Wrong order of events can lead to Sec. 382 problems in an otherwise simple transaction.

Example: Loss corporation X is owned equally by two shareholders, A and B. The shareholders plan to have A's shares redeemed and to sell half of B's shares to a new investor, C. If the redemption does not either precede or occur on the same day as C's acquisition of shares from B, this apparently simple plan will trigger an ownership change and limit the corporation's use of its net operating loss (NOL).

Sec. 382(g) provides that an ownership change will occur if one or more 5% shareholders increase their ownership of stock of a corporation by more than 50 percentage points over their lowest percent owned during the three-year period ending on the date of the increase. If A's stock is redeemed before the sale of B shares to C, B's ownership will increase from 50% to 100%. The increase will only be 50 percentage points (from 50 to 100) over B's lowest ownership during the three-year testing period. Because an ownership change is only triggered by a "more than 50 Percentage point increase" (emphasis added). there will be no ownership change as a result of the redemption. Similarly, on a later date, when B sells half of his stock to C, C will have an increase in ownership of exactly 50 percentage points; again, no ownership change will be triggered. (Note that on this second testing date B will own 50% of X (no increase over B's lowest ownership during the three-year testing period), and thus B's earlier increase in ownership from 50% to 100% is disregarded in computing the total increase in ownership as of the second testing date.)

With a minor alteration in the order of events, however, the outcome changes. If B were to sell half of his stock to C before the redemption, B would have a lowest ownership during the testing period of 25%. Thus, when A's stock is later redeemed, causing B's ownership to increase from 25% to 50%, B will have increased his ownership by 25 percentage points over his lowest ownership during the testing period. The redemption of A's stock will also cause C to own 50%, and C will have increased her ownership by 50 percentage points over her lowest ownership during the testing period (0%). These two increases will total 75 percentage points and will therefore trigger an ownership change.

If the redemption occurred after the sale but on the same day as the sale, there would be no ownership change; Temp. Regs. Sec. 1.382-2T(a)(2)(i)(B) provides that all computations of increases in percentage ownership are to be made as of the close of the testing date. In other words, a new lowest percentage owned is disregarded if it has been reversed as of the end of the day in which it occurred. Thus, if the redemption of A's shares occurred on the same day as the sale of B's stock to C, B's lowest ownership would be 50%, and not 25%, and the total percentage point increase would be 50, rather than 75.

As this analysis demonstrates, the order of events matters in Sec. 382 transactions. In addition to tracking increases in ownership, planners must take care to monitor the lowest percentage owned by 5% shareholders during the testing period.