
From the U.S. Code Online via GPO Access
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[Laws in effect as of January 2, 2001]
[Document not affected by Public Laws enacted between
  January 2, 2001 and January 28, 2002]
[CITE: 26USC384]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
          Subchapter C--Corporate Distributions and Adjustments
 
                           PART V--CARRYOVERS
 
Sec. 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

        Subsection (a) shall not apply to the preacquisition loss of any 
    corporation if such corporation and the gain corporation were 
    members of the same controlled group at all times during the 5-year 
    period ending on the acquisition date.

                        (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

        If either of the corporations referred to in paragraph (1) was 
    not in existence throughout the 5-year period referred to in 
    paragraph (1), the period during which such corporation was in 
    existence (or if both, the shorter of such periods) shall be 
    substituted for such 5-year period.

(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

            Any item of income which is properly taken into account for 
        any recognition period taxable year but which is attributable to 
        periods before the acquisition date shall be treated as a 
        recognized built-in gain for the taxable year in which it is 
        properly taken into account and shall be taken into account in 
        determining the amount of the net unrealized built-in gain.

        (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

            In the case of a corporation with a net unrealized built-in 
        loss, the term ``preacquisition loss'' includes any recognized 
        built-in loss.

                        (4) Gain corporation

        The term ``gain corporation'' means any corporation with a net 
    unrealized built-in gain.

                             (5) Control

        The term ``control'' means ownership of stock in a corporation 
    which meets the requirements of section 1504(a)(2).

               (6) Treatment of members of same group

        Except as provided in regulations and except for purposes of 
    subsection (b), all corporations which are members of the same 
    affiliated group immediately before the acquisition date shall be 
    treated as 1 corporation. To the extent provided in regulations, 
    section 1504 shall be applied without regard to subsection (b) 
    thereof for purposes of the preceding sentence.

            (7) Treatment of predecessors and successors

        Any reference in this section to a corporation shall include a 
    reference to any predecessor or successor thereof.

                        (8) Other definitions

        Except as provided in regulations, the terms ``net unrealized 
    built-in gain'', ``net unrealized built-in loss'', ``recognized 
    built-in loss'', ``recognition period'', and ``recognition period 
    taxable year'', have the same respective meanings as when used in 
    section 382(h), except that the acquisition date shall be taken into 
    account in lieu of the change date.

(d) Limitation also to apply to excess credits or net capital losses

    Rules similar to the rules of subsection (a) shall also apply in the 
case of any excess credit (as defined in section 383(a)(2)) or net 
capital loss.

(e) Ordering rules for net operating losses, etc.

                         (1) Carryover rules

        If any preacquisition loss may not offset a recognized built-in 
    gain by reason of this section, such gain shall not be taken into 
    account in determining under section 172(b)(2) the amount of such 
    loss which may be carried to other taxable years. A similar rule 
    shall apply in the case of any excess credit or net capital loss 
    limited by reason of subsection (d).

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


                               Amendments

    1989--Subsec. (e)(1). Pub. L. 101-239 substituted ``built-in gain'' 
for ``build-in gain''.
    1988--Subsec. (a). Pub. L. 100-647, Sec. 2004(m)(1)(A), amended 
subsec. (a) generally, making changes in substance and structure.
    Subsec. (b). Pub. L. 100-647, Sec. 2004(m)(3), substituted 
``corporations under common control'' for ``50 percent of gain 
corporation held'' in heading and amended text generally. Prior to 
amendment, text read as follows: ``Subsection (a) shall not apply if 
more than 50 percent of the stock (by vote and value) of the gain 
corporation was held throughout the 5-year period ending on the 
acquisition date--
        ``(1) in any case described in subsection (a)(1), by members of 
    the affiliated group referred to in subsection (a)(1), or
        ``(2) in any case described in subsection (a)(2), by the 
    acquiring corporation or members of such acquiring corporation's 
    affiliated group.
For purposes of the preceding sentence, stock described in section 
1504(a)(4) shall not be taken into account.''
    Subsec. (c)(1)(A). Pub. L. 100-647, Sec. 2004(m)(1)(D), substituted 
``subsection (a)(1)(B)'' for ``subsection (a)(2)''.
    Subsec. (c)(2). Pub. L. 100-647, Sec. 2004(m)(1)(C), amended par. 
(2) generally. Prior to amendment, par. (2) read as follows: ``The term 
`acquisition date' means the date on which the gain corporation becomes 
a member of the affiliated group or, in any case described in subsection 
(a)(2), the date of the distribution or transfer in the liquidation or 
reorganization.''
    Subsec. (c)(4) to (8). Pub. L. 100-647, Sec. 2004(m)(1)(B), 
redesignated par. (4) as (8) and added pars. (4) to (7).
    Subsecs. (e), (f). Pub. L. 100-647, Sec. 2004(m)(2), (4), 
substituted ``a corporation'' for ``the gain corporation'' in subsec. 
(e)(2), redesignated subsec. (e) as (f), and added subsec. (e).


                    Effective Date of 1989 Amendment

    Amendment by Pub. L. 101-239 effective, except as otherwise 
provided, as if included in the provision of the Technical and 
Miscellaneous Revenue Act of 1988, Pub. L. 100-647, to which such 
amendment relates, see section 7817 of Pub. L. 101-239, set out as a 
note under section 1 of this title.


                    Effective Date of 1988 Amendment

    Amendment by Pub. L. 100-647 effective, except as otherwise 
provided, as if included in the provisions of the Revenue Act of 1987, 
Pub. L. 100-203, title X, to which such amendment relates, see section 
2004(u) of Pub. L. 100-647, set out as a note under section 56 of this 
title.


                             Effective Date

    Section 10226(c) of Pub. L. 100-203 provided that: ``The amendments 
made by this section [enacting this section] shall apply in cases where 
the acquisition date (as defined in section 384(c)(2) of the Internal 
Revenue Code of 1986 as added by this section) is after December 15, 
1987; except that such amendments shall not apply in the case of any 
transaction pursuant to--
        ``(1) a binding written contract in effect on or before December 
    15, 1987, or
        ``(2) a letter of intent or agreement of merger signed on or 
    before December 15, 1987.''


        Election To Have Amendments by Pub. L. 100-647 Not Apply

    Section 2004(m)(5) of Pub. L. 100-647 provided that: ``In any case 
where the acquisition date (as defined in section 384(c)(2) of the 1986 
Code as amended by this subsection) is before March 31, 1988, the 
acquiring corporation may elect to have the amendments made by this 
subsection not apply. Such an election shall be made in such manner as 
the Secretary of the Treasury or his delegate shall prescribe and shall 
be made not later than the later of the due date (including extensions) 
for filing the return for the taxable year of the acquiring corporation 
in which the acquisition date occurs or the date 120 days after the date 
of the enactment of this Act [Nov. 10, 1989]. Such an election, once 
made, shall be irrevocable.''
