An IRS internal legal memorandum (ILM 201432015) released Aug. 8 came to a favorable conclusion for startup companies with Section 382 concerns.
Under the facts of the ILM, a corporation had incurred net operating losses since it was formed. Before it commenced business operations and related to various agreements connected with the formation of the company, the taxpayer corporation issued stock on three discrete dates. The ILM states that if the three dates were treated distinctly, a later issuance date would be a Section 382 ownership change date. However, the company argued that the first three dates should be integrated, because they were part of the initial capitalization of the company. This integration would have prevented the later issuance date from being a Section 382 ownership change date.
The ILM agreed with the taxpayer. In particular, the analysis posited that if a startup company had two issuances two months apart that were part of a company's initial capitalization and prior to the start of business activity, the purpose of Section 382 (to avoid loss trafficking) is not served by treating the two issuances as separate testing dates.
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