[Code of Federal Regulations]
[Title 26, Volume 4]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.383-1]

[Page 523-529]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.383-1  Special limitations on certain capital losses and excess 
credits.

    (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.

    (a) Outline of topics.
    (b) In general.
    (c) Definitions.
    (1) Coordination with definitions and nomenclature used in section 
382.
    (2) Pre-change capital loss.
    (3) Pre-change credit.
    (4) Pre-change loss.
    (5) Regular tax liability.
    (6) Section 383 credit limitation.
    (i) Definition.
    (ii) Example.
    (d) Limitation on use of pre-change losses and pre-change credits.
    (1) In general.
    (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.
    (3) Coordination with other limitations.

[[Page 524]]

    (i) In general.
    (ii) Examples.
    (e) Carryforward of unused section 382 limitation.
    (1) Computation of carryforward amount.
    (2) Section 383 credit reduction amount.
    (3) Computation of section 383 credit reduction amount; illustration 
using tax rates and brackets in effect for calendar year 1988.
    (4) Special rules for determining the section 383 credit reduction 
amount.
    (i) Ordering rules.
    (ii) Special rule for credits under section 38(a).
    (f) Examples.
    (g) Coordination with section 382 and the regulations thereunder.
    (h) Alternative minimum tax.
    (i) [Reserved]
    (j) Effective date.
    (k) Transitional rules regarding information statements

    (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

[[Page 525]]

loss described in Sec. 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.

     L, a new loss corporation, is a calendar year taxpayer. L has an 
ownership change on December 31, 1987. For 1988, L has taxable income 
(prior to the use of any pre-change losses) of $100,000. In addition, L 
has a section 382 limitation of $25,000, a pre-change net operating loss 
carryover of $12,000, a pre-change minimum tax credit of $50,000, and no 
pre-change capital losses. L's section 383 credit limitation is the 
excess of its regular tax liability computed after allowing a $12,000 
net operating loss deduction (taxable income of $88,000; regular tax 
liability of $18,170), over its regular tax liability computed after 
allowing an additional deduction in the amount of L's section 382 
limitation remaining after the application of paragraphs (d)(2)(i) 
through (iv) of this section, or $13,000 (taxable income of $75,000; 
regular tax liability of $13,750). L's section 383 credit limitation is 
therefore $4,420 ($18,170 minus $13,750).

    (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 Sec. 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).

[[Page 526]]

    (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.
    (ii) Examples:

    Example (1). L is a calendar year taxpayer and has an ownership 
change on December 31, 1987. For 1988, L has taxable income of $300,000, 
a regular tax liability of $100,250 and a tentative minimum tax of 
$90,000. L has no pre-change losses, but has a business credit 
carryforward from 1985 of $25,000, no portion of which is due to the 
regular percentage of the investment tax credit under section 46. L has 
a section 382 limitation for 1988 of $50,000. L's section 383 credit 
limitation is $19,500, i.e., an amount equal to the excess of L's 
regular tax liability ($100,250) over its regular tax liability 
calculated by allowing an additional deduction of $50,000. Pursuant to 
the limitation contained in section 38(c), however, L is entitled to use 
only $10,250 of its business credit carryforward in 1988. The unabsorbed 
portion of L's section 382 limitation (computed pursuant to paragraph 
(e) of this section) is carried forward under section 382(b)(2). The 
unused portion of L's business credit carryforward, $14,750, is carried 
forward to the extent provided in section 39.
    Example (2). Assume the same facts as in Example (1), except that 
L's tentative minimum tax is $70,000. L's use of its investment tax 
credit carryforward is no longer limited by section 38(c); however, 
pursuant to section 383 and this section, L is entitled to use only 
$19,500 of its business credit carryforward in 1988. The unused portion 
of L's business credit carryforward, $5,500, is carried forward to the 
extent provided in section 39. There is no unused section 382 limitation 
to be carried forward.

    (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

[[Page 527]]

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.

    Example (1). (i) L, a calendar year taxpayer, has an ownership 
change on December 31, 1987. Before the application of carryovers, L, a 
new loss corporation, has $60,000 of capital gain, $100,000 of ordinary 
taxable income and a section 382 limitation of $100,000 for its first 
post-change year beginning after the change date. L's only carryovers 
are an $80,000 capital loss carryover and a $100,000 net operating loss 
carryover. Both carryovers are from taxable years ending before the 
change date and thus are pre-change losses.
    (ii) L first uses $60,000 of its pre-change capital loss carryover 
to offset its capital gain. This reduces its section 382 limitation to 
$40,000 (i.e., $100,000-$60,000). L's pre-change net operating loss 
carryover can therefore be used only to the extent of $40,000. L's 
remaining $20,000 pre-change capital loss carryover and remaining 
$60,000 pre-change net operating loss carryover are carried to later 
years to the extent permitted under this section and sections 172, 
382(l)(2) and 1212.
    Example (2). (i) L, a calendar year taxpayer, has an ownership 
change on December 31, 1987. L has $750,000 of ordinary taxable income 
(before the application of carryovers) and a section 382 limitation of 
$1,500,000 for 1988. L's only carryovers are from pre-1987 taxable years 
and consist of a $500,000 net operating loss (``NOL'') carryover and a 
$200,000 foreign tax credit carryover, all of which may be used under 
the section 904 limitation. The NOL carryover is a pre-change loss, and 
the foreign tax credit carryover is a pre-change credit. L has no other 
credits which can be used for 1988 and is not liable for an alternative 
minimum tax for 1988.
    (ii) The following computation illustrates the application of this 
section for 1988:

 1. Taxable income before carryovers.......................     $750,000
 2. Pre-change NOL carryover...............................      500,000
 3. Section 382 limitation.................................    1,500,000
 4. Amount of pre-change NOL carryover that can be used          500,000
 (lesser of line 1, 2, or 3)...............................
 5. Taxable income (line 1 minus line 4)...................      250,000
 6. Section 382 limitation remaining (line 3 minus line 4).    1,000,000
 7. Pre-change credit carryover............................      200,000
 8. Regular tax liability (line 5 x section 11 rates):
    $50,000x0.15=$7,500
     25,000x0.25=6,250
     25,000x0.34=8,500
    150,000x0.39=58,500....................................       80,750
 9. Modified tax liability (line 5 minus line 6 (but not               0
 less than zero)) x section 11 rates)......................
10. Section 383 credit limitation (line 8 minus line 9)....       80,750
11. Amount of pre-change credits that can be used (lesser         80,750
 of line 7 or line 10).....................................
12. Amount of pre-change credits to be carried over to 1989      119,250
 under section 904(c) (line 7 minus line 11)...............
13. Section 383 credit reduction amount:
    ($80,750 minus $22,250)/0.39=$150,000
    ($22,250 minus $13,750)/0.34=25,000
    ($13,750 minus $7,500)/0.25=25,000
    $7,500/0.15=50,000.....................................      250,000
14. Section 382 limitation to be carried to 1989 under           750,000
 section 382(b)(2) (Line 6 minus line 13)..................



[[Page 528]]

    Example (3). (i) Assume the same facts as in Example (2), except 
that, for purposes of section 1561(a), L is a component member of a 
controlled group of corporations and the taxable income of the 
controlled group of corporations for 1988 is $2,000,000.
    (ii) The following computation illustrates the application of this 
section for 1988:

 1. Taxable income before carryovers.......................     $750,000
 2.Pre-change NOL carryover................................      500,000
 3. Section 382 limitation.................................    1,500,000
 4. Amount of pre-change NOL carryover that can be used          500,000
 (lesser of line 1, 2, or 3)...............................
 5. Taxable income (line 1 minus line 4)...................      250,000
 6. Section 382 limitation remaining (line 3 minus line 4).    1,000,000
 7. Pre-change credit carryover............................      200,000
 8. Regular tax liability (line 5x0.34 (the effective             85,000
 section 11 rate under section 1561(a)))...................
 9. Modified tax liability (line 5 minus line 6 (but not               0
 less than zero)) x section 11 rates)......................
10. Section 383 credit limitation (line 8 minus line 9)....       85,000
11. Amount of pre-change credits that can be used (lesser         85,000
 of line 7 or line 10).....................................
12. Amount of pre-change credits to be carried over to 1989      115,000
 under section 904(c) (line 7 minus line 11)...............
13. Section 383 credit reduction amount (line 11 divided by      250,000
 0.34).....................................................
14. Section 383 limitation to be carried to 1989 under           750,000
 section 382(b)(2) (line 6 minus line 13)..................


    Example (4). (i) L, a calendar year taxpayer, has an ownership 
change on December 31, 1987. L has $80,000 of ordinary taxable income 
(before the application of carryovers) and a section 382 limitation of 
$25,000 for 1988, a post-change year. L's only carryover is from a pre-
1987 taxable year and is a general business credit carryforward under 
section 39 in the amount of $10,000 (no portion of which is attributable 
to the investment tax credit under section 46). The general business 
credit carryforward is a pre-change credit. L has no other credits which 
can be used for 1988 and is not liable for an alternative minimum tax 
for 1988.
    (ii) The following computation illustrates the application of this 
section:

1. Taxable income..........................................      $80,000
2. Section 382 limitation..................................       25,000
3. Pre-change credit carryover.............................       10,000
4. Regular tax liability (line 1 x section 11 rates):
    $50,000x0.15=$7,500
    25,000x0.25=6,250
    5,000x0.34=1,700.......................................       15,450
5. Modified tax liability ((line 1 minus line 2) x section
 11 rates):
    $50,000x0.15=$7,500
    5,000x0.25=1,250.......................................        8,750
6. Section 383 credit limitation (line 4 minus line 5).....        6,700
7. Amount of pre-change credits that can be used (lesser of        6,700
 line 3 or line 6).........................................
8. Amount of pre-change credits to be carried over to 1989         3,300
 under sections 39 and 382(l)(2) (line 3 minus line 7).....
9. Regular tax payable (line 4 minus line 7)...............        8,750
10. Section 383 credit reduction amount:
    ($15,450 minus $13,750)/0.34=$5,000
    ($13,750 minus $8,750)/0.25=20,000.....................       25,000
11. Section 382 limitation to be carried to 1989 under                 0
 section 382(b)(2) (line 2 minus line 10)


    (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 Sec. 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 Sec. 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 Sec. 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 Sec. 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 Sec. 1.382-2T (a)(2)(ii)(A) and (B) or pre-change credits 
(as defined in paragraph

[[Page 529]]

(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 
Sec. 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]