How to Identify 5% Shareholders

kristin jones
SECTION 382 SOLUTIONS
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Analyzing the ownership of a loss corporation can be a tedious task, particularly if the corporation has multiple shareholders of different types and multiple classes of stock. 

There is no shortcut to the analysis, as any prudent tax practitioner would carefully gather the relevant documents and proceed with identifying individuals who are 5-percent shareholders, first-tier and higher-tier entities, and public groups.  In my opinion, this can be made much easier with visuals.

This example is taken from the Section 382 Regulations – 1.382-2T(g)(4).  This is example 1 illustrated.  The analysis would be as follows:

  • Shareholder A is a 5-percent shareholder of Loss Corp because he would own a 20% direct ownership interest.
  • Shareholder B is not a 5-percent shareholder of Loss Corp because she would own only 1.5% of Loss Corp (15% interest in P1 x 10% interest in Loss Corp). Instead Shareholder B is part of Public P1.
  • P1 and E are both first-tier entities because they each have a direct ownership interest of 5% or more in Loss Corp.
  • P2 and P3 each have a direct ownership interest in E, a first tier entity and are higher-tier entities.  Because neither P2 nor P3 are owned at any time by another higher-tier entity, they are also highest-tier entities.
  • The shareholders who are direct owners of Loss Corp but who own less than 5% of Loss Corp on an individual basis are a public group – Public Loss Corp.
  • The shareholders who are direct owners of P2 and P3 but who own less than 5% of P2 and P3 on an individual basis are a public group – Public P2 and Public P3.
section 382 loss company ownership

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