Frequently Asked Questions
Who is eligible for the Common Control Exception to Built-in Gain Limitations?
The loss corporation and the gain corporation must have been members of the same controlled group (using a 50% ownership test) for the 5-year period ending on the acquisition date.
How does the Common Control Exception to Built-in Gain Limitations work?
Exempts corporations from the rule prohibiting preacquisition losses from offsetting built-in gains if the corporations were under common control for 5 years.
What law authorizes the Common Control Exception to Built-in Gain Limitations?
The Common Control Exception to Built-in Gain Limitations is authorized under IRC §384(b) of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §384
Source: Internal Revenue Code, Title 26, United States Code
§ 384. Limitation on use of preacquisition losses to offset built-in gains(a) General ruleIf—(1)(A) a corporation acquires directly (or through 1 or more other corporations) control of another corporation, or
(B) the assets of a corporation are acquired by another corporation in a reorganization described in subparagraph (A), (C), or (D) of section 368(a)(1), and
(2) either of such corporations is a gain corporation,
income for any recognition period taxable year (to the extent attributable to recognized built-in gains) shall not be offset by any preacquisition loss (other than a preacquisition loss of the gain corporation).
(b) Exception where corporations under common control(1) In generalSubsection (a) shall not apply to the preacquisition loss of any corporation if such corporation and the gain corporation were members of the same controlled group at all times during the 5-year period ending on the acquisition date.
(2) Controlled groupFor purposes of this subsection, the term “controlled group” means a controlled group of corporations (as defined in section 1563(a)); except that—(A) “more than 50 percent” shall be substituted for “at least 80 percent” each place it appears,
(B) the ownership requirements of section 1563(a) must be met both with respect to voting power and value, and
(C) the determination shall be made without regard to subsection (a)(4) of section 1563.
(3) Shorter period where corporations not in existence for 5 yearsIf either of the corporations referred to in paragraph (1) was not in existence throughout the 5-year period referred to in paragraph (1), the period during which such corporation was in existence (or if both, the shorter of such periods) shall be substituted for such 5-year period.
(c) DefinitionsFor purposes of this section—(1) Recognized built-in gain(A) In generalThe term “recognized built-in gain” means any gain recognized during the recognition period on the disposition of any asset except to the extent the gain corporation (or, in any case described in subsection (a)(1)(B), the acquiring corporation) establishes that—(i) such asset was not held by the gain corporation on the acquisition date, or
(ii) such gain exceeds the excess (if any) of—(I) the fair market value of such asset on the acquisition date, over
(II) the adjusted basis of such asset on such date.
(B) Treatment of certain income itemsAny item of income which is properly taken into account for any recognition period taxable year but which is attributable to periods before the acquisition date shall be treated as a recognized built-in gain for the taxable year in which it is properly taken into account and shall be taken into account in determining the amount of the net unrealized built-in gain.
(C) LimitationThe amount of the recognized built-in gains for any recognition period taxable year shall not exceed—(i) the net unrealized built-in gain, reduced by
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