The IRS on October 21 issued final regulations (T.D. 9638) under Section 382 on application of the segregation rules to small shareholders. The final regulations are intended to ease the administrative burden and complexity of the segregation rules for loss corporations with small shareholders.
The final regulations provide three new taxpayer-favorable exceptions to the current segregation rules for small shareholders:
- the secondary transfer exception,
- the small redemption exception, and
- the general exception to the segregation rules for five-percent entities.
The final regulations adopt the proposed regulations (REG-149625-10) published on November 23, 2011, with certain amendments, and are generally effective for testing dates on or after October 22, 2013. Taxpayers have the option to apply the regulations to earlier testing dates (subject to specific restrictions discussed below, including that the final regulations neither create nor eliminate an ownership change).