26 USC 384 - Limitation on use of preacquisition losses to offset built-in gains

U.S Code last checked for updates: May 10, 2024

§ 384.

Limitation on use of preacquisition losses to offset built-in gains

(a)

General rule

If—

(1)

(A)

a corporation acquires directly (or through 1 or more other corporations) control of another corporation, or

(B)

the assets of a corporation are acquired by another corporation in a reorganization described in subparagraph (A), (C), or (D) of section 368(a)(1), and

(2)

either of such corporations is a gain corporation,

income for any recognition period taxable year (to the extent attributable to recognized built-in gains) shall not be offset by any preacquisition loss (other than a preacquisition loss of the gain corporation).

(b)

Exception where corporations under common control

(1)

In general

(2)

Controlled group

For purposes of this subsection, the term “controlled group” means a controlled group of corporations (as defined in section 1563(a)); except that—

(A)

“more than 50 percent” shall be substituted for “at least 80 percent” each place it appears,

(B)

the ownership requirements of section 1563(a) must be met both with respect to voting power and value, and

(C)

the determination shall be made without regard to subsection (a)(4) of section 1563.

(3)

Shorter period where corporations not in existence for 5 years

(c)

Definitions

For purposes of this section—

(1)

Recognized built-in gain

(A)

In general

The term “recognized built-in gain” means any gain recognized during the recognition period on the disposition of any asset except to the extent the gain corporation (or, in any case described in subsection (a)(1)(B), the acquiring corporation) establishes that—

(i)

such asset was not held by the gain corporation on the acquisition date, or

(ii)

such gain exceeds the excess (if any) of—

(I)

the fair market value of such asset on the acquisition date, over

(II)

the adjusted basis of such asset on such date.

(B)

Treatment of certain income items

(C)

Limitation

The amount of the recognized built-in gains for any recognition period taxable year shall not exceed—

(i)

the net unrealized built-in gain, reduced by

(ii)

the recognized built-in gains for prior years ending in the recognition period which (but for this section) would have been offset by preacquisition losses.

(2)

Acquisition date

The term “acquisition date” means—

(A)

in any case described in subsection (a)(1)(A), the date on which the acquisition of control occurs, or

(B)

in any case described in subsection (a)(1)(B), the date of the transfer in the reorganization.

(3)

Preacquisition loss

(A)

In general

The term “preacquisition loss” means—

(i)

any net operating loss carryforward to the taxable year in which the acquisition date occurs, and

(ii)

any net operating loss for the taxable year in which the acquisition date occurs to the extent such loss is allocable to the period in such year on or before the acquisition date.

Except as provided in regulations, the net operating loss shall, for purposes of clause (ii), be allocated ratably to each day in the year.

(B)

Treatment of recognized built-in loss

(4)

Gain corporation

(5)

Control

(6)

Treatment of members of same group

(7)

Treatment of predecessors and successors

(8)

Other definitions

(d)

Limitation also to apply to excess credits or net capital losses

(e)

Ordering rules for net operating losses, etc.

(1)

Carryover rules

(2)

Ordering rule for losses carried from same taxable year

In any case in which—

(A)

a preacquisition loss for any taxable year is subject to limitation under subsection (a), and

(B)

a net operating loss from such taxable year is not subject to such limitation,

taxable income shall be treated as having been offset 1st by the loss subject to such limitation.

(f)

Regulations

The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section, including regulations to ensure that the purposes of this section may not be circumvented through—

(1)

the use of any provision of law or regulations (including subchapter K of this chapter), or

(2)

contributions of property to a corporation.

(Added Pub. L. 100–203, title X, § 10226(a), Dec. 22, 1987, 101 Stat. 1330–414; amended Pub. L. 100–647, title II, § 2004(m)(1)–(4), Nov. 10, 1988, 102 Stat. 3606, 3607; Pub. L. 101–239, title VII, § 7812(c)(1), Dec. 19, 1989, 103 Stat. 2412.)

cite as: 26 USC 384