Key Takeaway
On August 28, 2026, the Internal Revenue Service (the “Service”) released PLR 202635001 (the “Ruling”), which provides useful guidance on the procedures to establish “actual knowledge” for purposes of an ownership change analysis under section 382. The Ruling is significant because it allowed the taxpayer to use shareholder registers, public filings, questionnaires, and follow-up communications to identify overlapping public shareholders and apply the section 382 segregation rules where the loss corporation indirect ownership was not otherwise apparent. As a result, the loss corporation was permitted to account for the overlapping shareholders’ continuing ownership, which could reduce the ownership shift otherwise produced by the default segregation rules and, depending on the resulting computation, help avoid an ownership change and the corresponding limitation under section 382.
Relevant Factual Background
The taxpayer in the Ruling is a domestic corporation (“Taxpayer”) that serves as the common parent of a U.S. consolidated federal income tax group (the “Taxpayer Group”). The Taxpayer Group had significant consolidated net operating loss (“NOL”) carryforwards and therefore constituted a “loss corporation” within the meaning of section 382(k)(1).[1] Taxpayer was indirectly owned by a publicly traded foreign corporation (“Acquiring”) whose stock that was owned entirely by less-than-5-percent shareholders and therefore by a single public group for section 382 purposes.
Another publicly traded foreign corporation (“Seller”), owned Target. Acquiring acquired all the Target stock in exchange for newly issued Acquiring shares, which Seller distributed to its shareholders shortly after closing (the “Transaction”). Following the Transaction, former Seller shareholders owned a percentage of Acquiring.
Taxpayer believed that certain investors owned less than 5 percent of both Acquiring and Seller immediately before the Transaction and therefore could comprise an “Overlapping Public Group”. To identify these overlapping holders, Taxpayer reviewed shareholder registers, analyzed public securities filings, and obtained ownership information through shareholder questionnaires and follow-up communications.
In the Ruling request, Taxpayer requested the Service to rule on whether the ownership information obtained constituted “actual knowledge” and allowed the Overlapping Public Group to be taken into account separately in measuring the section 382 ownership shift resulting from the Transaction.
The Basics of Section 382 and Treas. Reg. § 1.382-2T(j)(2) and (k)(2)
Section 382 generally limits a company’s ability to use NOLs following an ownership change, which typically occurs when more than 50 percent of a corporation’s stock changes hands among five-percent shareholders over a specified testing period.[2]
A central feature of the section 382 ownership change rules is the treatment of public shareholders; that is, shareholders that own or are treated as owning less than 5 percent of the corporation’s stock. Because a publicly traded corporation generally cannot identify every beneficial owner of its stock, the regulations employ a series of aggregation and segregation presumptions designed to facilitate ownership tracking. Under Treas. Reg. § 1.382-2T(j)(2), certain transactions involving a loss corporation require the creation of separate public groups, even where the corporation lacks evidence that new investors have actually entered the ownership base.
The segregation rules generally apply to specified transactions, including certain reorganizations, stock issuances, public offerings, redemptions, and transactions involving rights to acquire stock. In these cases, a public group that acquires stock is generally treated as separate from the public group that held stock immediately before the transaction, and the regulations presume no overlap between the two groups absent actual knowledge to the contrary.[3]
The practical consequence of this rule is that ownership continuity may be disregarded even where substantial overlap exists among actual investors. For example, in a stock-for-stock acquisition involving two widely held public corporations, the regulations generally presume that the acquiring corporation’s public shareholders and the target corporation’s public shareholders are entirely distinct populations. As a result, the target’s historic public group and the acquiring shareholder group are treated as separate 5-percent shareholders for section 382 purposes, potentially increasing an ownership shift.
The policy rationale underlying the segregation rules is a workable construct that allows the ownership change computation to be completely without undue burden. Without such presumptions, publicly traded corporations would face substantial practical difficulties in tracking changes in beneficial ownership across thousands of investors. The regulations therefore substitute a series of mechanical assumptions for actual investor-level data. However, these same assumptions can occasionally produce results that diverge from economic reality when a meaningful number of investors hold and/or acquire interests in a loss corporation in multiple transactions.
Treas. Reg. § 1.382-2T(k)(2) operates as a limited corrective mechanism to the otherwise rigid segregation framework. The provision recognizes that, in certain circumstances, a loss corporation may possess information regarding its actual ownership that differs from the regulatory presumptions. To the extent the loss corporation has “actual knowledge” of stock ownership on a testing date or obtains such information before filing the tax return for the year containing the testing date, the corporation must take that information into account when determining whether an ownership change has occurred.
Most importantly for publicly traded corporations, Treas. Reg. § 1.382-2T(k)(2) permits the loss corporation to consider actual knowledge concerning ownership overlap between different public groups. Specifically, where the corporation has actual knowledge that members of one public group also own interests as members of another public group, the corporation may incorporate that overlap into its ownership change analysis.
This provision operates as a limited way to rebut the no-overlap presumption described in Treas. Reg. § 1.382-2T(j)(2)(iii)(B)(1). Where reliable evidence demonstrates that separate public groups have common members, the actual knowledge rule allows that presumption to be reflected in the ownership change analysis.
Key Service Determinations in the Ruling
The Service ruled favorably on three issues involving the taxpayer’s ability to identify overlapping ownership between two widely held public corporations. Collectively, the rulings allowed the taxpayer to move beyond the default public-group segregation presumptions and incorporate verified ownership information into its section 382 analysis.
The Service concluded that the taxpayer’s methodology for identifying overlapping shareholders constituted an acceptable means of establishing “actual knowledge” under Treas. Reg. § 1.382-2T(k)(2). The taxpayer relied on shareholder register data, public securities filings, and questionnaires distributed to significant investors believed to hold interests in both companies. Consistent with a prior ruling, PLR 202146003,[4] the Ruling provides additional insight into the type of evidence the Service will accept as actual knowledge of overlapping public-company ownership under Treas. Reg. § 1.382-2T(k)(2).
The Service further ruled that the taxpayer could use this actual knowledge to treat the overlapping shareholders as an additional indirect public group. As a result, the taxpayer was permitted to look through the default no-overlap presumption and account for the overlapping investors’ continuing economic interest in the loss corporation.
Finally, the Service ruled that the overlapping public group’s ownership increase would equal only the excess of its post-acquisition ownership over its pre-acquisition ownership. Rather than treating the overlapping investors as entirely new owners, the Ruling allowed the taxpayer to measure only their net ownership increase, producing an analysis more closely aligned with the economics of the transaction.
Key Takeaways and How We Help
Although private letter rulings apply only to the taxpayer to which they are issued and cannot be cited as precedent, this Ruling is an example of a way in which taxpayers can improve their tax positions (and gain assurance) through the private letter ruling process. In particular, through additional investigation and diligence the Taxpayer was able to overcome mechanical presumptions to preserve significant value associated with their NOLs and other tax attributes.
WilliamsMarston has significant technical expertise and regularly conducts detailed ownership analysis under section 382. Therefore, WilliamsMarston is well-positioned to help clients preserve valuable tax attributes, quantify ownership-change risk, and in the case of an ownership shift analysis, deploy strategies that achieve a more sensible result. If you are evaluating a transaction, restructuring, or other strategic alternative involving significant tax attributes, WilliamsMarston would welcome the opportunity to help navigate these issues and identify opportunities to maximize after-tax value.
[1] Unless otherwise indicated, all “section” references are to the Internal Revenue Code of 1986, as amended (the “Code”), and all “Treas. Reg.” references are to the Treasury regulations promulgated thereunder.
[2] Sections 382(a), (g).
[3] Treas. Reg. § 1.382-2T(j)(2)(iii)(A)
[4] June 1, 2026.
