LIMITATIONS ON REFUNDS DUE TO NET OPERATING LOSS CARRYBACKS OR EXCESS INTEREST ALLOCABLE TO CORPORATE EQUITY REDUCTION TRANSACTIONS.

SEC. 7211. LIMITATIONS ON REFUNDS DUE TO NET OPERATING LOSS CARRYBACKS OR EXCESS INTEREST ALLOCABLE TO CORPORATE EQUITY REDUCTION TRANSACTIONS. (a) In General.—Paragraph (1) of section 172(b) (relating to years to which loss may be carried) is amended by adding at the end thereof the following new subparagraph: “(M) Excess interest loss.— “(i) In general.—If— “(I) there is a corporate equity reduction transaction, and “(II) an applicable corporation has a corporate equity reduction interest loss for any loss limitation year ending after August 2, 1989, then the corporate equity reduction interest loss shall be a net operating loss carryback and carryover to the taxable years described in subparagraphs (A) and (B), except that such loss shall not be carried back to a taxable year preceding the taxable year in which the corporate equity reduction transaction occurs. “(ii) Loss limitation year.—For purposes of clause (i) and subsection (m), the term ‘loss limitation year’ means, with respect to any corporate equity reduction transaction, the taxable year in which such transaction occurs and each of the 2 succeeding taxable years. 103 STAT. 2343 “(iii) Applicable corporation.—For purposes of clause (i), the term ‘applicable corporation means a C corporation— “(I) which acquires stock, or the stock of which is acquired, in a major stock acquisition, “(II) a corporation making distributions with respect to, or redeeming, its stock in connection with an excess distribution, or “(III) any successor corporation of a corporation described in subclause (I) or (II). “(iv) Other definitions.— “For definitions of terms used in this subparagraph, see subsection (m).” (b) Corporate Equity Reduction Interest Loans and Corporate Equity Reduction Transaction Defined.—Section 172 is amended by redesignating subsection (m) as subsection (n) and by inserting after subsection (l) the following new subsection: “(m) Corporate Equity Reduction Interest Losses.—For purposes of this section— “(1) In general.—The term ‘corporate equity reduction interest loss’ means, with respect to any loss limitation year, the excess (if any) of— “(A) the net operating loss for such taxable year, over “(B) the net operating loss for such taxable year determined without regard to any allocable interest deductions otherwise taken into account in computing such loss. “(2) Allocable interest deductions.— “(A) In general.—The term ‘allocable interest deductions’ means deductions allowed under this chapter for interest on the portion of any indebtedness allocable to a corporate equity reduction transaction. “(B) Method of allocation.—Except as provided in regulations and subparagraph (E), indebtedness shall be allocated to a corporate equity reduction transaction in the manner prescribed under clause (ii) of section 263A(f)(2)(A) (without regard to clause (i) thereof). “(C) Allocable deductions not to exceed interest increases.—Allocable interest deductions for any loss limitation year shall not exceed the excess (if any) of— “(i) the amount allowable as a deduction for interest paid or accrued by the taxpayer during the loss limitation year, over “(ii) the average of such amounts for the 3 taxable years preceding the taxable year in which the corporate equity reduction transaction occurred. “(D) De minimis rule.—A taxpayer shall be treated as having no allocable interest deductions for any taxable year if the amount of such deductions (without regard to this subparagraph) is less than $1,000,000. “(E) Special rule for certain unforeseeable events.—If an unforeseeable extraordinary adverse event occurs during a loss limitation year but after the corporate equity reduction transaction— “(i) indebtedness shall be allocated in the manner described in subparagraph (B) to unreimbursed costs paid or incurred in connection with such event before 103 STAT. 2344being allocated to the corporate equity reduction transaction, and “(ii) the amount determined under subparagraph (C)(i) shall be reduced by the amount of interest on indebtedness described in clause (i). “(F) Transition rule.—If any of the 3 taxable years described in subparagraph (C)(ii) end on or before August 2, 1989, the taxpayer may substitute for the amount determined under such subparagraph an amount equal to the interest paid or accrued (determined on an annualized basis) during the taxpayer’s taxable year which includes August 3, 1989, on indebtedness of the taxpayer outstanding on August 2, 1989. “(3) Corporate equity reduction transaction.— “(A) In general.—The term ‘corporate equity reduction transaction’ means— “(i) a major stock acquisition, or “(ii) an excess distribution. “(B) Major stock acquisition.— “(i) In general.—The term ‘major stock acquisition’ means the acquisition by a corporation pursuant to a plan of such corporation (or any group of persons acting in concert with such corporation) of stock in another corporation representing 50 percent or more (by vote or value) of the stock in such other corporation, “(ii) Exceptions.—The term ‘major stock acquisition’ shall not include— “(I) a qualified stock purchase (within the meaning of section 338) to which an election under section 338 applies, or “(II) except as provided in regulations, an acquisition in which a corporation acquires stock of another corporation which, immediately before the acquisition, was a member of an affiliated group (within the meaning of section 1504(a)) other than the common parent of such group. “(C) Excess distribution.—The term ‘excess distribution’ means the excess (if any) of— “(i) the aggregate distributions (including redemptions) made during a taxable year by a corporation with respect to its stock, over “(ii) the greater of— “(I) 150 percent of the average of such distributions during the 3 taxable years immediately preceding such taxable year, or “(II) 10 percent of the fair market value of the stock of such corporation as of the beginning of such taxable year. “(D) Rules for applying subparagraph (b).—For purposes of subparagraph (B)— “(i) Plans to acquire stock.—All plans referred to in subparagraph (B) by any corporation (or group of persons acting in concert with such corporation) with respect to another corporation shall be treated as 1 plan. 103 STAT. 2345 “(ii) Acquisitions during 24-month period.—All acquisitions during any 24-month period shall be treated as pursuant to I plan. “(E) Rules for applying subparagraph (C).—For purposes of subparagraph (C)— “(i) Certain preferred stock disregarded.—Stock described in section 1504(a)(4), and distributions (including redemptions) with respect to such stock, shall be disregarded. “(ii) Issuance of stock.—The amounts determined under clauses (i) and (ii)(i) of subparagraph (C) shall be reduced by the aggregate amount of stock issued by the corporation during the applicable period in exchange for money or property other than stock in the corporation. “(4) Other rules.— “(A) Ordering rule.—For purposes of paragraph (1), in determining the allocable interest deductions taken into account in computing the net operating loss for any taxable year, taxable income for such taxable year shall be treated as having been computed by taking allocable interest deductions into account after all other deductions. “(B) Coordination with subsection (b)(2).—In applying paragraph (2) of subsection (b), the corporate equity reduction interest loss shall be treated in a manner similar to the manner in which a foreign expropriation loss is treated. “(C) Members of affiliated groups.—Except as provided by regulations, all members of an affiliated group filing a consolidated return under section 1501 shall be treated as 1 taxpayer for purposes of this subsection and subsection (b)(1)(M). “(5) Regulations.—The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this subsection, including regulations— “(A) for applying this subsection to successor corporations and in cases where a taxpayer becomes, or ceases to be, a member of an affiliated group filing a consolidated return under section 1501, “(B) to prevent the avoidance of this subsection through related parties, pass-through entities, and intermediaries, and “(C) for applying this subsection where more than 1 corporation is involved in a corporate equity reduction transaction. (c) Effective Date.— (1) In general.—Except as provided in this subsection, the amendments made by this section shall apply to corporate equity reduction transactions occurring after August 2, 1989, in taxable years ending after August 2, 1989. (2) Exceptions.—In determining whether a corporate equity reduction transaction has occurred after August 2, 1989, there shall not be taken into account— (A) acquisitions or redemptions of stock, or distributions with respect to stock, occurring on or before August 2, 1989, (B) acquisitions or redemptions of stock after August 2, 1989, pursuant to a binding written contract (or tender offer filed with the Securities and Exchange Commission) in 103 STAT. 2346effect on August 2, 1989, and at all times thereafter before such acquisition or redemption, or (C) any distribution with respect to stock after August 2, 1989, which was declared on or before August 2, 1989. Any distribution to which the preceding sentence applies shall be taken into account under section 172(m)(3)(C)(ii)(I) of the Internal Revenue Code of 1986 (relating to base period for distributions).