(a) Outline of topics. In order to facilitate the use of this section, this paragraph lists the paragraphs, subparagraphs and subdivisions contained in this section.

(b) In general. Under section 383, if an ownership change occurs with respect to a loss corporation, the section 382 limitation and the section 383 credit limitation (as defined in paragraph (c)(6) of this section) for a post-change year shall apply to limit the amount of taxable income and regular tax liability, respectively, that can be offset by pre-change capital losses and pre-change credits of the new loss corporation. The section 383 credit limitation for a post-change year bears a direct relationship to the amount, if any, of the section 382 limitation that remains after taking into account the reduction in the loss corporation's taxable income during a post-change year as a result of its pre-change losses (as defined in paragraph (c)(4) of this section). In general, the section 383 credit limitation is an amount equal to the tax liability of the new loss corporation for the post-change year which is attributable to so much of the corporation's taxable income that would be reduced by allowing as a deduction its section 382 limitation remaining after accounting for the use of pre-change losses. As pre-change losses and pre-change credits of a corporation are used, they absorb the section 382 limitation and the section 383 credit limitation, respectively, in the manner prescribed by paragraph (d) of this section. See also section 382 and the regulations thereunder.

(c) Definitions—(1) Coordination with definitions and nomenclature used in section 382. Terms and nomenclature used in this section, and not otherwise defined herein, shall have the same respective meanings as in section 382 and the regulations thereunder, taking into account that the limitations of section 383 and this section apply to pre-change capital losses and pre-change credits.

(2) Pre-change capital loss. The term pre-change capital loss means—

(i) Any capital loss carryover under section 1212 of the old loss corporation to the taxable year ending on the change date or in which the change date occurs,

(ii) Any net capital loss of the old loss corporation for the taxable year in which the ownership change occurs, to the extent such loss is allocable to the period in such year ending on or before the change date, and

(iii) If the old loss corporation has a net unrealized built-in loss, any recognized built-in loss for any recognition period taxable year (within the meaning of section 382(h)) that is a capital loss.

(3) Pre-change credit. The term pre-change credit means—

(i) Any excess foreign taxes under section 904(c) of the old loss corporation—

(A) carried forward to the taxable year ending on the change date or in which the change date occurs, or

(B) carried forward from the taxable year that includes the change date, to the extent such credit is allocable to the period in such year ending on or before the change date,

(ii) Any credit under section 38 of the old loss corporation—

(A) carried forward to the taxable year ending on the change date or in which the change date occurs, or

(B) carried forward from a taxable year that includes the change date to the extent such credit is allocable to the period in such year ending on or before the change date, and

(iii) The available minimum tax credit of the old loss corporation under section 53 to the extent attributable to periods ending on or before the change date.

(4) Pre-change loss. Solely for purposes of this section, the term prechange loss means any pre-change loss described in §1.382-2(a)(2) other than pre-change credits described in paragraph (c)(3) of this section.

(5) Regular tax liability. For purposes of this section, the term regular tax liability has the same meaning as provided in section 26(b).

(6) Section 383 credit limitation—(i) Definition. The section 383 credit limitation for a post-change year of a new loss corporation is an amount equal to the excess of—

(A) The new loss corporation's regular tax liability for the post-change year, over

(B) The new loss corporation's regular tax liability for the post-change year computed, for this purpose, by allowing as an additional deduction an amount equal to the section 382 limitation remaining after the application of paragraphs (d)(2)(i) through (iv) of this section.

(ii) Example.

(d) Limitation on use of pre-change losses and pre-change credits—(1) In general. The amount of taxable income of a new loss corporation for any post-change year that may be offset by pre-change losses shall not exceed the amount of the section 382 limitation for the post-change year. The amount of the regular tax liability of a new loss corporation for any post-change year that may be offset by pre-change credits shall not exceed the amount of the section 383 credit limitation for the post-change year.

(2) Ordering rules for utilization of pre-change losses and pre-change credits and for absorption of the section 382 limitation and the section 383 credit limitation. Pre-change losses described in any subdivision of this paragraph (d)(2) can offset taxable income in a post-change year only to the extent that the section 382 limitation for that year has not been absorbed by pre-change losses described in any lower-numbered subdivisions. Pre-change credits described in any subdivision of this paragraph (d)(2) can offset regular tax liability in a post-change year only to the extent that the section 383 credit limitation for that year has not been absorbed by pre-change credits described in any lower numbered subdivisions. The section 382 limitation is absorbed by one dollar for each dollar of pre-change loss that is used to offset taxable income. The section 383 credit limitation is absorbed by one dollar for each dollar of pre-change credit that is used to offset regular tax liability. For each post-change year, the section 382 limitation and the section 383 credit limitation of a new loss corporation are absorbed by such corporation's pre-change losses and pre-change credits in the following order:

(i) Pre-change capital losses described in paragraph (c)(2)(iii) of this section that are recognized and are subject to the section 382 limitation in such post-change year,

(ii) Pre-change capital losses described in paragraphs (c)(2)(i) and (ii) of this section,

(iii) Pre-change losses that are described in §1.382-2(a)(2) (other than losses that are pre-change capital losses) that are recognized and are subject to the section 382 limitation in such post-change year,

(iv) Pre-change losses not described in paragraphs (d)(2)(i) through (iii) of this section,

(v) Pre-change credits described in paragraph (c)(3)(i) of this section (excess foreign taxes),

(vi) Pre-change credits described in paragraph (c)(3)(ii) of this section (business credits), and

(vii) Pre-change credits described in paragraph (c)(3)(iii) of this section (minimum tax credit).

(3) Coordination with other limitations—(i) In general. Paragraphs (d)(1) and (2) of this section shall be applied after the application of all other limitations contained in subtitle A which are applicable to the use of a pre-change loss or pre-change credit in a post-change year. Thus, only otherwise currently allowable pre-change losses and pre-change credits will result in the absorption of the section 382 limitation and the section 383 credit limitation. The application of section 59A is not a limitation contained in subtitle A for purposes of this paragraph (d)(3)(i). Therefore, the treatment of pre-change losses and pre-change credits in the computation of the base erosion minimum tax amount will not affect whether such losses or credits result in absorption of the section 382 limitation and the section 383 credit limitation.

(ii) Examples:

(e) Carryforward of unused section 382 limitation—(1) Computation of carryforward amount. The section 382 limitation that can be carried forward under section 382(b)(2) is the excess, if any, of (i) the section 382 limitation for the post-change year remaining after the application of paragraphs (d)(2)(i) through (iv) of this section, over (ii) the section 383 credit reduction amount for that post-change year.

(2) Section 383 credit reduction amount. The section 383 credit reduction amount for a post-change year is equal to the amount of taxable income attributable to the portion of the new loss corporation's regular tax liability for the year that is offset by pre-change credits. Each dollar of regular tax liability that is offset by a dollar of pre-change credit is divided by the effective marginal rate at which that dollar of tax was imposed to determine the amount of taxable income that resulted in that particular dollar of regular tax liability. The sum of these “grossed-up” amounts for the taxable year is the section 383 credit reduction amount. In determining the effective marginal rate at which a dollar of tax was imposed, special rules regarding rates of tax (e.g., sections 11(b)(2) and (15) or taxable income brackets (e.g., section 1561), or both, shall be taken into account. See Example (3) in paragraph (f) of this section illustrating the effect of section 1561(a). Paragraph (e)(3) of this section illustrates the gross-up computation of the section 383 credit reduction amount based on the tax table and the rates of tax prescribed by section 11(b) as in effect for taxable years beginning on January 1, 1988.

(3) Computation of section 383 credit reduction amount; illustration using tax rates and brackets in effect for calendar year 1988.

(i) Assuming no special rules regarding rates of tax or taxable income brackets apply, the section 383 credit reduction amount for a new loss corporation is the sum of the amounts determined under paragraphs (e)(3)(ii), (iii), (iv), (v), and (vi) of this section.

(ii) The amount determined under this subdivision (ii) is the amount (if any) by which pre-change credits offset so much of the new loss corporation's regular tax liability as exceeds $113,900, divided by 0.34.

(iii) The amount determined under this subdivision (e)(3)(iii) is the amount (if any) by which pre-change credits offset so much of the new loss corporation's regular tax liability as exceeds $22,250 (but does not exceed $113,900), divided by 0.39.

(iv) The amount determined under this subdivision (e)(3)(iv) is the amount (if any) by which pre-change credits offset so much of the new loss corporation's regular tax liability as exceeds $13,750 (but does not exceed $22,250), divided by 0.34.

(v) The amount determined under this subdivision (e)(3)(v) is the amount (if any) by which pre-change credits offset so much of the new loss corporation's regular tax liability as exceeds $7,500 (but does not exceed $13,750), divided by 0.25.

(vi) The amount determined under this subdivision (e)(3)(vi) is the amount (if any) by which pre-change credits offset so much of the new loss corporation's regular tax liability as does not exceed $7,500, divided by 0.15.

(4) Special rules for determining the section 383 credit reduction amount—(i) Ordering rules. For purposes of this paragraph (e), credits, including pre-change credits, are considered to offset regular tax liability in the order that such credits are applied under the ordering rules of part IV of subchapter A of chapter 1 and section 904. For example, for purposes of this paragraph (e), excess foreign taxes carried over under section 904(c) (whether or not a pre-change credit) are considered (under section 38(c)) to offset regular tax liability before the 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.

(ii) Special rule for credits under section 38(a). For purposes of applying this paragraph (e), credits under section 38(a) that, under section 38(c)(2) as applicable, taking into account amendments made by section 11813 of the Revenue Reconciliation Act of 1990, effectively offset both regular tax liability and the tax imposed by section 55 (relating to minimum tax), are considered to offset regular tax liability.

(f) Examples. The following examples illustrate the operation of paragraphs (b) through (e) of this section. For purposes of these examples, the term modified tax liability means the amount determined under paragraph (c)(6)(i)(B) of this section.

(g) Coordination with section 382 and the regulations thereunder. The rules and principles of section 382 (including, for example, section 382(b)(3) and section 382(l)(2)) and the regulations thereunder shall also apply with respect to section 383 and this section. To the extent section 382(h)(6) applies to credits, the principles of this section apply to such credits. In applying the rules and principles of section 382 and the regulations thereunder, appropriate adjustments shall be made to take into account that section 383 and this section apply to pre-change capital losses and pre-change credits. For example, in applying §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).

(h) Alternative minimum tax. See §1.383-2T for the application of the limitations contained in sections 382 and 383 in computing the alternative minimum tax under section 55.

(i) [Reserved]

(j) Effective date. Subject to any exception from the application of section 382 or the section 382 limitation with respect to a loss corporation, section 383 and this section apply to any loss corporation with respect to which an ownership change occurs after December 31, 1986. See §1.382-2T(m) for effective date rules relating to ownership changes. If section 383 was not taken into account or was applied other than in accordance with this section in a prior taxable year with respect to which section 383 applies, the taxpayer should, within the period of limitation, file an amended return and pay any additional tax due plus interest.

(k) Transitional rules regarding information statements—(1) Exception. An information statement described in §1.382-2T(a)(2)(ii) of this section that would be required to be filed solely by reason of the loss corporation having pre-change capital losses (as defined in §1.382-2T (a)(2)(ii)(A) and (B) or pre-change credits (as defined in paragraph (c)(3) of this section) is not required to be filed with the income tax return of the loss corporation for any taxable year for which the due date (including extensions) of the income tax return is on or before November 20, 1989, or for which the income tax return is filed on or before October 10, 1989.

(2) Statement with respect to prior periods. A corporation which is a loss corporation for any taxable year ending in 1987, 1988 or 1989 solely because it has pre-change capital losses (as defined in paragraphs (c)(2)(i) and (ii) of this section or pre-change credits (as defined in paragraph (c)(3) of this section) must attach a separate information statement to its 1988 and 1989 income tax returns. Such information statement must (i) include the information specified in §1.382-2T (a)(2)(ii)(A) and (B) (without regard to testing dates before May 6, 1986) for each taxable year ending on or after May 6, 1986 for which the corporation was a loss corporation, (ii) state whether and to what extent pre-change capital losses (as defined in paragraphs (c)(2)(i) and (ii) of this section) or pre-change credits (as defined in paragraph (c)(3) of this section) utilized by the corporation in a taxable year to which the section 382 limitation applied, exceeded the amount permitted under this section, and (iii) be labeled “Information Statement with Respect to Transition Periods.” For purposes of the preceding sentence, information previously reported in an information statement, including a statement filed with a 1988 return, may be excluded. The requirements of this paragraph (k)(2) apply only with respect to 1988 and 1989 taxable years with respect to which the due date of the income tax return (including extensions) is after November 20, 1989, and for which the income tax return is not filed on or before October 10, 1989.

[T.D. 8264, 54 FR 38668, Sept. 20, 1989; T.D. 8264, 54 FR 46187, Nov. 1, 1989; T.D. 8264, 54 FR 50043, Dec. 4, 1989. Redesignated and amended by T.D. 8352, 56 FR 29434, June 27, 1991; T.D. 9885, 84 FR 67038, Dec. 6, 2019]