LIMITATION ON USE OF PREACQUISITION LOSSES TO OFFSET BUILT-IN GAINS.

SEC. 10226. LIMITATION ON USE OF PREACQUISITION LOSSES TO OFFSET BUILT-IN GAINS. (a) General Rule.— Part V of subchapter C of chapter 1 (relating to carryovers) is amended by adding at the end thereof the following new section: “SEC. 384. LIMITATION ON USE OF PREACQUISITION LOSSES TO OFFSET BUILT-IN GAINS. “(a) General Rule.— “(1) Stock acquisitions, etc.— If— “(A) a corporation (hereinafter in this section referred to as the ‘gain corporation’) becomes a member of an affiliated group, and “(B) such corporation has a net unrealized built-in gain, the income of such corporation for any recognition period taxable year (to the extent attributable to recognized built-in gains) shall not be offset by any preacquisition loss of any other member of such group. “(2) Asset acquisitions.— If— “(A) the assets of a corporation (hereinafter in this section referred to as the ‘gain corporation’) are acquired by another corporation— “(i) in a liquidation to which section 332 applies, or “(ii) in a reorganization described in subparagraph (A), (C), or (D) of section 368(a)(1), and “(B) the gain corporation has a net unrealized built-in gain, the income of the acquiring corporation for any recognition period taxable year (to the extent attributable to recognized built-in gains of the gain corporation) shall not be offset by any preacquisition loss of any corporation (other than the gain corporation). “(b) Exception Where 50 Percent of Gain Corporation Held.— 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. “(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)(2), 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. 101 STAT. 1330–415 “(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 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. “(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) 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) 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 the gain corporation.” (b) Clerical Amendment.— The table of sections for part V of subchapter C of chapter 1 is amended by adding at the end thereof the following new item: 101 STAT. 1330–416 “Sec. 384. Limitation on use of preacquisition losses to offset built-in gains.” (c) Effective Date.— The amendments made by 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.