## Facts

- Garber Industries Holding Co., Inc. was a closely held corporation with stock primarily owned by two brothers, Charles M. Garber and Kenneth R. Garber, along with other family members.
- The corporation generated substantial net operating losses (NOLs) in multiple years and carried them forward under I.R.C. § 172; by 1997, its NOL carryforwards exceeded $20 million.
- In 1996, the corporation completed a reorganization that shifted ownership: Charles’s interest decreased to 19% and Kenneth’s increased to 65%, while other ownership interests remained unchanged.
- In April 1998, Kenneth and his wife sold all of their Garber Industries shares (65%) to Charles, increasing Charles’s ownership from 19% to 84%; no other shares changed hands that year.
- On its 1998 return, the corporation claimed an NOL carryover deduction of $808,935.
- After audit, the IRS determined the 1998 transaction caused an “ownership change” under I.R.C. § 382 and limited the allowable NOL deduction to about $121,258, resulting in a deficiency.
- The Tax Court upheld the IRS determination, and the corporation appealed.

## Issues

1. Whether the 1998 sale of 65% of the corporation’s stock from Kenneth (and his wife) to Charles caused an “ownership change” under I.R.C. § 382 that limited the corporation’s NOL carryforwards.
2. Whether § 382’s constructive ownership and family grouping rules permit aggregating siblings’ ownership interests, or otherwise permit attribution methods that would prevent finding an ownership change.

## Decision

- The Fifth Circuit affirmed the Tax Court.
- The court held the 1998 stock sale resulted in an “ownership change” under I.R.C. § 382.
- The court upheld the IRS’s limitation on the corporation’s NOL carryforwards and the resulting deficiency.

## Legal Principles

- An “ownership change” under I.R.C. § 382 occurs when, over the testing period, one or more 5-percent shareholders experience a cumulative increase of more than 50 percentage points compared to their lowest ownership during the period.
- Section 382 applies constructive ownership rules “similar to” I.R.C. § 318, but with statutory modifications, including a narrower family grouping rule.
- For § 382 family grouping, stock may be aggregated among an individual and specified relatives (including spouse, children, grandchildren, and parents); siblings are not included and therefore are not aggregated on that basis.
- The absence of § 318’s anti-double-attribution provision within § 382 does not authorize attribution schemes that expand § 382 beyond its specified family grouping model.
- Ownership-change analysis under § 382 focuses on shifts among 5-percent shareholders and does not allow indirect aggregation through a non-shareholder parent to treat siblings as a single economic unit.

## Conclusion

Because Charles’s ownership increased from 19% to 84% when he acquired Kenneth’s 65% block, and siblings could not be combined under § 382’s family grouping rule, the transaction produced a greater-than-50-percentage-point increase for a 5-percent shareholder and triggered § 382’s NOL limitation.


Garber Indus., Inc. v. Comm’r, 435 F.3d 555 (5th Cir. 2006)