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Keywords

corporation
corporation

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Garber Industries Holding Co., Inc. v. C.I.R., 124 T.C. No. 1, 124 T.C. 1, Tax Ct. Rep. (CCH) 55,901, Tax Ct. Rep. Dec. (RIA) 124.1

Facts

P, a closely held corporation, was the parent of an affiliated group that filed consolidated Federal income tax returns. In April 1998, A sold all of his shares in P to his brother B, resulting in B's percentage ownership of P increasing by more than 50 percentage points. P claimed a net operating loss (NOL) deduction of $808,935 for 1998, but the IRS determined that the transaction resulted in an ownership change under section 382, leading to a reduction of the NOL deduction to $121,258.

P, a closely held corporation, is the parent of an affiliated group that files consolidated Federal income tax returns. In April 1998, A sold all of his P shares to his brother, B. As a result of that sale, B's percentage ownership of P increased by more than 50 percentage points.

Issue

Whether a 1998 stock sale between siblings that increased one sibling's percentage ownership of the corporation by more than 50 percentage points resulted in an ownership change for purposes of section 382, triggering limitations on NOL carryovers.

The parties have settled all issues save one, leaving for our decision only the question of whether a 1998 stock sale between siblings that increased one sibling's percentage ownership of petitioner by more than 50 percentage points resulted in an ownership change for purposes of section 382, triggering that section's limitation on net operating loss (NOL) carryovers.

Rule

The family aggregation rule of section 382(1)(3)(A)(i) applies solely from the perspective of individuals who are shareholders of the loss corporation, meaning siblings are not aggregated for purposes of applying section 382 if none of their parents or grandparents is a shareholder.

Sec. 382(1)(3)(A) provides that, with certain exceptions, the constructive ownership rules of section 318 apply in determining stock ownership. Under the first of those exceptions, set forth in section 382(1)(3)(A)(i), the family attribution rules of section 318(a)(1) and (5)(B) do not apply; instead, an individual and all members of his family described in section 318(a)(1) are treated as one individual.

Analysis

The court analyzed the statutory language of section 382(1)(3)(A)(i) and determined that it does not support the aggregation of siblings as one individual for the purposes of NOL limitations. The court emphasized that the family aggregation rule is intended to apply only to immediate family members, such as spouses, children, grandchildren, and parents, and not to siblings. Therefore, the sale of shares between A and B constituted an ownership change under section 382.

Our own analysis of the legislative evolution of section 382(1)(3)(A)(i) leads us to believe that both parties have erroneously interpreted that provision. For the reasons discussed below, we conclude that Congress most likely intended the aggregation rule of section 382(1)(3)(A)(i) to apply solely from the perspective of individuals who are shareholders (as determined under the attribution rules of section 382(1)(3)(A)) of the loss corporation.

Conclusion

The court upheld the IRS's determination that the transaction resulted in an ownership change, affirming the reduction of P's NOL deduction. The decision was entered for the IRS.

We hold that the family aggregation rule of section 382(1)(3)(A)(i) applies solely from the perspective of individuals who are shareholders (as determined under the attribution rules of section 382(1)(3)(A)) of the loss corporation.

Who won?

IRS, because the court found that the transaction between the siblings resulted in an ownership change under section 382, which triggered limitations on the NOL deduction.

Decision for IRS.

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