ADDITIONAL NET OPERATING LOSS CARRYOVER YEARS; LIMITATIONS ON NET OPERATING LOSS CARRYOVERS.

SEC. 806. ADDITIONAL NET OPERATING LOSS CARRYOVER YEARS; LIMITATIONS ON NET OPERATING LOSS CARRYOVERS. (a) In General.— Section 172(b)(1)(B), as amended by section 1606(b) of this Act, is amended by adding at the end thereof the following new sentence: “Except as provided in subparagraphs (C), (D), (E), and (F), a net operating loss for any taxable year ending after December 31, 1975, shall be a net operating loss carryover to each of the 7 taxable years following the taxable year of such loss.” (b) Regulated Transportation Corporations.— (1) In general.— Section 172(b)(1)(C) is amended by adding at the end thereof the following new sentence: “For any taxable year ending after December 31, 1975, the preceding sentence shall be applied by substituting ‘9 taxable years’ for ‘7 taxable years’.” (2) Conforming amendment.— Paragraph (3) of section 172 (g), as amended by section 1901(a)(29) of this Act, is amended— (A) by striking “and” at the end of subparagraph (A); (B) by striking the period at the end of subparagraph (B) and inserting in lieu thereof “; and”; and (C) by adding at the end thereof the following new subparagraph: “(C) in the ease of a net operating loss carryover from a loss year ending after December 31, 1975, subparagraphs (A) and (B) shall be applied by substituting ‘8th taxable year’ for the ‘6th taxable year’ and ‘9th taxable year’ for ‘7th taxable year.’” (c) Election to Forego Carryback Period.— Section 172 (b)(3), as amended by section 1001(a)(29) of this Act, is amended by adding at the end thereof the following new subparagraph: “(E) Any taxpayer entitled to a carryback period under paragraph (1) may elect to relinquish the entire carryback period with respect to a net operating loss for any taxable year ending after December 31, 1975. Such election shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including extensions of time) for filing the taxpayer’s return for the taxable year of the net operating loss for which the election is to be in effect. Such election, once made for any taxable year, shall be irrevocable for that taxable year.” (d) Insurance Companies.— (1) Life insurance companies.— (A) In general.— Paragraph (1) of section 812(b) is amended by adding at the end thereof the following new sentence: “In the case of an operations loss for any taxable year ending after December 31, 1975, this paragraph shall be applied by substituting ‘7 taxable years’ for ‘5 taxable year’s’.” (B) Election to forego carryback periods.— Section 812(b) is amended by adding at the end thereof the following new paragraph: (3) Election for operations loss carrybacks.— In the case, of a loss from operations for any taxable year ending after December 31, 1975, the taxpayer may elect to relinquish the entire carry-90 STAT. 1599back period for such loss. Such election shall be made by the due date (including extensions of tune) for filing the return for the taxable year of the loss from operations for which the election is to be in effect, and once made for any taxable year, such election shall be irrevocable for that taxable year.” (2) Mutual insurance companies.— (A) In general.— Section 825(d) is amended to read as follows: “(d) Years to Which Carried.— “(1) In general.— The unused loss for any taxable year shall be— “(A) an unused loss carryback to each of the 3 taxable years preceding the loss year, and “(B) an unused loss carryover to each of the 5 taxable years following the loss year. In the case of an unused loss for a taxable year ending after December 31, 1975, such unused loss shall be an unused loss carryover to each of the 7 taxable years following the loss year. “(2) Election for unused loss carrybacks.— In the case of an unused loss for any taxable year ending after December 31, 1975, the taxpayer may elect to relinquish the entire carryback period for such loss. Such election shall be made by the due date (including extensions of time) for filing the return for the taxable year of the unused loss for which the election is to be in effect, and once made for any taxable year, such election shall be irrevocable for that taxable year.” (e) Amendment of Section 382.— Section 382 (relating to special limitations on net operating loss carryovers) is hereby amended to read as follows: “SEC. 382. SPECIAL LIMITATIONS ON NET OPERATING LOSS CARRY-OVER. “(a) Certain Acquisitions of Stock of a Corporation.— “(1) In general.— If— “(A) on the last day of a taxable year of a corporation, “(B) any one or more of the persons described in paragraph (4)(B) own, directly or indirectly, a percentage of the total fair market value of the participating stock or of all the stock of the corporation which exceeds by more than 60 percentage points the percentage of such stock owned by such person or persons at— “(i) the beginning of such taxable year, or “(ii) the beginning of the first, or second preceding taxable year, and “(C) such increase in percentage points is attributable to— “(i) a purchase by such person or persons of such stock, or of the stock of another corporation owning stock in such corporation, or of an interest in a partnership or trust owning stock in such corporation, “(ii) an acquisition (by contribution, merger, or consolidation) of an interest in a partnership owning stock in such corporation, or an acquisition (by contribution, merger, or consolidation) by a partnership of such stock, “(iii) an exchange to which section 351 (relating to transfer to corporation controlled by transferor) applies, or an acquisition by a corporation of such stock in an exchange in which section 351 applies to the transferor, 90 STAT. 1600 “(iv) a contribution to the capita] of such corporation, “(v) a decrease in the amount of such stock outstanding or in the amount of stock outstanding of another corporation owning stock in such corporation (except a decrease resulting from a redemption to pay death taxes to which section 303 applies), “(vi) a liquidation of the interest of a partner in a partnership owning stock in such corporation, or “(vii) any combination of the transactions described in clauses (i) through (vi), then the net Operating loss carryover, if any, from such taxable year and the net operating loss carryovers, if any, from prior taxable years to such taxable year and subsequent taxable years of such corporation shall be reduced by the percentage determined under paragraph (2), “(2) Reduction or net operating loss carryover.— The reduction applicable under paragraph (1) shall be the sum of the percentages determined by multiplying— “(A) by three and one-half the increase in percentage points (including fractions thereof) in excess of 60 and up to and including 80, and “(B) by one and one-half the increase in percentage points (including fractions thereof) in excess of 80. The reduction under this paragraph shall be determined by reference to the increase in percentage points of the total fair market value of the participating stock or of all the stock, whichever increase is greater. “(3) Minimum ownership rule.— Notwithstanding the provisions of paragraph (1), a net operating loss carryover from a taxable year shall not be reduced under this subsection if, at all times during the last half of such taxable year, any of the persons described in paragraph (4)(B)(determined on the last day of the taxable year referred to in paragraph (1)(A)) owned at least 40 percent of the total fair market value of the participating stools and of all the stock of the corporation. For purposes of the preceding sentence, persons owning stock of a corporation on the last day of its first taxable year shall be considered to have owned such stock at all times during the last half of such first taxable year. “(4) Operating rules.— For purposes of this subsection— “(A) Definition of purchase.— The term ‘purchase’ means an acquisition of stock the basis of which is determined by reference to its cost to the holder thereof. “(B) Description of person or persons.— The person or persons referred to in paragraph (1)(B) shall be the 15 persons (or such lesser number as there are persons owning the stock on the last day of the taxable year) who own the greatest percentage of the total fail’ market value of all the stock on the last day of that year, except that if any other person owns the same percentage of such stock at such time as is owned by one of the 15 persons, that other person shall also be included. If any of the persons are so related that the stock owned by one is attributed to the other under the rules specified in subparagraph (C), such persons shall be considered as only one person solely for the purpose of selecting the 15 persons (more or less) who own the greatest percentage of the total fair market value of all the stock. 90 STAT. 1601 “(C) Constructive ownership.— Section 318 (relating to constructive ownership of stock) shall apply in determining the ownership of stock, except that section 318(a)(2)(C) and 318(a)(3)(C) shall be applied without regard to the 50 percent limitation contained therein. “(D) Short taxable tears.— If one of the taxable years of the corporation referred to in paragraph (1)(B) is a short taxable year, then such paragraph and paragraph (6) shall be applied by substituting ‘first, second, or third’ for ‘first or second’ each time, such phrase occurs. “(5) Exceptions.— This subsection shall not apply to a purchase or other acquisition of stock (or of an interest in a partnership or trust owning stock in the corporation)— “(A) from a person whose ownership of stock would be attributed to the holder by application of paragraph (4)(C) to the extent that such stock would be so attributed; “(B) if (and to the extent) the basis thereof is determined under section 1014 or 1023 (relating to property acquired from a decedent), or section 1015(a) or (b) (relating to property acquired by gift or transfers in trust); “(C) by a security holder or creditor in exchange for the relinquishment or extinguishment in whole or part of a claim against the corporation, unless the claim was acquired for the purpose of acquiring such stock; “(D) by one or more persons who were full-time employees of the corporation at all times during the period of 36 months ending on the last day of the taxable year of the corporation (or at all times during the period of the corporation’s existence, if shorter); “(E) by a trust described in section 401(a) which is exempt from tax under section 501 (a) and which benefits exclusively the employees (or their beneficiaries) of the corporation, including a member of a controlled group of corporations (within the meaning of section 1563(a) determined without regard to section 1563(a)(4) and (e)(3)(C)) which includes such corporation; “(F) by an employee stock ownership plan meeting the, requirements of section 301(d) of the Tax Reduction Act of 1975; or “(G) in a recapitalization described in section 368(a)(1)(E). “(6) Successive applications of subsection.— If— “(A) a net operating loss carryover is reduced under this subsection at the end of a taxable year of a corporation, and “(B) any person described in paragraph (4)(B) who owns stock of the corporation on the last day of such taxable year does not own, on the last day of the first or second succeeding taxable year of the corporation, it greater percentage of the total fair market value of the participating stock or of all the stock of the corporation than such person owned on the last day of such taxable year. then, for purposes of applying this subsection as of the end of the first or second succeeding taxable year (as the case may be), stock owned by such person at the end of such succeeding taxable year shall be considered owned by such person at the beginning of the first or second preceding taxable year. Other rules relating 90 STAT. 1602to the manner and extent of successive applications of this section in the case of increases in ownership and transfers of stock by the persons described in paragraph (4)(B) shall be prescribed by regulations issued by the Secretary. “(b) Reorganizations.— “(1) In general.— If one corporation acquires the stock or assets of another corporation in a reorganization described in section 368(a)(1)(A), (B), (C), (D)(but only if the requirements of section 354 (b)(1) are met), or (F), and if— “(A) the acquiring or acquired corporation has a net. operating loss for the taxable year which includes the date of the acquisition, or a net operating loss carryover from a prior taxable year to such taxable year, and “(B) the shareholders (immediately before the reorganization) of such corporation (the ’loss corporation’), as the result of owning stock of the loss corporation, own (immediately after the reorganization) less than 40 percent of the total fair market value of the participating stock or of all the stock of the acquiring corporation, then the net operating loss carryover (if any) of the loss corporation from the taxable, year which includes the date of the acquisition, and the net operating loss carryovers (if any) of the loss corporation from prior taxable years to such taxable year and subsequent taxable years, shall be reduced by the percentage determined under paragraph (2), “(2) Reduction of net operating loss carryover.— “(A) Ownership of 20 percent or more.— If such shareholders own less than Id percent, but not less than 20 percent, of the total fair market value of the participating stock or of all the stock of the acquiring corporation, the reduction applicable under paragraph (1) shall be the percentage equal to the number of percentage points (including fractions thereof) less than 40 percent, multiplied by three and one-half. “(B) Ownership of less than 20 percent.— If such shareholders own less than 20 percent of the total fair market value of the participating stock or of all the stock of the acquiring corporation, the reduction applicable under paragraph (1) shall be the sum of— “(i) the percentage that would be determined under subparagraph (A) if the shareholders owned 20 percent of such stock, plus “(ii) the percentage equal to the number of percent age points (including fractions thereof) of such stock less than 20 percent, multiplied by one and one-half. The reduction under this paragraph shall be determined by reference to the lesser of the percentage of the total fair market value of the participating stock or of all the stock of the acquiring corporation owned by such shareholders. “(3) Losses of controlled corporations.— For purposes of this subsection— “(A) Holding companies.— If, immediately before the reorganization, the acquiring or acquired corporation controls a corporation which has a net operating loss for the taxable year which includes the date of the acquisition, or a net operating loss carryover from a prior taxable year to such taxable year, the acquiring or acquired corporation, as the case 90 STAT. 1603may be, shall be treated as the loss corporation (whether or not such corporation is a loss corporation). The reduction, if any, so determined under paragraph (2) shall be applied to the losses of such controlled corporation. “(B) Triangular reorganizations.— Except as otherwise provided in paragraph (5), if the shareholders of the loss corporation (immediately before the reorganization) own, as a result of the reorganization, stock in a corporation controlling the acquiring corporation, such shareholders shall be treated as owning (immediately after the reorganization) a percentage of the total fair market value of the participating stock and of all the stock of the acquiring corporation owned by the controlling corporation equal to the percentage of the total fair market value of the participating stock and of all the stock, respectively, of the controlling corporation owned by such shareholders. “(4) Special rules.— For purposes of applying paragraph (i)(B)— “(A) Certain related transactions.— If, immediately before the reorganization— “(i) one or more shareholders of the loss corporation own stock of such corporation which such shareholder acquired during the 36month period ending on the date of the acquisition in a transaction described in paragraph (1) or in subsection (a)(1)(C)(unless excepted by subsection (a)(5)), and “(ii) such shareholders own more than 50 percent of the total fair market value of the stock of another corporation a party to the reorganization, or any such shareholder is a corporation controlled by another corporation a party to the reorganization. then such shareholders shall not be treated as shareholders of the loss corporation with respect to such stock. “(B) Certain prior ownership of loss corporation.— If, immediately before the reorganization, the acquiring or acquired coil»oration owns stock of the loss corporation, then paragraph (1)(B) shall be applied by treating the shareholders of the loss corporation as owning an additional amount of the total fair market, value of the participating stock and of all the stock of the acquiring corporation, as a result of owning stock in the loss corporation, equal to the total fair market value of the participating stock and of all the stock, respectively, of the loss corporation owned (immediately before the reorganization) by the acquiring or acquired corporation. This subparagraph shall not apply to stock of the loss corporation owned by the acquiring or acquired corporation if such stock was acquired by such corporation within the 36month period ending on the date of the reorganization in a transaction described in subsection (a)(1)(C)(unless excepted by subsection (a)(5)); or to a reorganization described in section 368(a)(1)(B) or (C) to the extent the acquired corporation does not distribute the stock received by it to its own shareholders. “(C) Certain asset acquisitions.— If a loss corporation receives stock of the acquiring corporation in a reorganization described in section 368(a)(1)(C) and does not distribute such stock to its shareholders, paragraph (1)(B) shall be 90 STAT. 1604applied by treating the shareholders of the loss corporation us owning (immediately after the reorganization) such undistributed stock in proportion to the fair market value of the stock which such shareholders own in the loss corporation. “(5) Certain stock-for-stock reorganizations.— In the case of a reorganization described in section 368(a)(1)(B) in which the acquired corporation is a loss corporation— “(A) Stock which is exchanged.— Paragraphs (1)(B) and (2) shall be applied by reference to the ownership of stock of the loss corporation (rather than the acquiring corporation) immediately after the reorganization. Shareholders of the loss corporation who exchange stock of the loss corporation shall be treated as owning (immediately after the reorganization) a percentage of the total fair market value of the participating stock and of all the stock of the loss corporation acquired in the exchange by the acquiring corporation which is equal to the percentage of the total fair market value of the participating stock and of all the stock, respectively, of the acquiring corporation owned (immediately after the reorganization) by such shareholders. “(B) Stock which is not exchanges.— Stock of the loss corporation owned by shareholders immediately before the reorganization which was not exchanged in the reorganization shall be taken info account in applying paragraph (1)(B). For purposes of the preceding sentence, the acquiring corporation (or a corporation controlled by the acquiring corporation) shall not be treated as a shareholder of the loss corporation with respect to stock of the loss corporation acquired in a transaction described in paragraph (1), or in subsection (a)(1)(C)(unless excepted by subsection (a)(5)) , during the 36month period ending on the date of the exchange. “(C) Triangular exchanges.— For purposes of applying the rules in this paragraph, if the shareholders of the loss corporation receive stock of a corporation controlling the acquiring corporation, such shareholders shall be treated as owning a percentage of the participating stock and of all the stock of the acquiring corporation owned by the controlling corporation equal to the percentage of the total fair market value of the participating stock and of all the stock, respectively, which such shareholders own of the controlling corporation immediately after the reorganization. “(6) Exceptions.— The limitations in this subsection shall not apply— “(A) if the same persons own substantially all the stock of the acquiring corporation and of the other corporation in substantially the, same proportions; or “(B) to a net operating loss carryover from a taxable year if the acquiring or acquired corporation owned at least 40 percent of the total fair market value of the participating stock and of all the stock of the loss corporation at all times during the last half of such taxable year. For purposes of subparagraph (A), if the acquiring or acquired corporation is controlled by another corporation, the shareholders of the controlling corporation shall be considered as also owning the stock owned by the controlling corporation in that proportion which the total fair market value of the stock which 90 STAT. 1605each shareholder owns in the controlling corporation bears to the total fair market value of ail the stock in the controlling corporation. “(c) Rules Relating to Stock.— For purposes of this section— “(1) The term ‘stock’ means all shares of stock, except stock which— “(A) is not entitled to vote, “(B) is fixed and preferred as to dividends and does not participate in corporate growth to any significant extent. “(C) has redemption and liquidation rights which do not exceed the paid-in capital or par value represented by such stock (except for a reasonable redemption premium in excess of such paid-in capital or par value), and “(D) is not convertible into another class of stock. “(2) The term ‘participating stock’ means stock (including common stock) which represents an interest in the earnings and assets of the issuing corporation which is not limited to a stated amount of money or property or percentage of paid-in capital or par value, or by any similar formula. “(3) The Secretary shall prescribe regulations under which— “(A) stock or convertible securities shall be treated as stock or participating stock, or “(B) stock (however denoted) shall not be treated as stock or participating stock, by reason of conversion and call rights, rights in earnings and assets, priorities and preferences as to distributions of earnings or assets, and similar factors.” (f) Conforming Amendments.— (1) Amendment of section 368.— Section 368(c) (relating to the definition of control) is amended by striking out “and this part,” and inserting in lieu thereof “this part, and part V,”. (2) Amendment of section 383.— Section 383 (relating to special limitations on certain carryovers) is amended to read as follows: “SEC. 383. SPECIAL LIMITATIONS ON UNUSED INVESTMENT CREDITS, WORK INCENTIVE PROGRAM CREDITS, FOREIGN TAXES, AND CAPITAL LOSSES. “In the case of a change of ownership of a corporation in the manner described in section 382 (a) or (b), the limitations provided in section 382 in such cases with respect to net operating losses shall apply in the same manner, as provided under regulations prescribed by the Secretary, with respect to any unused investment credit, of the corporation under section 46(b), to any unused work incentive program credit of the corporation under section 50A(b), to any excess foreign taxes of the corporation under section 904(d), and to any net capital loss of the corporation under section 1212.” (g) Effective Date.— (1) The amendments made by subsections (a), (b), (c), and (d) shall apply to losses incurred in taxable years ending after December 31, 1975. (2) For purposes of applying sections 382(a) and 383 (as it relates to section 382(a)) of the Internal Revenue Code of 1954, as amended by subsections (e) and (f), the amendments made by subsections (e) and (f) shall take effect for taxable years beginning after June 30, 1978, except that, the beginning of the taxable years specified in clause (ii) of section 382(a)(1)(B) of 90 STAT. 1606such Code, as so amended, shall be considered to be the later of: (A) the beginning of such taxable years, or (B) January 1, 1978. (3) Sections 382(b) and 383 (as it relates to section 382(b)) of the, Internal Revenue Code of 1954, as amended by subsections (e) and (f), shall apply (and such sections as in effect prior to such amendment shall not apply) to reorganizations pursuant to a plan of reorganization adopted by one or more of the parties thereto on or after January 1, 1978. For purposes of the preceding sentence, a corporation shall be considered to have adopted a plan of reorganization on the date on which a resolution of the board of directors is passed adopting the plan or recommending its adoption to the shareholders, or on the date on which the shareholders approve, the plan of reorganization, whichever is earlier.