the acquiring corporation shall succeed to and take into account, as of the close of the day of distribution or transfer, the items described in subsection (c) of the distributor or transferor corporation, subject to the conditions and limitations specified in paragraphs (2) and (3) and subsections (b) and (c). "(2) In the case of an acquisition described in paragraph (1) (B) to which any of the special rules of section 368 (e) (relating to acquisitions of assets by, and transfers of assets to, subsidiaries) apply, the acquiring corporation for purposes of this section means the corporation which, upon completion of a transfer to which section 368 (e) applies, owns substantially all of the assets transferred by the transferor corporation in the reorganization. "(3) In the case of an acquisition referred to in paragraph (1) (C), and in the case of an acquisition referred to in paragraph (2) upon the completion of which no one corporation owns substantially all of the assets transferred in the reorganization by the transferor corporation, the determination of whether and to what extent "(A) the transferor corporation, in the case of an acquisition referred to in paragraph (1) (C), shall retain or take into account any of the items referred to in this subsection. "(B) any corporation shall be deemed an acquiring corporation for the purpose of succeeding to or taking into account any of such items, and "(C) the operating rules in subsection (b) shall be applied, shall be made under regulations to be prescribed by the Secretary or his delegate. Such regulations shall provide that any corporation which upon completion of a transfer referred to in this paragraph owns a substantial portion of the assets transferred by the transferor corporation shall be deemed to be an acquiring corporation with respect to the items referred to in subsections (c) (1) and (2) to the extent appropriate to such assets and that, in the case of a transfer referred to in paragraph (1) (C), the transferor corporation shall retain and take into account the items referred to in subsection (c) (1) and (2) to the extent appropriate to the assets retained by it. Such regulations shall provide for the treatment of other items referred to in subsection (c) in a manner appropriate to their character and the relationship thereof to the assets and liabilities of the respective corporations." (b) AMENDMENT OF SECTION 381 (b).-Section 381 (b) is amended by striking "(F)" and inserting in lieu thereof “(A)”. (c) AMENDMENTS OF SECTION 381 (c). (1) Subparagraph (A) of section 381 (c) (1) is amended by striking out the words "loss carryovers" and inserting in lieu thereof the word "losses". (2) Clause (v) of section 381 (c) (17) (C) is amended by striking out the word "year" immediately following the words "net operating loss". (3) Paragraphs (4), (5), (6), and (8) of section 381 (c) are stricken, and there is inserted in lieu thereof the following: "(4) METHOD OF ACCOUNTING.— "(A) INVENTORIES.-In any case in which inventories are received by the acquiring corporation, such inventories shall be taken by such corporation (in determining its income) on the same basis on which such inventories were taken by the distributor or transferor corporation, unless different methods were used by several distributor or transferor corporations or by a distributor or transferor corporation and the acquiring corporation. If different methods were used, the acquiring corporation shall use the method or combination of methods of taking inventory adopted pursuant to regulations prescribed by the Secretary or his delegate. "(B) METHOD OF COMPUTING DEPRECIATION ALLOWANCE.-The acquiring corporation shall be treated as the distributor or transferor corporation for purposes of computing the depreciation allowance under paragraphs (2), (3), and (4) of section 167 (b) on property acquired in a distribution or transfer with respect to that part or all of the basis in the hands of the acquiring corporation as does not exceed the basis in the hands of the distributor or transferor corporation. "(C) INSTALLMENT METHOD.-If the acquiring corporation acquires installment obligations (the income from which the distributor or transferor corporation has elected, under section 453, to report on the install ment basis) the acquiring corporation shall, for purposes of section 453, be treated as if it were the distributor or transferor corporation. "(D) OTHER ACCOUNTING METHODS.-In all other respects the acquiring corporation shall use the method of accounting used by the distributor or transferor corporation on the date of distribution or transfer unless different methods were used by several distributor or transferor corporations or by a distributor or transferor corporation and the acquiring corporation. If different methods were used, the acquiring corporation shall use the method or combination of methods of computing taxable income adopted pursuant to regulations prescribed by the Secretary or his delegate." (4) Paragraphs (9), (10), (11), (12), (13), (14), (15), (16), (17), (18), (19), and (20) of section 381 (c) are renumbered, respectively, paragraphs (5), (6), (7), (8), (9), (10), (11), (12), (13), (14), (15), and (16). (5) The last sentence in paragraph (16) of section 381 (c) (renumbered as paragraph (12) under the preceding amendment) is stricken. (6) Section 381 (c) is amended by adding at the end thereof the follow ing new paragraph: "(17) OTHER ITEMS.-The acquiring corporation shall be treated as the distributor or transferor corporation with respect to any item and for any purpose not referred to in this subsection if it is established to the satisfaction of the Secretary or his delegate that for purposes of this section such item or purpose is in a category similar to that of any of the items referred to in this subsection and that such treatment is consistent with the treatment of such items." SEC. 29. SPECIAL LIMITATIONS ON NET OPERATING LOSS CARRYOVERS-AMENDMENT OF SECTION 382. Section 382 is amended to read as follows: "SEC. 382. SPECIAL LIMITATIONS ON NET OPERATING LOSS CARRYOVERS. "(a) GENERAL RULE.-In the case of a change in ownership of the outstanding stock of a corporation which occurs in the manner described in subsection (b) or (c) the net operating loss carryovers, if any, of the corporation (hereinafter in this section referred to as the loss corporation') with respect to which such change in ownership is considered, under such subsections, to have occurred shall be limited to the extent provided in subsection (d). The limitations of this section shall not apply if, for at least 2 years prior to the transaction resulting in the change in ownership, more than 50 percent of the fair market value of the outstanding stock of each corporation was owned by the same persons in substantially the same proportions. "(b) CHANGE IN OWNERSHIP RESULTING FROM INCREASE IN STOCK OWNER SHIP. "(1) IN GENERAL.-If, at the end of a taxable year of a corporation- "(i) the beginning of such taxable year, or "(ii) the beginning of the prior taxable year, and "(B) the increase in percentage points at the end of such taxable year is not attributable to "(i) the receipt of such stock by gift, bequest, or inheritance, or "(ii) a decrease in the amount of such stock outstanding as a result of a redemption to pay death taxes to which section 303 applies, the net operating loss carryovers, if any, from prior taxable years of such corporation to such taxable year shall be limited in the manner described in subsection (d). "(2) DESCRIPTION OF PERSON OR PERSONS.-The person or persons referred to in paragraph (1) shall be the 10 persons (or such lesser number as there are persons owning the outstanding stock at the end of such taxable year) who own the greatest percentage of the fair market value of such stock at the end of such taxable year; except that, if any other person owns the same percentage of such stock at such time as is owned by one of the 10 persons, such person shall also be included. If any of the persons are so related that such stock owned by one is attributed to the other under the rules specified in subsection (d), such persons shall be considered as only one person solely for the purpose of selecting the 10 persons (more or less) who own the greatest percentage of the fair market value of such outstanding stock. "(3) SPECIAL BULE FOR STOCK ACQUIRED IN A SECTION 368 (a) (1) (B) REORGANIZATION.-For purposes of this subsection, but not subsection (d), if stock in the loss corporation is acquired as a result of a reorganization described in section 368 (a) (1) (B) the former shareholders of the loss corporation shall be deemed to own that percentage of the fair market value of the stock in the loss corporation as the fair market value of the stock in the acquiring corporation which they received in exchange for the stock which they owned in the loss corporation (other than stock acquired by shareholders of the acquiring corporation within the 2-year period preceding the date of the exchange) bears to the fair market value of the entire outstanding stock in the acquiring corporation. "(c) CHANGE IN OWNERSHIP RESULTING FROM ACQUISITION OF ASSETS.— "(1) IN GENERAL.-If, in the case of a reorganization specified in paragraph (1) (B) of section 381 (a), the transferor corporation or the acquiring corporation "(A) has a net operating loss which is a net operating loss carryover to the first taxable year of the acquiring corporation ending after the date of transfer, and "(B) the stockholders (immediately before the reorganization) of such loss corporation, as the result of owning stock, directly or indirectly, of the loss corporation (other than stock acquired by the other corporation or its shareholders within the 2-year period ending with the date of the reorganization), own (immediately after the reorganization) 50 percent or less of the fair market value of the outstanding stock of the acquiring corporation, the net operating loss carry-overs, if any, from prior taxable years of the loss corporation to the first taxable year of the acquiring corporation ending after the date of transfer shall be limited in the manner described in subsection (d). "(2) PRIOR OWNERSHIP OF STOCK OF LOSS CORPORATION BY ACQUIRING CORPORATION.-For purposes of this subsection and subsection (d), if, prior to an acquisition of assets of a loss corporation in a reorganization described in section 368 (a) (1) (C) or (D), the acquiring corporation owns stock in thte loss corporation, then the stock of the loss corporation deemed to be owned (immediately after the reorganization) by the shareholders of the acquiring corporation as a result of their ownership of stock in the loss corporation immediately before the reorganization, such latter excess of the total outstanding stock immediately after the reorganization over the amount of such stock (immediately before the reorganization) shall be the amount being reduced (on account of the indirect ownership by the acquiring corporation's shareholders of stock of the loss corporation through ownership of stock of the loss corporation by the acquiring corporation) by an amount corresponding to the amount of stock which would have been transferred to the acquiring corporation in the reorganization had its stock in the loss corporation been acquired in the reorganization for a consideration proportionate to that transferred to the other shareholders of the loss corporation. "(d) LIMITATION ON NET OPERATING LOSS CARRYOVERS.-In the case of a change of ownership described in subsection (b) or (c), the amount of the net operating loss carryovers, if any, from prior taxable years to be included in the net operating loss deduction for the taxable year referred to in subsection (b) or (c), whichever is applicable, shall be 50 per centum of the Section 382 Ceiling Amount. "(1) SECTION 382 CEILING AMOUNT.-The Section 382 Ceiling Amount shall be determined immediately before the change in ownership described in subsection (b) or (c) and shall be the sum of "(A) the consideration transferred or distributed with respect to stock in the transaction or transactions which result in such change of ownership, plus "(B) an amount, in respect of the remainder (if any) of the outstanding stock, measured by the amount of the consideration transferred for, or distributed with respect to, the stock described in subparagraph (A). "(2) CONSIDERATION.-For purposes of this subsection, the term 'consideration' includes stock, securities, money, or other property. The total amount of the consideration shall be reduced, to the extent prescribed under regulations issued by the Secretary or his delegate, by the amount of money and the fair market value of property transferred to a corporation in any case where such a transfer has a substantial effect on the amount of consideration referred to in paragraph (1) (A), if— "(A) such transfer occurs during the 6-month period preceding a change in ownership described in subsection (b) or (c), and "(B) the amount is transferred in a transaction described in Section 351 or constitutes paid-in surplus or a contribution to capital. "(e) ATTRIBUTION OF OWNERSHIP.-Section 318, relating to constructive ownership of stock, shall apply in determining the ownership of stock, except that section 318 (a) (4), relating to options, shall be applied only if any such option is exercised and, in that event, as of the time such option is acquired. "(f) CHANGE IN OWNERSHIP IN TAXABLE YEAR OF Loss.-Where a change of ownership occurs which is described in subsection (b) or in subsection (c) (where the taxable year of the loss corporation is not closed by reason of such change) on a day other than the last day of the taxable year of a corporation and such corporation sustains a net operating loss in such taxable year, such taxable year shall be considered to be two taxable years (hereinafter referred to as the 'pre-acquisition part year' and the 'post-acquisition part year'). "(1) The pre-acquisition part year shall begin on the same day as such taxable year begins and shall end on the date of such change of ownership. "(2) The post-acquisition part year shall begin on the day following the date of such change of ownership and shall end on the same day as the end of such taxable year. "(3) The net operating loss attributable to the pre-acquisition year shall be an amount which bears the same ratio to the amount allowable (without regard to this paragraph) as the number of days in the taxable year before such change of ownership occurs bears to the number of days in the taxable year. For purposes of the limitation on net operating loss carryovers provided in subsection (d) such net operating loss shall be treated as a loss from a prior taxable year of such corporation. "(4) The net operating loss attributable to the post-acquisition part year shall be the amount of the net operating loss which bears the same ratio to the amount allowable (without regard to this paragraph) as the number of days in the taxable year after such change of ownership occurs bears to the total number of days in the taxable year. "(g) NET OPERATING LOSS CARRYOVERS TO SUBSEQUENT YEARS.-In computing the net operating loss carryovers to taxable years subsequent to a taxable year in which there was a limitation applicable to a net operating loss carryover by operation of this section, the income of such taxable year, as computed under section 172 (b) (2), shall be increased by the amount of the reduction of the total net operating loss carryover determined under subsection (d) in computing the net operating loss carryovers to such subsequent taxable year. "(h) STOCK OF CORPORATION CONTROLLING ACQUIRING CORPORATION.-If the shareholders of the loss corporation (immediately before a reorganization described in section 381 (a) (1) (B)) own as a result of the reorganization, stock in a corporation controlling the acquiring corporation, such stock of the controlling corporation shall, for purposes of this subsection, be treated as stock of the acquiring corporation in an amount valued at an equivalent fair market value. "(i) DEFINITION OF STOCK.-For purposes of this section (other than subsection (d)), 'stock' means all shares except nonvoting stock which is limited and preferred as to dividends. "(j) APPLICATION OF SECTION 269.-If section 269 applies to a transaction, this section shall not apply." REPORT ON CORPORATE DISTRIBUTIONS AND ADJUSTMENTS TO ACCOMPANY SUBCHAPTER C ADVISORY GROUP RECEIVED BY THE SUBCOMMITTEE ON INTERNAL REVENUE TAXATION AND TRANSMITTED TO THE COMMITTEE ON WAYS AND MEANS U. S. HOUSE OF REPRESENTATIVES FROM THE Advisory Group on Subchapter C of the DECEMBER 24, 1957 UNITED STATES GOVERNMENT PRINTING OFFICE WASHINGTON: 1957 |