Recapture of overall foreign loss
(1) General rule
(1)General rule#
For purposes of this subpart, in the case of any taxpayer who sustains an overall foreign loss for any taxable year, that portion of the taxpayer’s taxable income from sources without the United States for each succeeding taxable year which is equal to the lesser of—
(A) the amount of such loss (to the extent not used under this paragraph in prior taxable years), or
(B) 50 percent (or such larger percent as the taxpayer may choose) of the taxpayer’s taxable income from sources without the United States for such succeeding taxable year,
shall be treated as income from sources within the United States (and not as income from sources without the United States).
(1)(A)#
the amount of such loss (to the extent not used under this paragraph in prior taxable years), or
(1)(B)#
50 percent (or such larger percent as the taxpayer may choose) of the taxpayer’s taxable income from sources without the United States for such succeeding taxable year,
(2)Overall foreign loss defined#
For purposes of this subsection, the term “overall foreign loss” means the amount by which the gross income for the taxable year from sources without the United States (whether or not the taxpayer chooses the benefits of this subpart for such taxable year) for such year is exceeded by the sum of the deductions properly apportioned or allocated thereto, except that there shall not be taken into account—
(A) any net operating loss deduction allowable for such year under section 172(a), and
(B) any— (i) foreign expropriation loss for such year, as defined in section 172(h) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), or (ii) loss for such year which arises from fire, storm, shipwreck, or other casualty, or from theft,
to the extent such loss is not compensated for by insurance or otherwise.
(2)(A)#
any net operating loss deduction allowable for such year under section 172(a), and
(2)(B)#
any—
(i) foreign expropriation loss for such year, as defined in section 172(h) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), or
(ii) loss for such year which arises from fire, storm, shipwreck, or other casualty, or from theft,
(3)Dispositions#
(A) In general For purposes of this chapter, if property which has been used predominantly without the United States in a trade or business is disposed of during any taxable year— (i) the taxpayer, notwithstanding any other provision of this chapter (other than paragraph (1)), shall be deemed to have received and recognized taxable income from sources without the United States in the taxable year of the disposition, by reason of such disposition, in an amount equal to the lesser of the excess of the fair market value of such property over the taxpayer’s adjusted basis in such property or the remaining amount of the overall foreign losses which were not used under paragraph (1) for such taxable year or any prior taxable year, and (ii) paragraph (1) shall be applied with respect to such income by substituting “100 percent” for “50 percent”. In determining for purposes of this subparagraph whether the predominant use of any property has been without the United States, there shall be taken into account use during the 3-year period ending on the date of the disposition (or, if shorter, the period during which the property has been used in the trade or business).
(B) Disposition defined and special rules (i) For purposes of this subsection, the term “disposition” includes a sale, exchange, distribution, or gift of property whether or not gain or loss is recognized on the transfer. (ii) Any taxable income recognized solely by reason of subparagraph (A) shall have the same characterization it would have had if the taxpayer had sold or exchanged the property. (iii) The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect taxable income recognized solely by reason of subparagraph (A).
(C) Exceptions Notwithstanding subparagraph (B), the term “disposition” does not include— (i) a disposition of property which is not a material factor in the realization of income by the taxpayer, or (ii) a disposition of property to a domestic corporation in a distribution or transfer described in section 381(a).
(D) Application to certain dispositions of stock in controlled foreign corporation (i) In general This paragraph shall apply to an applicable disposition in the same manner as if it were a disposition of property described in subparagraph (A), except that the exception contained in subparagraph (C)(i) shall not apply. (ii) Applicable disposition For purposes of clause (i), the term “applicable disposition” means any disposition of any share of stock in a controlled foreign corporation in a transaction or series of transactions if, immediately before such transaction or series of transactions, the taxpayer owned more than 50 percent (by vote or value) of the stock of the controlled foreign corporation. Such term shall not include a disposition described in clause (iii) or (iv), except that clause (i) shall apply to any gain recognized on any such disposition. (iii) Exception for certain exchanges where ownership percentage retained A disposition shall not be treated as an applicable disposition under clause (ii) if it is part of a transaction or series of transactions— (I) to which section 351 or 721 applies, or under which the transferor receives stock in a foreign corporation in exchange for the stock in the controlled foreign corporation and the stock received is exchanged basis property (as defined in section 7701(a)(44)), and (II) immediately after which, the transferor owns (by vote or value) at least the same percentage of stock in the controlled foreign corporation (or, if the controlled foreign corporation is not in existence after such transaction or series of transactions, in another foreign corporation stock in 2 2 So in original. which was received by the transferor in exchange for stock in the controlled foreign corporation) as the percentage of stock in the controlled foreign corporation which the taxpayer owned immediately before such transaction or series of transactions. (iv) Exception for certain asset acquisitions A disposition shall not be treated as an applicable disposition under clause (ii) if it is part of a transaction or series of transactions in which the taxpayer (or any member of an affiliated group of corporations filing a consolidated return under section 1501 which includes the taxpayer) acquires the assets of a controlled foreign corporation in exchange for the shares of the controlled foreign corporation in a liquidation described in section 332 or a reorganization described in section 368(a)(1). (v) Controlled foreign corporation For purposes of this subparagraph, the term “controlled foreign corporation” has the meaning given such term by section 957. (vi) Stock ownership For purposes of this subparagraph, ownership of stock shall be determined under the rules of subsections (a) and (b) of section 958.
(4)Accumulation distributions of foreign trust#
For purposes of this chapter, in the case of amounts of income from sources without the United States which are treated under section 666 (without regard to subsections (b) and (c) thereof if the taxpayer chose to take a deduction with respect to the amounts described in such subsections under section 667(d)(1)(B)) as having been distributed by a foreign trust in a preceding taxable year, that portion of such amounts equal to the amount of any overall foreign loss sustained by the beneficiary in a year prior to the taxable year of the beneficiary in which such distribution is received from the trust shall be treated as income from sources within the United States (and not income from sources without the United States) to the extent that such loss was not used under this subsection in prior taxable years, or in the current taxable year, against other income of the beneficiary.
(5)Treatment of separate limitation losses#
(A) In general The amount of the separate limitation losses for any taxable year shall reduce income from sources within the United States for such taxable year only to the extent the aggregate amount of such losses exceeds the aggregate amount of the separate limitation incomes for such taxable year.
(B) Allocation of losses The separate limitation losses for any taxable year (to the extent such losses do not exceed the separate limitation incomes for such year) shall be allocated among (and operate to reduce) such incomes on a proportionate basis.
(C) Recharacterization of subsequent income If— (i) a separate limitation loss from any income category (hereinafter in this subparagraph referred to as “the loss category”) was allocated to income from any other category under subparagraph (B), and (ii) the loss category has income for a subsequent taxable year, such income (to the extent it does not exceed the aggregate separate limitation losses from the loss category not previously recharacterized under this subparagraph) shall be recharacterized as income from such other category in proportion to the prior reductions under subparagraph (B) in such other category not previously taken into account under this subparagraph. Nothing in the preceding sentence shall be construed as recharacterizing any tax.
(D) Special rules for losses from sources in the United States Any loss from sources in the United States for any taxable year (to the extent such loss does not exceed the separate limitation incomes from such year) shall be allocated among (and operate to reduce) such incomes on a proportionate basis. This subparagraph shall be applied after subparagraph (B).
(E) Definitions For purposes of this paragraph— (i) Income category The term “income category” means each separate category of income described in subsection (d)(1). (ii) Separate limitation income The term “separate limitation income” means, with respect to any income category, the taxable income from sources outside the United States, separately computed for such category. (iii) Separate limitation loss The term “separate limitation loss” means, with respect to any income category, the loss from such category determined under the principles of section 907(c)(4)(B).
(F) Dispositions If any separate limitation loss for any taxable year is allocated against any separate limitation income for such taxable year, except to the extent provided in regulations, rules similar to the rules of paragraph (3) shall apply to any disposition of property if gain from such disposition would be in the income category with respect to which there was such separate limitation loss.