LIMITATION ON USE OF GROUP LOSSES TO OFFSET INCOME OF SUBSIDIARY PAYING PREFERRED DIVIDENDS.

SEC. 7201. LIMITATION ON USE OF GROUP LOSSES TO OFFSET INCOME OF SUBSIDIARY PAYING PREFERRED DIVIDENDS. (a) General Rule.—Section 1503 (relating to computation and payment of tax) is amended by adding at the end thereof the following new subsection: “(f) Limitation on Use of Group Losses to Offset Income of Subsidiary Paying Preferred Dividends.— “(1) In general.—In the case of any subsidiary distributing during any taxable year dividends on any applicable preferred stock— “(A) no group loss item shall be allowed to reduce the disqualified separately computed income of such subsidiary for such taxable year, and “(B) no group credit item shall be allowed against the tax imposed by this chapter on such disqualified separately computed income. “(2) Group items.—For purposes of this subsection— “(A) Group loss item.—The term ‘group loss item’ means any of the following items of any other member of the affiliated group which includes the subsidiary: “(i) Any net operating loss and any net operating loss carryover or carryback under section 172. “(ii) Any loss from the sale or exchange of any capital asset and any capital loss carryover or carryback under section 1212. “(B) Group credit item.—The term ‘group credit item’ means any credit allowable under part IV of subchapter A of chapter 1 (other than section 34) to any other member of the affiliated group which includes the subsidiary and any carryover or carryback of any such credit. “(3) Other definitions.—For purposes of this subsection— “(A) Disqualified separately computed income.— The term ‘disqualified separately computed income’ means the portion of the separately computed taxable income of the subsidiary which does not exceed the dividends distributed by the subsidiary during the taxable year on applicable preferred stock. “(B) Separately computed taxable income.—The term ‘separately computed taxable income’ means the separate taxable income of the subsidiary for the taxable year determined— “(i) by taking into account gains and losses from the sale or exchange of a capital asset and section 1231 gains and losses, “(ii) without regard to any net operating loss or capital loss carryover or carryback, and 103 STAT. 2329 “(iii) with such adjustments as the Secretary may prescribe. “(C) Subsidiary.—The term ‘subsidiary’ means any corporation which is a member of an affiliated group filing a consolidated return other than the common parent. “(D) Applicable preferred stock.—The term ‘applicable preferred stock’ means stock described in section 1504(a)(4) in the subsidiary which is— “(i) issued after November 17, 1989, and “(ii) held by a person other than a member of the same affiliated group as the subsidiary. “(4) Regulations.—The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the provisions of this subsection, including regulations— “(A) to prevent the avoidance of this subsection through the transfer of built-in losses to the subsidiary, “(B) to provide rules for cases in which the subsidiary owns (directly or indirectly) stock in another member of the affiliated group, and “(C) to provide for the application of this subsection where dividends are not paid currently, where the redemption and liquidation rights of the applicable preferred stock exceed the issue price for such stock, or where the stock is otherwise structured to avoid the purposes of this subsection.” (b) Effective Dates.— (1) In general.—The amendment made by this section shall apply to taxable years ending after November 17, 1989. (2) Binding contract exception.—For purposes of section 1503(f)(3)(D) of the Internal Revenue Code of 1986, stock issued after November 17, 1989, pursuant to a written binding contract in effect on November 17, 1989, and at all times thereafter before such issuance, shall be treated as issued on November 17, 1989. (3) Special rule when subsidiary leaves group.—If, by reason of a transaction after November 17, 1989, a corporation ceases to be, or becomes, a member of an affiliated group, the stock of such corporation shall be treated, for purposes of section 1503(f)(3)(D) of such Code, as issued on the date of such cessation or commencement, unless such transaction is of a kind which would not result in the recognition of any deferred intercompany gain under the consolidated return regulations by reason of the acquisition of the entire group. (4) Retired stock.— (A) Except as provided in subparagraph (B), if stock issued before November 18, 1989, (or described in paragraph (2)), is retired or acquired after November 17, 1989, by the corporation or another member of the same affiliated group, such stock shall be treated, for purposes of section 1503(f)(3)(D) of such Code, as issued on the date of such retirement or acquisition. (B) Subparagraph (A) shall not apply to any retirement or acquisition pursuant to an obligation to reissue under a binding written contract in effect on November 17, 1989, and at all times thereafter before such retirement or acquisition. 103 STAT. 2330 (5) Auction rate preferred.—For purposes of section 1503(f)(3)(D) of such Code, auction rate preferred stock shall be treated as issued when the contract requiring the auction became binding. (6) Special rule for certain auction rate preferred.—For purposes of section 1503(0(3)(0) of the Internal Revenue Code of 1986, any auction rate preferred stock shall be treated as issued before November 18, 1989, if— (A) a subsidiary was incorporated before July 10, 1989 for the special purpose of issuing such stock, (B) a rating agency was retained before July 10, 1989, and (C) such stock is issued before the date 30 days after the date of the enactment of this Act.