Par. 2. Sections 1.172(h)-0 through 1.172(h)-5 are added to read as follows:
(a) In general.
(b) Applicable corporation.
(1) In general.
(2) Predecessor and successor.
(c) CERT defined.
(1) In general.
(2) MSA defined.
(3) ED defined.
(d) Transactions tested as CERTs.
(1) Tax-free transactions.
(2) Multiple step plan of acquisition.
(3) Examples.
(e) Loss limitation years.
(f) Computation of three-year distribution average relevant to a potential ED.
(1) Integrated plan.
(2) Short taxable year.
(g) Effective/applicability date.
(a) In general. If there is a corporate equity reduction transaction (CERT) and an applicable corporation has a corporate equity reduction interest loss (CERIL) for any loss limitation year, section 172(b)(1)(E) and (h), this section, §§ 1.172(h)-2 through 1.172(h)-5, and § 1.1502-72 (collectively, the CERT rules ) limit the amount of net operating loss that can be carried back to any taxable year preceding the taxable year in which the CERT occurs. This section provides rules regarding the determination of whether a CERT has occurred and whether a taxable year constitutes a loss limitation year. See § 1.172(h)-2 for rules regarding the computation of a CERIL.
(b) Applicable corporation —(1) In general. The CERT rules apply only to applicable corporations. The term applicable corporation means a C corporation that acquires stock, or the stock of which is acquired, in a major stock acquisition (MSA), a C corporation making distributions with respect to, or redeeming, its stock in connection with an excess distribution (ED), or a C corporation that is a successor of any corporation described in this paragraph (b)(1). For special rules regarding the definition of an applicable corporation with regard to members that join and leave a consolidated group, see § 1.1502-72(a) and (b).
(2) Predecessor and successor. For purposes of the CERT rules, the term predecessor means a transferor or distributor of assets to a transferee or distributee (the successor) in a transaction to which section 381(a) applies. A corporation is a successor to its predecessor, and to all predecessors of that predecessor. If an applicable corporation transfers or distributes its assets to a successor, the successor is treated as an applicable corporation in the successor's taxable year during which the transfer or distribution occurs and any subsequent years.
(c) CERT defined —(1) In general. A CERT can be an MSA or an ED.
(2) MSA defined. An MSA is the acquisition by a corporation pursuant to a plan of such corporation (or any group of persons acting in concert with such corporation) of stock in another corporation representing 50 percent or more (by vote or value) of the stock in such other corporation.
(3) ED defined. An ED is any excess of the aggregate distributions made during a taxable year by a corporation with respect to its stock, over the greater of—
(i) 150 percent of the average of such distributions (the three-year distribution average) during the three taxable years immediately preceding such taxable year (the distribution lookback period); or
(ii) 10 percent of the fair market value of the stock of such corporation as of the beginning of such taxable year. For purposes of testing a potential ED, distributions include redemptions.
(d) Transactions tested as CERTs —(1) Tax-free transactions. A transaction may constitute a CERT and must be tested under the CERT rules regardless of whether gain or loss is recognized by any party. For example, a distribution that qualifies for tax-free treatment under section 355 is tested as a potential ED (or part of a potential ED). Likewise, the acquisition by a corporation of 50 percent or more of the stock of another corporation in a transaction meeting the requirements of section 351, section 368(a)(1)(A) and (a)(2)(E), or section 368(a)(1)(B) constitutes an MSA.
(2) Multiple step plan of acquisition. Solely for purposes of determining whether an MSA has occurred and determining the consequences of an MSA, all steps of an integrated plan (including redemptions and other distributions) are tested as a single potential MSA. If an integrated plan qualifies as an MSA and includes one or more distributions, then, for purposes of applying the CERT rules, the distributions are treated solely as a part of the MSA, regardless of whether such distributions would otherwise constitute an ED (or would so qualify in conjunction with other distributions). Any distributions during the year that are not part of the integrated plan qualifying as an MSA are tested as a potential ED.
(3) Examples. The following examples illustrate the rules of this paragraph (d). For purposes of these examples, unless otherwise stated, assume that all entities are domestic C corporations that do not join in the filing of a consolidated return and that the entities have no history of paying dividends or otherwise making distributions:
Example 1. Spin-off.
Distributing corporation (D) distributes stock of controlled corporation (C) to its shareholders in a transaction that satisfies the requirements of section 355. There is no taxable “boot” associated with the distribution. Pursuant to paragraph (d)(1) of this section, D's distribution of C stock is tested as a potential ED (in conjunction with any other distributions by D during the same taxable year). The same result would obtain if D distributes boot to its shareholders in addition to C stock.
Example 2.
Bootstrap acquisition. (i) Facts. T is a publicly-traded, widely-held corporation with a single class of stock outstanding with a fair market value of $100. The following steps occur as part of an integrated plan. Corporation A acquires 10 percent of the outstanding stock of T for $10. A forms a new corporation, S, with a contribution of $25. S obtains a loan of $65 from an unrelated lender, and then merges with and into T, with T surviving. In the merger, all shareholders of T except A receive cash in exchange for their shares, and as a consequence, A owns all of the outstanding stock of T. As a result of the merger, T becomes liable for S's $65 loan. Assume that the $90 cash payment from T to the T shareholders should be treated as a redemption to the extent of the $65 loan assumed by T, and as a stock acquisition by A to the extent of the remaining $25.
(ii) Analysis. A's direct acquisition of 10 percent of T's outstanding stock and the steps culminating with the merger are part of an integrated plan. Therefore, the multiple steps are tested together as a potential MSA. Because the steps of the integrated plan resulted in A's acquisition of 100 percent of T, the transaction is treated as a single MSA. Furthermore, because the $65 redemption is part of an MSA, it is treated solely as part of the MSA and is not tested as a potential ED. See paragraph (d)(2) of this section.
(e) Loss limitation years. The taxable year in which a CERT occurs and each of the two succeeding taxable years constitute loss limitation years with regard to the CERT. See § 1.172(h)-4(b) (addressing loss limitation years of successors) and § 1.1502-72(a)(3) (addressing loss limitation years of consolidated groups and former members of consolidated groups).
(f) Computation of three-year distribution average relevant to a potential ED —(1) Integrated plan. Section 172(h)(3)(C)(ii)(I) and paragraph (c)(3) of this section treat as an ED the excess of distributions in a taxable year over the taxpayer's average distributions (three-year distribution average) made in the three taxable years preceding the taxable year in which a potential ED occurs (distribution lookback period). The computation of a taxpayer's three-year distribution average under this paragraph (f) excludes any distribution during the distribution lookback period that is treated as part of an integrated plan qualifying as an MSA pursuant to paragraph (d)(2) of this section. See § 1.1502-72(f)(2) and (3) for rules relating to distributions (including intercompany distributions) made during a consolidated return year.
(2) Short taxable year. For purposes of computing the three-year distribution average under this paragraph (f), if the year of the potential ED is less than a full 12-month year, the distribution history with regard to any year of the taxpayer during a distribution lookback period (distribution lookback period year) equals the amount of distributions made during the distribution lookback period year multiplied by a fraction, the numerator of which equals the number of days in the short taxable year of the potential ED, and the denominator of which equals the number of days in the distribution lookback period year. The value of the fraction may not exceed 100 percent. No distributions are deemed made (in excess of amounts actually distributed) in a distribution lookback period year that is shorter than the year of the potential ED.
(g) Effective/applicability date. This section is applicable to CERTs occurring on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register . This section is also applicable to the deconsolidation of a member from, or the acquisition of a corporation by, a consolidated group that occurs on or after the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register . However, in each case, this section does not apply to any CERT, deconsolidation, or acquisition occurring pursuant to a written agreement that is binding before the date of publication of the Treasury decision adopting these rules as final regulations in the Federal Register .