26 U.S.C. § 384 — Limitation on use of preacquisition losses to offset built-in gains

(a) General rule. This section applies in two situations: (1)(A) a corporation directly or indirectly (through one or more other corporations) acquires control of another corporation, or (B) one corporation's assets are acquired by another corporation in certain reorganizations described in section 368(a)(1)(A), (C), or (D). If, in either situation, one of the corporations involved is a "gain corporation" — one with a net unrealized built-in gain — then income for a recognition-period taxable year that's attributable to recognized built-in gains cannot be offset by a "preacquisition loss," except a preacquisition loss belonging to the gain corporation itself. (b) Exception where corporations under common control. (1) This limitation does not apply to a corporation's preacquisition loss if that corporation and the gain corporation were part of the same controlled group at all times during the 5 years before the acquisition date. (2) "Controlled group" here means a controlled group of corporations as defined in section 1563(a), except: (A) "more than 50 percent" replaces "at least 80 percent" everywhere it appears; (B) the ownership test must be met for both voting power and value; and (C) section 1563(a)(4) is ignored. (3) If either corporation didn't exist for the full 5-year period, the shorter actual existence period (or the shorter of the two, if both are short) is used instead. (c) Definitions. (1) Recognized built-in gain means gain recognized during the recognition period on selling an asset, unless the gain corporation (or the acquiring corporation, in an asset-acquisition case) proves either that (i) it didn't hold the asset on the acquisition date, or (ii) the gain is more than the asset's fair market value on the acquisition date minus its adjusted basis then. Income items properly counted during the recognition period but earned before the acquisition date are also treated as recognized built-in gain, and count toward net unrealized built-in gain. The total recognized built-in gain for any one year can't exceed the net unrealized built-in gain, minus recognized built-in gains from earlier years that this section already blocked from being offset by preacquisition losses. (2) Acquisition date means the date control is acquired (in a stock acquisition) or the date of the transfer in the reorganization (in an asset acquisition). (3) Preacquisition loss means (A) any net operating loss carried forward to the year the acquisition date falls in, plus any net operating loss from that year that's allocable to the period before the acquisition date (allocated evenly across the days of the year, unless regulations say otherwise); and (B) for a corporation with a net unrealized built-in loss, any recognized built-in loss too. (4) Gain corporation means any corporation with a net unrealized built-in gain. (5) Control means stock ownership meeting the requirements of section 1504(a)(2). (6) Members of the same affiliated group right before the acquisition date are treated as one corporation, except as regulations provide and except for purposes of subsection (b). (7) Any reference to "a corporation" includes its predecessors and successors. (8) Except as regulations provide, "net unrealized built-in gain," "net unrealized built-in loss," "recognized built-in loss," "recognition period," and "recognition period taxable year" mean the same as in section 382(h), but using the acquisition date instead of the change date. (d) Limitation also to apply to excess credits or net capital losses. Rules like those in subsection (a) also apply to any "excess credit" (as defined in section 383(a)(2)) or net capital loss. (e) Ordering rules for net operating losses, etc. (1) If this section blocks a preacquisition loss from offsetting a recognized built-in gain, that gain is ignored when figuring, under section 172(b)(2), how much of the loss can carry to other years. The same rule applies to an excess credit or net capital loss limited under subsection (d). (2) If, for the same taxable year, a preacquisition loss is limited under subsection (a) but a net operating loss from that year is not, taxable income is treated as offset first by the loss that is limited. (f) Regulations. The Secretary must prescribe regulations needed to carry out this section, including rules to stop people from getting around it by using other provisions of law (including subchapter K) or by contributing property to a corporation.