Use of Prechange Corporate Attributes--Final Regulations Under Sections 382 and 383

 [4830-01]

 ACTION: Temporary and Final regulations.

 SUMMARY: This document contains final regulations relating to the use of certain corporate tax attributes under sections 382 and 383 of the Internal Revenue Code of 1986 ("the Code") that are attributable to the period preceding an ownership change of the corporation. Section 382 was amended by the Tax Reform Act of 1986 (the "1986 Act"), the Revenue Act of 1987 (the "1987 Act"), the Technical and Miscellaneous Revenue Act of 1988 (the "1988 Act") and the Revenue Reconciliation Act of 1989 (the "1989 Act"). Section 383 was amended by the 1986 Act and the 1988 Act. The final regulations under section 383 provide guidance relating to the manner and method of absorbing the section 382 limitation with respect to certain capital losses and excess credits after there has been an ownership change of a corporation within the meaning of section 382.

 DATES: The regulations are effective as of June 26, 1991 and generally are applicable to any ownership change within the meaning of section 382 occurring after December 31, 1986.

 FOR FURTHER INFORMATION CONTACT: Lori J. Jones of the Office of Assistant Chief Counsel (Corporate), Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224 (Attention: CC:CORP:3) or telephone (202) 566-3422 (not a toll-free number).

SUPPLEMENTARY INFORMATION:

PAPERWORK REDUCTION ACT

The collections of information contained in this final regulation have been reviewed and approved by the Office of Management and Budget in accordance with the requirements of the Paperwork Reduction Act (44 U.S.C. 3504(h)) under control number 1545-0123. The estimated annual burden per respondent/recordkeeper varies from 6 minutes to 30 minutes, depending on individual circumstances, with an estimated average of 18 minutes.

 These estimates are an approximation of the average time expected to be necessary for a collection of information. They are based on such information as is available to the Internal Revenue Service. Individual respondents/recordkeepers may require greater or less time, depending on their particular circumstances.

 Comments concerning the accuracy of this burden estimate and suggestions for reducing this burden should be directed to the Internal Revenue Service, Attn: IRS Reports Clearance Officer TR:FP, Washington, D.C. 20224.

BACKGROUND

 This document contains final regulations to be added to part 1 of title 26 of the Code of Federal Regulations ("CFR") under sections 382 and 383 of the Code. On September 20, 1989, the Federal Register published a Notice of Proposed Rulemaking (54 FR 38695) proposing amendments to the Income Tax Regulations (26 CFR part 1) under sections 382 and 383 by cross-reference to temporary regulations published the same day in the Federal Register (T.D. 8264; 54 FR 38664). That document also amended temporary regulations under section 382 which were published in the Federal Register on August 11, 1987 (T.D. 8149, 52 FR 29668). The temporary regulations published on August 11, 1987, also were proposed to be adopted as final regulations (52 FR 29704).

 The only written comments received by the Internal Revenue Service with respect to T.D. 8264 regarded the effect of the amendments to the section 382 temporary regulations on regulated investment companies under section 851 of the Code. These comments, which relate to the method of determining whether a regulated investment company has an ownership change, and not to the manner in which capital losses and excess credits are limited as the result of an ownership change, will be considered in a separate regulations project. Because no other comments were received and no public hearing was requested with respect to the temporary regulations under section 383, the final regulations adopt the temporary regulations under section 383 without any substantive changes other than a clarification of the ordering rule for absorption of general business credits and carryovers and, as discussed below, the addition of a rule coordinating sections 382(h)(6) (relating to the treatment of certain built-in items) and 383. The final regulations under section 383 provide guidance relating to the manner and method of absorbing the section 382 limitation with respect to certain capital losses and excess credits after there has been an ownership change of a corporation within the meaning of section 382.

 The document also includes final regulations under section 382 (new section 1.382-2) which contain the definitions of pre-change loss and loss corporation. The definition of pre-change loss was initially included in the temporary and proposed regulations published on August 11, 1987 and was amended by T.D. 8264 published on September 20, 1989. Only one technical comment with respect to the definition of pre-change loss was received; however, after careful consideration, it was determined that the definition in the temporary and proposed regulations is consistent with section 382 and the use of the term in those regulations. No public hearing was requested with respect to the above definition of pre-change loss. Accordingly, the final regulations adopt this definition, as amended by T.D. 8264, without any substantive changes from the temporary regulations.

 The definition of a loss corporation was also initially included in the temporary and proposed regulations published on August 11, 1987. Written comments were received in response to the definition of a loss corporation in the 1987 regulations, relating principally to the clarification of the separate accounting for losses and credits of an acquiring corporation and those of the distributor or transferor loss corporation in a section 381 transaction. The definition was amended by T.D. 8264 and additionally proposed to be further amended by a Notice of Proposed Rulemaking published in the Federal Register on January 29, 1991 (56 FR 4183). The proposed amendments published on January 29, 1991, also relate to the appropriate scope of the separate accounting rules and are still under consideration. Therefore, although the final regulations adopt the definition of a loss corporation, as published on August 11, 1987, and amended by T.D. 8264, without substantive change, the final regulations may be amended to further reflect the January 29, 1991 proposed amendments. Also, the amendment to section 1.382-2T(a)(2)(ii) made by T.D. 8264, relating to the filing of an information statement, is not adopted as a final regulation in this document, but will be addressed in connection with the temporary regulations published under section 382 on August 11, 1987.

 The final regulations under section 383 also adopt a change to section 1.383-1T(g) relating to the coordination of the rules of section 383 with rules and principles of section 382. These regulations provide that to the extent section 382(h)(6) (relating to the treatment of certain built-in items) applies to credits, the principles of section 383 apply to such credits. Regulations under section 382(h)(6) will address the application of that section to credits. Also, it is expected that separate proposed regulations addressing the allocation of income, loss and credits in the loss corporation's taxable year that includes the change date between pre- and post-change periods will provide additional rules for the application of sections 382 and 383 with respect to the change year.

SPECIAL ANALYSES

 It has been determined that these rules are not major rules as defined in Executive Order 12291. Therefore, a Regulatory Impact Analysis is not required. It has also been determined that section 553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 6) do not apply to these regulations, and, therefore, a final Regulatory Flexibility Analysis is not required. Pursuant to section 7805(f) of the Internal Revenue Code (as then in effect), the Notice of Proposed Rulemaking for the regulations was submitted to the Administrator of the Small Business Administration for comments on their impact on small business.

DRAFTING INFORMATION

 The principal author of these regulations is Lori J. Jones of the Office of Assistant Chief Counsel, Corporate, Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and Treasury Department participated in developing the regulation, on matters of both substance and style.

LIST OF SUBJECTS

26 CFR 1.56-0T through 1.58-9T

Income taxes, Reporting and recordkeeping requirements.

26 CFR 1.301-1 through 1.383-3

Income taxes, Reporting and recordkeeping requirements.

26 CFR 602

Reporting and recordkeeping requirements.

ADOPTION OF AMENDMENTS TO THE REGULATIONS.

Accordingly, parts 1 and 602 of title 26 of the Code of Federal Regulations are amended as follows:

PART 1 -- INCOME TAX; TAXABLE YEARS BEGINNING AFTER DECEMBER 31, 1953

Paragraph 1. The authority citation for part 1 is amended in part by adding the following citation:

Authority: 26 U.S.C. 7805 * * * section 1.382-2 also issued under 26 U.S.C. 382(m) and 26 U.S.C. 383, and section 1.383-1 and section 1.383-2 also issued under 26 U.S.C. 383.

Par. 2. Section 1.56(g)-1 is amended by removing "section 1.382-2T(f)(1)" in paragraphs (k)(2) and in (k)(4) in Example paragraph (iv) and adding in lieu thereof "section 1.382-2(a)(1)".

Par. 3. New section 1.382-0 is added to read as follows:

SECTION 1.382-0 EFFECTIVE DATE.

(a) Temporary regulations section 1.382-1T and section 1.382-2T and the final regulations under 382 (other than the regulations described in paragraph (b) of this section) reflect the amendments made to sections 382 and 383 by the Tax Reform Act of 1986. See section 1.382-2T(m) for effective date rules.

(b) Sections 1.382-1A, 1.382-2A, 1.382-3A, and 1.382-4A do not reflect the amendments made to sections 382 and 383 by the Tax Reform Act of 1986.

Par. 4. Sections 1.382(a)-1, 1.382(b)-1, 1.382(c)-1 and 1.382-2 are amended as follows:

1. Section 1.382(a)-1 is redesignated as section 1.382-1A and the section heading is revised to read, "Purchase of a corporation and change in its trade or business (Pre-Tax Reform Act of 1986)".

2. Section 1.382(b)-1 is redesignated as section 1.382-2A and the section heading is revised to read, "Change of ownership as the result of a reorganization (Pre-Tax Reform Act of 1986)".

3. Section 1.382(c)-1 is redesignated as section 1.382-3A and the section heading is revised to read, "Definition of stock (Pre-Tax Reform Act of 1986)".

4. Section 1.382-2 is redesignated as section 1.382-4A.

Par. 5. An undesignated center heading is added to precede newly designated section 1.382-1A to read as follows:

"REGULATIONS APPLICABLE TO TAXABLE YEARS PRIOR TO TAX REFORM ACT OF 1986"

Par. 6. New sections 1.382-1 is added and reserved and 1.382-2 is added to read as follows:

SECTION 1.382-1 LIMITATIONS ON THE USE OF CERTAIN TAX ATTRIBUTES FOLLOWING AN OWNERSHIP CHANGE. [Reserved]

SECTION 1.382-2 DEFINITION OF OWNERSHIP CHANGE UNDER SECTION 382 AS AMENDED BY THE TAX REFORM ACT OF 1986.

(a) CERTAIN DEFINITIONS FOR PURPOSES OF SECTIONS 382 AND 383 AND THE REGULATIONS THEREUNDER. The following definitions apply for purposes of sections 382 and 383 and the regulations thereunder.

(b) [Reserved]

Par. 7. Section 1.382-1T is amended by removing the entries for paragraphs (a)(2)(iv) and (f)(1)(i), (ii) and (iii).

Par. 8. Section 1.382-2T is amended as follows:

1. By removing the "T" from references to "section 1.383-1T" wherever it appears in paragraphs (a)(1), (f)(1)(i) and (ii), and (f)(22)(iv) and (v).

2. The fifth sentence of paragraph (a)(1) is amended by removing "paragraphs (f)(1) and (3)" and adding in lieu thereof "section 1.382-2(a)(1) and paragraph (f)(3)".

3. The last sentence of paragraph (a)(2)(ii) is amended by removing "paragraph (a)(2)(iv) and" and adding in lieu thereof "section 1.383-1(k) and paragraph".

4. Paragraph (e)(2)(iv) is amended by removing "paragraph (f)(1)(ii)" in Example 3 and adding in lieu thereof "section 1.382-2(a)(1)(ii)," and by removing "paragraph (f)(1)(iii)" each place it appears in Examples 1, 2 and 3 and adding in lieu thereof "section 1.382-2(a)(1)(iii)".

5. Paragraph (f)(1) is redesignated as section 1.382-2(a)(1) and is amended by --

A. removing "paragraph (a)(2)(i) of this section" and adding in lieu thereof "section 1.382-2T(a)(2)(i)" in paragraph (a)(1)(i)(B),

B. removing "paragraph (f)(1)" and adding in lieu thereof "paragraph (a)(1)" each place it appears, and

C. removing "paragraph (e)(2)(iv) of this section" and adding in lieu thereof "section 1.382-2T(e)(2)(iv)" in paragraph (a)(1)(iii).

6. The second sentence of paragraph (f)(18)(ii)(C) is removed.

7. The second sentence of paragraph (f)(18)(iii)(C) is removed.

8. Paragraph (f)(22) is redesignated as section 1.382-2(a)(2).

9. The second sentence of paragraph (h)(4)(ix) is removed.

10. New paragraphs (f)(1) and (f)(22) are added to read as follows:

SECTION 1.382-2T DEFINITION OF OWNERSHIP CHANGE UNDER SECTION 382, AS AMENDED BY THE TAX REFORM ACT OF 1986 (TEMPORARY).

* * * * *

(f) * * *

(1) LOSS CORPORATION. See section 382 and section 1.382-2(a)(1) for the definition of a loss corporation.

* * * * *

(22) PRE-CHANGE LOSS. See section 382 and section 1.382-2(a)(2) for the definition of pre-change loss.

* * * * *

Par. 9. Section 1.383-0 is added as follows:

SECTION 1.383-0 EFFECTIVE DATE.

(a) The regulations under section 383 (other than the regulations described in paragraph (b) of this section) reflect the amendments made to sections 382 and 383 by the Tax Reform Act of 1986. See section 1.383-1(j) for effective date rules.

(b) Sections 1.383-1A, 1.383-2A, and 1.383-3A do not reflect the amendments made to sections 382 and 383 by the Tax Reform Act of 1986.

Par. 10. Sections 1.383-1, 1.383-2, and 1.383-3 are amended as follows:

1. Section 1.383-1 is redesignated as section 1.383-1A and the section heading is revised to read, "Special limitations on carryovers of unused investment credits, work incentive program credits, foreign taxes and capital losses (Pre-Tax Reform Act of 1986)".

2. Section 1.383-2 is redesignated as section 1.383-2A and the section heading is revised to read, "Purchase of a corporation and change in its trade or business (Pre-Tax Reform Act of 1986)".

3. Section 1.383-3 is redesignated as section 1.383-3A and the section heading is revised to read, "Change in ownership as the result of a reorganization (Pre-Tax Reform Act of 1986)".

4. Section 1.383-1A, as redesignated, is amended by removing "1.383-2 and 1.383-3" and adding in lieu thereof "1.383-2A and 1.383- 3A" in the next to the last sentence and by removing "section 1.382-2" in the last sentence and adding in lieu thereof "section 1.382-4A".

Par. 11. Section 1.383-1T is redesignated as section 1.383-1 and is amended as follows:

1. The section heading is revised by removing "(Temporary)".

2. Paragraph (a) is amended by adding at the end of the table of contents, "(k) Transitional rules regarding information statements".

3. Paragraph (c)(2)(ii) is amended by removing "attributable" and adding in lieu thereof "allocable".

4. Paragraphs (c)(3)(i)(B) and (ii)(B) are amended by removing "attributable" and adding in lieu thereof "allocable".

5. Paragraphs (c)(4) and (d)(2)(iii) are amended by removing "section 1.382-2T(f)(22)" and adding in lieu thereof "section 1.382-2(a)(2)".

6. Paragraph (e)(4)(i) is amended by removing in the last sentence, "general business credits arising in the taxable year are considered (under section 39) to offset regular tax liability before general business credit carryovers to the taxable year." and, adding in lieu thereof, "general business credit carryovers to the taxable year are considered (under section 39) to offset regular tax liability before general business credits arising in the taxable year."

7. Paragraph (e)(4)(ii) is amended by adding after "section 38(c)(2)," the words "as applicable, taking into account amendments made by section 11813 of the Revenue Reconciliation Act of 1990,".

8. Paragraph (g) is amended by adding a new sentence after the first sentence and adding a new sentence at the end thereof as set forth below.

SECTION 1.383-1 SPECIAL LIMITATIONS ON CERTAIN CAPITAL LOSSES AND EXCESS CREDITS.

* * * * *

(g) COORDINATION WITH SECTION 382 AND THE REGULATIONS THEREUNDER. * * * To the extent section 382(h)(6) applies to credits, the principles of this section apply to such credits. * * * For example, in applying section 1.382-2T(f)(18)(ii)(C), (f)(18)(iii)(C) and (h)(4)(ix), any pre-change credits, as defined in paragraph (c)(3) of this section, must be converted to a deduction equivalent by dividing the amount of such credits by the maximum effective rate of tax provided for under section 11 (e.g., 0.34 for taxable years beginning in 1989).

* * * * *

A further amendment is made to section 1.382-2T as follows:

Par. 12. Paragraph (a)(2)(iv) is redesignated as paragraph (k) of newly designated section 1.383-1 and amended by:

A. revising the heading of newly redesignated paragraph to read, "Transitional rules regarding information statements",

B. redesignating paragraphs (a)(2)(iv)(A) and (B) as paragraphs (k)(1) and (k)(2), respectively, of section 1.383-1,

C. removing "paragraph (a)(2)(ii) of this section" in newly redesignated paragraph (k)(1) and adding in lieu thereof, "section 1.382-2T(a)(2)(ii)",

D. removing "section 1.383-1T(c)(2)(i) and (ii)" each place it appears in newly redesignated paragraph (k) and adding in lieu thereof "paragraphs (c)(2)(i) and (ii) of this section",

E. removing "section 1.383-1T(c)(3)" each place it appears in newly redesignated paragraph (k) and adding in lieu thereof "paragraph (c)(3) of this section",

F. removing paragraphs (a)(2)(ii)(A) and (B) of this section" in newly redesignated paragraph (k) and adding in lieu thereof "section 1.382-2T(a)(2)(ii)(A) and (B)",

G. removing "section 1.383-1T" in newly redesignated paragraph (k)(2) and adding in lieu thereof "this section", and

H. removing "subdivision (B)" in the last sentence of newly redesignated paragraph (k)(2) and adding in lieu thereof "paragraph (k)(2)".

Par. 13. Section 1.383-2T is redesignated as section 1.383-2 and the section heading is amended by removing "(Temporary)".

PART 602 -- OMB CONTROL NUMBERS UNDER PAPERWORK REDUCTION ACT

Par. 14. The authority for part 602 continues to read as follows:

Authority: 26 U.S.C. 78

Par. 15. Section 602.101(c) is amended by inserting in the appropriate place in the table "Section 1.383-1 * * * 1545-0123".