to receive or obligation to issue stock as interest or dividends on a debt instrument or stock that was issued after the filing of the petition in the title 11 or similar case for ownership changes occurring before April 8, 1992.

* * * * *

(o) Options not subject to attribution -- (1) Section 1.382-2T(h)(4)(i) (relating to the deemed exercise rule) shall not apply to the following options to acquire stock of a loss corporation reorganized pursuant to a plan of reorganization that is confirmed in a title 11 or similar case (within the meaning of section 368(a)(3)(A)) but only until the time the plan becomes effective --

(i) Any option created by the solicitation or receipt of acceptances to the plan;

(ii) The option created by the confirmation of the plan; and

(iii) Any option created under the plan.

(2) This paragraph (o) generally applies to any testing date occurring on or after September 5, 1990. However, this paragraph (o) does not apply on any testing date occurring on or after April 8, 1992 if, in connection with the plan of reorganization, the loss corporation issues stock (including stock described in section 1504(a)(4)) or otherwise receives a capital contribution before the effective date of the plan for a principal purpose of using before the effective date losses and credits that would be subject to limitation under section 382(a) or would be eliminated under section 382(l)(5)(B) or (C) if this paragraph (o) did not apply on the testing date. A loss corporation may elect to apply this paragraph (o) to any testing date occurring before September 5, 1990, by filing the following statement with its income tax return: "THIS IS AN ELECTION TO APPLY SECTION 1.382-3(o) FOR TESTING DATES OCCURRING PRIOR TO SEPTEMBER 5, 1990, TO OPTIONS CREATED BY OR UNDER A PLAN OF REORGANIZATION CONFIRMED IN A TITLE 11 OR SIMILAR CASE." A loss corporation may elect to not apply this paragraph (o) to testing dates occurring on or after September 5, 1990, to April 8, 1992 by filing the following statement with its income tax return: "THIS IS AN ELECTION TO NOT APPLY SECTION 1.382-3(o) FOR TESTING DATES OCCURRING ON OR AFTER SEPTEMBER 5, 1990, TO APRIL 8, 1992 TO OPTIONS CREATED BY OR UNDER A PLAN OF REORGANIZATION CONFIRMED IN A TITLE 11 OR SIMILAR CASE." Either of these statements must be filed with an income tax return (including an amended return) of the loss corporation not later than the due date (including extensions) for filing the income tax return of the loss corporation for the taxable year including or ending with April 8, 1992.

PART 602 -- OMB CONTROL NUMBERS UNDER THE PAPERWORK REDUCTION ACT

Par. 4. The authority citation for 602 continues to read as follows:

Authority: 26 U.S.C. 7805.

Par. 5. Section 602.101 is amended by adding the following entry in the table:

 "Section 1.382-3                         1545-1260".