of the corporation which can otherwise be carried forward under section 50A(b), to any unused foreign taxes of the corporation which can otherwise be carried forward under section 904(d), and to any net capital loss of the corporation which can otherwise be carried forward under section 1212. Sections 1.383-2 and 1.383-3 are prescribed pursuant to the authority granted the Secretary or his delegate by section 383 to prescribe regulations governing the manner in which the limitations provided in section 382 shall apply with respect to the abovementioned items. For the election to apply sections 382 and 383, as amended by the Tax Reform Act of 1976, see § 382-2.

[TD. 7343, 40 FR 1698, Jan. 9, 1975, as amended by T.D. 7650, 44 FR 61573, May 26, 1979)

#1.383-2 Purchase of a corporation and change in its trade or business.

(a) In general. If the ownership and business of a corporation are changed in the manner described in section 382(a) and the regulations thereunder, then the limitation applicable in such cases to the carryover of the net operating losses of such corporation shall also apply to the carryover of the unused investment credits of such corporation which could otherwise be carried forward under section 46(b), the unused work incentive program credits of such corporation which could otherwise be carried forward under section 50A(b), the unused foreign taxes of such corporation which could otherwise be carried forward under section 904(d), and the net capital losses of such corporation which could otherwise be carried forward under section 1212. Thus, if the limitation provided in section 382(a) is applicable at the end of a corporation's taxable year, then all investment credit carryovers, all work incentive program credit carryovers, all unused foreign tax carryovers, and all capital loss carryovers from prior taxable years of such corporation are excluded in computing tax liability for such taxable year and for subsequent taxable years.

(b) Effective date. (1) The limitation provided in this section shall apply

only with respect to changes in ownership occurring after December 10, 1971, pursuant to a contract entered into on or after September 29, 1971.

(2) For purposes of applying section 382(a) in determining whether the limitation provided in this section applies, the beginning of the taxable years specified in clauses (i) and (ii) of section 382(a)(1)(A) shall be the beginning of such taxable years or December 10, 1971, whichever occurs later. Thus, if X Corporation made its returns for 1971 and 1972 on the basis of the calendar year, then in determining whether section 382(a) would apply as of December 31, 1971, the beginning of the taxable years specified in clauses (i) and (ii) of section 382(a)(1)(A) would be December 10, 1971, and in determining whether section 382(a) would apply as of December 31, 1972, the beginning of the taxable year specified in clause (i) of section 382(a)(1)(A) would be January 1, 1972, and the beginning of the taxable year specified in clause (ii) of section 382(a)(1)(A) would be December 10,

1971.

[T.D. 7343, 40 FR 1698, Jan. 9, 1975]

§ 1.383-3 Change in ownership as the result of a reorganization.

(a) In general. (1) If, in the case of a reorganization specified in section 381(a)(2), (i) the transferor corporation or the acquiring corporation has an unused investment credit, an unused work incentive program credit, an unused foreign tax or a net capital loss which may be carried forward to the first taxable year of the acquiring corporation ending after the date of transfer, and (ii) as a result of the reorganization there is a change in own. ership of such corporation within the meaning of section 382(b)(1)(B), then the limitation applicable in such cases to the carryover of the net operating losses of such corporation shall apply in the manner provided in this section to the carryover of any unused investment credits, any unused work incentive program credits, any unused foreign taxes, and any net capital losses of such corporation. Thus, if the limitation provided in section 382(b)(1) would apply in such a case to the net

Γ

operating loss carryovers of a corporation (whether or not such corporation has any such carryovers), a similar limitation, computed with the modifications provided in this paragraph, shall apply to the investment credit carryovers, to the work incentive program credit carryovers, to the foreign tax carryovers, and to the capital loss carryovers of such corporation.

(2)(i) If there is a change in ownership of a corporation within the meaning of section 382(b)(1)(B), then the amount of the reduction provided in section 382(b)(1) shall be determined with respect to the total carryovers of such corporation from taxable years ending on or before the date of transfer which may otherwise be carried to the first taxable year of the acquiring corporation ending after such date. In such a case, for purposes of computing carryovers of the transferor and acquiring corporations from taxable years ending on or before the date of transfer to taxable years of the acquiring corporation ending after the date of transfer, the amount of the reduction shall be applied against the earliest carryover, whether a carryover of the transferor corporation or of the acquiring corporation, which may otherwise be carried to the acquiring corporation's first taxable year ending after the date of transfer, then against the next earliest carryover which may otherwise be carried to such first taxable year, etc. To the extent of the amount of the reduction, such carryovers shall be eliminated and shall not be included in computing the total carryover to the acquiring corporation's first taxable year ending after the date of transfer or to subsequent taxable years.

(ii) For purposes of this subparagraph, if the date of transfer is on a day other than the last day of a taxable year of the acquiring corporation, then the amount of the reduction shall be applied only against the carryovers of the transferor corporation or of the acquiring corporation which may be carried to the acquiring corporation's postacquisition part year under the principles of § 1.381(c)(23)1(e) (relating to investment credit carryovers).

(iii) For purposes of this subparagraph, a carryover from a taxable year of the transferor corporation ending on or before the last day of a taxable year of the acquiring corporation shall be considered to be a carryover from a taxable year prior to such taxable year of the acquiring corporation.

(3) The provisions of paragraph (a)(2) of this section may be illustrated by the following example dealing with the carryover of unused investment credit:

Example. X Corporation and Y Corporation are organized on January 1, 1970, and each makes its return on the basis of the calendar year. On December 31, 1972. Y acquires the assets of X in a reorganization described in section 381(a)(2). Immediately after the reorganization, those persons who were stockholders of X immediately before the reorganization, as the result of owning stock of X, own 10 percent of the fair market value of the outstanding stock of Y. so that the investment credit carryovers of X as of the close of the date of transfer are reduced under section 382(b)(2) by 50 percent. The investment credit carryovers as of the close of the date of transfer of X Corporation and Y Corporation for taxable years 1970 through 1972 are as follows:

For the first taxable year ending after the date of transfer, the acquiring corporation has an excess limitation of $500 (ie., the excess of the limitation based on the amount of tax for such year over the amount of credit earned for such year). The computation of investment credit carryovers from prior taxable years of the transferor and acquiring corporations to the acquiring corporation's first taxable year ending after the date of transfer and to subsequent taxable years is as follows:

(1) The amount of the reduction computed under subparagraph (1) of this paragraph with respect to the investment credit carryovers from prior taxable years of X Corporation is $350 ($700 × 50%). One hundred dollars of such reduction is first applied against and eliminates X's $100 carryover from 1970: $100 of such reduction is applied against and eliminates Y's $100 carryover from 1970; $100 of such reduction is applied against and eliminates X's $100 carryover from 1971; the remaining $50 of such reduc

erwise be carried to the first taxable

year of the acquiring corporation ending after the date of transfer, then against the next earliest carryover of the same origin which may otherwise be carried to such first taxable year, etc. To the extent of the amount of the reduction, such carryovers shall be eliminated and shall not be included in computing the total carryover to the acquiring corporation's first taxable year ending after the date of transfer or to subsequent taxable years.

(4) The provisions of subparagraphs (2) and (3) of this paragraph may be illustrated by the following example:

Example. T, a domestic corporation, and S, a domestic corporation, are organized on January 1, 1970, and each makes its return on the basis of the calendar year. On December 31, 1972, S Corporation acquires the assets of T Corporation in a reorganization described in section 381(a)(2). Immediately after the reorganization, those persons who were stockholders of T Corporation immediately before the reorganization, as the result of owning stock of T, own 10 percent of the fair market value of the outstanding stock of S, so that T's foreign tax carryovers as of the close of the date of transfer are reduced by 50 percent. The unused foreign tax carryovers as of the close of the date of transfer of T Corporation and S Corporation for taxable years 1970 through 1972 are as follows:

fer and to subsequent taxable years is as follows:

(i) Unused foreign tax carryovers attributable to country X. The amount of the reduction computed under subparagraph (2) of this paragraph with respect to the total unused foreign tax carryovers from prior taxable years of T Corporation attributable to taxes paid or accrued to country X is $100 ($200 × 50%). Fifty dollars of such reduction is applied against and eliminates T's $50 carryover from 1970. The remaining $50 of such reduction is then applied against S's $100 carryover from 1970 and reduces such carryover to $50. After the reduction, the total carryover to the first taxable year of the acquiring corporation ending after the date of transfer attributable to taxes paid or accrued to country X is $200 (i.e., S's $50 carryover from 1970 and T's $150 carryover from 1971). Since the acquiring corporation has elected the overall limitation for its first taxable year ending after the date of transfer, the carryovers attributable to country X from per-country limitation years may not be applied in such first taxable year and the total $200 is carried to the next succeeding taxable year.

(ii) Unused foreign tax carryovers attributable to country Y. The amount of the reduction computed under subparagraph (2) of this paragraph with respect to the total unused foreign tax carryovers from prior taxable years of T Corporation attributable to taxes paid or accrued to country Y is $100 ($200 × 50%). The total $100 reduction is applied against and eliminates T's carryover from 1970. After the reduction, the total carryover to the first taxable year of the acquiring corporation ending after the date of transfer attributable to taxes paid or accrued to country Y is $150 (i.e., S's $50 carryover from 1970 and T's $100 carryover from 1971). Since the acquiring corporation has elected the overall limitation for its first taxable year ending after the date of transfer, the carryovers attributable to country Y from per-country limitation years may not be applied in such first taxable year and the total $150 is carried to the next succeeding taxable year.

(iii) Unused foreign tax carryovers attributable to country Z. The amount of reduction computed under subparagraph (2) of this paragraph with respect to the total unused foreign tax carryovers from prior taxable years of T Corporation attributable to taxes paid or accrued to country Z is $50 ($100 x 50%). The total $50 reduction is applied against T's $100 carryover from 1970 and thus reduces such carryover to the first taxable year of the acquiring corporation ending after the date of transfer to $50. Since the acquiring corporation has elected the overall limitation for its first taxable year ending after the date of transfer, the

carryover attributable to country Z from the per-country limitation year may not be applied in such first taxable year and the total $50 is carried to the next succeeding taxable year.

(IV) Unused foreign tax carryovers from erall limitation years. The amount of the reduction computed under subparagraph (2) of this paragraph with respect to the total anused foreign tax carryovers from prior taxable years of T Corporation to which the overall limitation applied is $100 ($200 x 50%). Fifty dollars of such reduction is appied against and eliminates S's $50 carryover from 1971 and the remaining $50 of such reduction is applied against T's $200 carryover from 1972 and reduces such carryover to $150. After the reduction, the total carryover to the first taxable year of the acquiring corporation ending after the date of transfer attributable to taxes paid or accrued in taxable years to which the overa limitation applied is $250 (i.e.. T's $150 arryover from 1972 and S's $100 carryover from 1972). Since for such first taxable year the acquiring corporation has an excess limitation of $200 with respect to carryovers artsing in overall limitation years, T's $150 carryover from 1972 and $50 of S's $100 carryover from 1972 may be added to the amount of credit allowed by section 901 for such year. The total carryover to taxable years of the acquiring corporation subsequent to such first taxable year attributable to taxes paid or accrued in overall limitation years is $50 (ie., the remainder of S's carryover from 1972, $50).

(c) Effective date. (1) The limitation provided in this section shall apply only with respect to reorganizations occurring after December 10, 1971, pursuant to a plan of reorganization or a contract entered into on or after September 29, 1971.

(2) For purposes of subparagraph (1) of this paragraph, a reorganization shall be considered to occur on the date of transfer as defined in section 381(b)(2) and § 1.381(b)-1(b).

(3) For purposes of subparagraph (1) of this paragraph, a plan of reorgani zation or a contract shall be consid ered to have been entered into on the date on which the duly authorized representatives of the transferor and acquiring corporations enter into an agreement evidencing the plan of reorganization, or on the date on which the plan of reorganization is adopted by the shareholders of the transferor and acquiring corporations, whichever occurs earlier.

(Sec. 383, 85 Stat. 521 (26 U.S.C. 383); sec. 7805, 68A Stat. 917 (26 U.S.C. 7805) of the Internal Revenue Code of 1954) [T.D. 7343, 40 FR 1699, Jan. 9, 1975]

§ 1.385-1 Stock or indebtedness.

(a) Effective date-(1) In general. The regulations under section 385 apply to instruments (as defined in § 1.385-3 (c)) and preferred stock issued after 90 days after publication of the final revisions to the section 385 regulations in the FEDERAL REGISTER, or, if later, December 31, 1982, and to loans described in § 1.385-7 and guaranteed loans made after 90 days after publication of the final revisions to the section 385 regulations in the FEDERAL REGISTER, or, if later, December 31, 1982.

(2) Exceptions. The regulations under section 385 do not apply to

(i) Instruments issued pursuant to a plan of reorganization filed on or before December 29, 1980, in a proceeding under the Federal bankruptcy laws (Title 11, U.S.C.) or under the Regional Rail Reorganization Act of 1973, or

(ii) Instruments, loans described in § 1.385-7, guaranteed loans, or preferred stock issued or made pursuant to a written contract which is binding on December 29, 1980, and at all times thereafter.

(b) Scope-(1) In general. The regulations under section 385 contain rules under which certain interests in corporations are treated as stock or indebtedness. All other interests (such as bank deposits, insurance policies, claims for wages, and trade accounts payable) are outside the scope of the regulations. Any interest outside the scope of the regulations will be treated as stock or indebtedness under applicable principles of law without reference to the regulations.

(2) Similar distinctions. Certain other sections of the Internal Revenue Code make distinctions that are similar to (but not the same as) the one between stock and indebtedness. Section 385 does not necessarily govern these distinctions. Thus, for example, an interest in an organization may be treated as indebtedness under section 385, but the net profits of the organization may, by reason of the indebted