Notice 2010-2 — Notice 2010-2

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Part III - Administrative, Procedural, and Miscellaneous

Application of Section 382 to Corporations Whose Instruments are Acquired and
Disposed of by the Treasury Department Under Certain Programs Pursuant to the
Emergency Economic Stabilization Act of 2008

Notice 2010-2

This notice provides additional guidance regarding the application of section 382
of the Internal Revenue Code and other provisions of law to corporations whose
instruments are acquired and disposed of by the Treasury Department pursuant to the
Emergency Economic Stabilization Act of 2008, P.L. 110-343 (EESA). This notice
amplifies and supersedes Notice 2009-38, 2009-18 I.R.B. 901, to provide additional
guidance.

I. PURPOSE

The Internal Revenue Service (Service) and Treasury Department (Treasury)
intend to issue regulations implementing certain of the rules as described below.
Pending the issuance of further guidance, taxpayers may rely on the rules set forth in
this notice to the extent provided herein.

Section 101(a)(1) of EESA authorizes the Secretary to establish the Troubled
Asset Relief Program (TARP). Section 102(a) of EESA authorizes the Secretary to also
establish a program to guarantee troubled assets. This notice provides guidance to
corporate issuers with respect to Treasury's acquisition of instruments pursuant to the
following EESA programs: (i) the Capital Purchase Program for publicly-traded issuers
(Public CPP); (ii) the Capital Purchase Program for private issuers (Private CPP); (iii)
the Capital Purchase Program for S corporations (S Corp CPP); (iv) the Targeted
Investment Program (TARP TIP); (v) the Asset Guarantee Program; (vi) the
Systemically Significant Failing Institutions Program; (vii) the Automotive Industry
Financing Program; and (viii) the Capital Assistance Program for publicly-traded issuers
(TARP CAP). Unless otherwise specified below, a reference to "the Programs" shall
include any of the various EESA programs described in the preceding sentence.

II. BACKGROUND

Section 382(a) of the Internal Revenue Code (Code) provides that the taxable
income of a loss corporation for a year following an ownership change may be offset by
pre-change losses only to the extent of the section 382 limitation for such year. An
ownership change occurs with respect to a corporation if it is a loss corporation on a
testing date and, immediately after the close of the testing date, the percentage of stock
of the corporation owned by one or more 5-percent shareholders has increased by more
than 50 percentage points over the lowest percentage of stock of such corporation
owned by such shareholders at any time during the testing period. See section 1.382-

2T(a)(1) of the Income Tax Regulations. Section 382(m) of the Code provides that the
Secretary shall prescribe such regulations as may be necessary or appropriate to carry
out the purposes of sections 382 and 383. Section 7805(a) of the Code provides that
except where such authority is expressly given to any person other than an officer or
employee of Treasury, the Secretary shall prescribe all needful rules and regulations for
the enforcement of Title 26, including all rules and regulations as may be necessary by
reason of any alteration of law in relation to internal revenue.
Section 101(c)(5) of EESA provides that the Secretary is authorized to issue
such regulations and other guidance as may be necessary or appropriate to carry out
the purposes of EESA.
Except as otherwise provided, any definitions and terms used in this notice have
the same meaning as they do in section 382 of the Code (and the regulations
thereunder) or in EESA, as applicable. Unless otherwise specified, a reference to
"section" is to the particular section of the Code or regulations.

III. GUIDANCE REGARDING CORPORATIONS WHOSE INSTRUMENTS ARE
ACQUIRED BY TREASURY PURSUANT TO EESA

Taxpayers may rely on the rules described in this Section III to the extent
provided below.
RULES:
A. Characterization of instruments (other than warrants) issued to Treasury. Any
instrument issued to Treasury pursuant to any of the Programs except TARP CAP,

whether owned by Treasury or subsequent holders, shall be treated for all Federal
income tax purposes as an instrument of indebtedness if denominated as such, and as
stock described in section 1504(a)(4) if denominated as preferred stock. No instrument
so denominated shall be treated as stock for purposes of section 382 while held by
Treasury or by other holders, except that preferred stock described in section
1504(a)(4) will be treated as stock for purposes of section 382(e)(1). In the case of any
instrument issued to Treasury pursuant to TARP CAP, the appropriate classification of
such instrument shall be determined by applying general principles of Federal tax law.
B. Characterization of warrants issued to Treasury. For all Federal income tax
purposes, any warrant to purchase stock issued to Treasury pursuant to any of the
Programs except Private CPP and S Corp CPP, whether owned by Treasury or
subsequent holders, shall be treated as an option (and not as stock). While held by
Treasury, such warrant will not be deemed exercised under section 1.382-4(d)(2). For
all Federal income tax purposes, any warrant to purchase stock issued to Treasury
pursuant to the Private CPP shall be treated as an ownership interest in the underlying
stock, which shall be treated as preferred stock described in section 1504(a)(4). For all
Federal income tax purposes, any warrant issued to Treasury pursuant to the S Corp
CPP shall be treated as an ownership interest in the underlying indebtedness.
C. Value-for-value exchange. For all Federal income tax purposes, any amount
received by an issuer in exchange for instruments issued to Treasury under the
Programs shall be treated as received, in its entirety, as consideration for such
instruments.

D. Section 382 treatment of stock acquired by and redeemed from Treasury.
For purposes of section 382, with respect to any stock (other than preferred stock
described in section 1504(a)(4)) issued to Treasury pursuant to the Programs (either
directly or upon the exercise of a warrant), the ownership represented by such stock on
any date on which it is held by Treasury shall not be considered to have caused
Treasury's ownership in the issuing corporation to have increased over its lowest
percentage owned on any earlier date. Except as provided in the following sentence,
such stock is considered outstanding for purposes of determining the percentage of
stock owned by other 5-percent shareholders on any testing date. For purposes of
measuring shifts in ownership by any 5-percent shareholder on any testing date
occurring on or after the date on which an issuing corporation redeems stock held by
Treasury that had been issued to Treasury pursuant to the Programs (either directly or
upon the exercise of a warrant), the stock so redeemed shall be treated as if it had
never been outstanding.
E. Section 382 treatment of stock sold by Treasury to public shareholders. If
Treasury sells stock that was issued to it pursuant to the Programs (either directly or
upon the exercise of a warrant) and the sale creates a public group ("New Public
Group"), the New Public Group's ownership in the issuing corporation shall not be
considered to have increased solely as a result of such a sale. A New Public Group's
ownership shall be treated as having increased to the extent the New Public Group
increases its ownership pursuant to any transaction other than a sale of stock by
Treasury, including pursuant to a stock issuance described in section 1.382-3(j)(2) or a

redemption (see section 1.382-2T(j)(2)(iii)(C)). Such stock is considered outstanding for
purposes of determining the percentage of stock owned by other 5-percent
shareholders on any testing date, and section 382 (and the regulations thereunder)
shall otherwise apply to the New Public Group in the same manner as with respect to
other public groups.
F. Section 382(l)(1) not applicable with respect to capital contributions made by
Treasury pursuant to the Programs. For purposes of section 382(l)(1), any capital
contribution made by Treasury pursuant to the Programs shall not be considered to
have been made as part of a plan a principal purpose of which was to avoid or increase
any section 382 limitation.
G. Certain exchanges. Paragraphs (C), (D), (E), and (F), but not paragraphs (A)
and (B), of this notice apply to "Covered Instruments" as though such instruments were
issued directly to Treasury under the Programs. For purposes of this notice, the term
"Covered Instrument" means any instrument acquired by Treasury in exchange for an
instrument that was issued to Treasury under the Programs. In addition, the term also
includes any instrument acquired by Treasury in exchange for a Covered Instrument.
General principles of Federal tax law determine the characterization of all Covered
Instruments.

IV. RELIANCE ON NOTICE

Taxpayers may rely on the rules described in Section III of this notice. These
rules will continue to apply unless and until there is additional guidance. Any future

contrary guidance will not apply to any instrument (i) issued to Treasury pursuant to the
Programs, or acquired by Treasury in an exchange described in Section III(G) of this
notice, prior to the publication of that guidance, or (ii) issued to Treasury pursuant to the
Programs, or acquired by Treasury in an exchange described in Section III(G) of this
notice, under a binding contract entered into prior to the publication of that guidance. In
exercising its authority under EESA in this notice, Treasury and the Service intend no
implication regarding the Federal income tax results that would obtain with respect to
instruments that are not specifically described in this notice. Accordingly, the Federal
income tax consequences of instruments not described in this notice continue to be
determined based upon the application of general principles of Federal tax law to the
specific facts and circumstances of each case.

V. EFFECT ON OTHER DOCUMENTS

This notice amplifies and supersedes Notice 2009-38, 2009-18 I.R.B. 901.

DRAFTING INFORMATION

The principal author of this notice is R ubin B. Ranat of the Office of Associate
Chief Counsel (Corporate). For further information regarding this notice, contact Rubin
B. Ranat at (202) 622-7530 (not a toll-free call).