2023 Laws of Puerto Rico › TITLE THIRTEEN - Taxation and Finance (§§ 1 — 33423) › Subtitle 17 - Internal Revenue Code of 2011 (§§ 30001 — 33423) › PART II - Income Taxes (§§ 30041 — 30622) › Chapter 1005 - Computation of Taxable Income (§§ 30101 — 30157) › Subchapter D - Determination of Capital Gains and Losses (§§ 30141 — 30149) › § 30144 - Recognition of gain or loss

(a) General rule.— In the sale or exchange of property, the total amount of the gain or loss determined under § 30143 of this title shall be recognized, except for the provisions of this section hereinafter.
(b) Exchanges solely in kind.—
(1) Property held for productive use or investment.— No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment (excluding stock in trade or other property held primarily for sale, stocks, bonds, or notes, shares, and interests, certificates of trust or beneficial interests or other securities or evidences of indebtedness or interest) if such property is exchanged solely for property of like kind which is to be held either for productive use in a trade or business or for investment.
(2) Stock for stock of same corporation.— No gain or loss shall be recognized if common stock in a corporation is exchanged solely for common stock in the same corporation, or if preferred stock in a corporation is exchanged solely for preferred stock in the same corporation.
(3) Stock for stock in case of reorganization.— No gain or loss shall be recognized if stock or securities in a corporation [that is] a party to a reorganization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation [that is] a party to the reorganization.
(4) Property for stock or securities in case of reorganization.— No gain or loss shall be recognized if a corporation [that is] a party to a reorganization exchanges property, in compliance with the plan of reorganization, solely for stock or securities in another corporation [that is] a party to the reorganization.
(5) Transfer to corporation controlled by transferor.—
(A) No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securities in such corporation and immediately after the exchange such person or persons are in control of the corporation.
(B) Special rules to shareholders.—
(i) The fact that any corporation that transfers property to another corporation in an exchange described in paragraph (A) distributes part or all of the stock in the corporation which it receives in the exchange to its shareholders shall not be taken into account provided that the requirement of control of such paragraph has been met.
(ii) Special rule for subsection (s) of this section.— If the requirements of subsection (s) of this section (or so much of subsection (c)(1) of this section as relates to subsection (s) of this section) are met with respect to a distribution described in subparagraph (i), then, solely for purposes of determining the tax treatment of the transfers of property to the controlled corporation by the distributing corporation, the fact that the shareholders of the distributing corporation dispose of part or all of the distributed stock, or the fact that the corporation whose stock was distributed issues additional stock, shall not be taken into account in determining control for purposes of this section.
(C) Treatment of controlled corporation.— If property is transferred to a corporation (hereinafter in this subsection referred to as the “controlled corporation”) in an exchange with respect to which gain or loss is not recognized (in whole or in part) to the transferor under paragraph (A), and such exchange is not in pursuance of a plan of reorganization, § 30144(p) of this title shall apply to any transfer in such exchange by the controlled corporation in the same manner as if such transfer were a distribution in respect to its shares.
(D) Exception.— This clause shall not apply to a transfer of property to an investment company, as said term is defined in regulations prescribed by the Secretary.
(6) Property received by a corporation in total liquidation of another corporation.— No gain or loss shall be recognized on the receipt by a corporation of property distributed in total liquidation of another corporation. For purposes of this clause, a distribution shall be considered to be in total liquidation only if:
(A) The corporation receiving such property was, on the date of the adoption of the plan of liquidation, and has continued to be at all times until the receipt of the property, the owner of stock in such other corporation who held at least eighty percent (80%) of the total combined voting power of the classes of stock entitled to vote and the owner of at least eighty percent (80%) of the total number of all the other classes of stock (except stock without voting rights, and limited and preferred stock in terms of dividends), and was not, at any moment whatsoever on or before the date of the adoption of the liquidation plan and until the receipt of the property, the owner of a percent of any class of stock greater than the percent of said class of stock owned at the moment of receipt of the property; and
(B) no distribution whatsoever was made under the liquidation plan before the first day of the taxable year of the corporation beginning after June 30, 1995; and either
(C) the distribution is by such other corporation in complete cancellation or redemption of all its stock, and the transfer of all the property occurs within the taxable year; in such case the adoption by the shareholders of the resolution under which is authorized the distribution of all the assets of such corporation in complete cancellation or redemption of all its stock shall be considered an adoption of a plan of liquidation, even though no time for the completion of the transfer of the property is specified in such resolution; or either
(D) such distribution is one of a series of distributions by such other corporation in complete cancellation or redemption of all its stock in accordance with a plan of liquidation under which the transfer of all the property under the liquidation is to be completed within three (3) years from the close of the taxable year during which is made the first of the series of distributions under the plan, except that if such transfer is not completed within such period, or if the taxpayer does not continue qualified under paragraph (A) until the completion of such transfer, no distribution under the plan shall be considered a distribution in total liquidation.
(E) If such transfer of all the property does not occur within the taxable year, the Secretary may require of the taxpayer such bond, or waiver of the statute of limitations on assessment and collection, or both, as he/she may deem necessary to insure (if the transfer of the property is not completed within such three (3)-year period, or if the taxpayer does not continue qualified under paragraph (A) until the completion of such transfer) the assessment and collection of all income taxes imposed by this part for such taxable year or subsequent taxable years, to the extent attributable to property so received.
(F) A distribution otherwise constituting a distribution in total liquidation within the meaning of this clause shall not be considered as not constituting such a distribution merely because it does not constitute a distribution or liquidation within the meaning of the corporate law under which the distribution is made; and for purposes of this clause, a transfer of property of such other corporation to the taxpayer shall not be considered as not constituting a distribution, or one of a series of distributions, in complete cancellation or redemption of all the stock of such other corporation, merely because the carrying out of the plan involves:
(i) The transfer under the plan to the taxpayer by such other corporation of property, not attributable to shares owned by the taxpayer, on an exchange described in clause (4) of this subsection, and
(ii) the complete cancellation or redemption under the plan, as a result of exchanges described in clause (3) of this subsection, of the shares not owned by the taxpayer.
(7) Transfer of property between spouses or incident to divorce.—
(A) General rule.— No gain or loss shall be recognized on a transfer of property from an individual to or in trust for the benefit of:
(i) A spouse, or
(ii) a former spouse, but only if the transfer is incident to the divorce.
(B) Transfer treated as gift and the transferee has transferor’s basis.— For the purpose of this part, in the case of any transfer of property described in paragraph (A):
(i) The property shall be treated as acquired by the transferee by gift, and
(ii) the basis of the transferee in the property shall be the adjusted basis of the transferor.
(C) Incident to divorce.— For purposes of paragraph (A)(ii), a transfer of property is incident to the divorce if such transfer:
(i) Occurs within one (1) year after the date on which the marriage ceases, or
(ii) is related to the cessation of the marriage.
(D) Special rule where spouse is nonresident alien.— Paragraph (A)(i) shall not apply if the spouse of the individual making the transfer is a nonresident alien.
(E) Transfers in trust where liability exceeds basis.— Paragraph (A) shall not apply to the transfer of property in trust to the extent that the sum of the amount of the liabilities assumed, plus the amount of the liabilities to which the property is subject, exceeds the total of the adjusted basis of the property transferred.
(F) Proper adjustment shall be made under paragraph (B) in the basis of the transferee in such property to take into account gain recognized by reason of the paragraph (E).
(8) Gain or loss not recognized on reorganization of corporations in certain receivership and bankruptcy proceedings.— No gain or loss shall be recognized if property of a corporation is transferred in pursuance of an order of the court having jurisdiction over such corporation:
(A) In a receivership, foreclosure, or similar proceeding, or
(B) in a proceeding under Section 77B or Chapter X of the National Bankruptcy Act, as amended, to another corporation organized or made use of to effectuate a plan of reorganization approved by the court in such proceeding, in exchange solely for stock or securities in such other corporation.
(9) Indirect exchanges and transfers solely of insurance policies.—
(A) Definitions.— For the purpose of this clause, the following terms shall have the meaning stated hereinbelow:
(i) Endowment contract.— The term “contract of endowment insurance” means a contract with an insurance company which depends in part on the life expectancy of the insured, but which may be payable in full in a single payment or installments during his/her life.
(ii) Annuity contract.— The term “annuity contract” means a contract that may be payable during the life of the annuitant only in installments. The annuity may be fixed or variable, and the amounts may be covered into one or more accounts separated under the terms and conditions provided by the Insurance Code of Puerto Rico.
(iii) Life insurance contract.— The term “contract of life insurance” means a contract of endowment insurance that is not ordinarily payable in full during the life of the insured.
(B) Exchange on insurance contracts.— No gain or loss shall be recognized on the exchange if:
(i) A contract of life insurance is exchanged for another contract of life insurance or for an endowment or annuity contract or any combination thereof; or
(ii) a contract of endowment insurance is exchanged for another contract of endowment insurance which provides for regular payments beginning at a date not later than the date payments would have begun under the contract exchanged, or for an annuity contract, or any combination thereof, or
(iii) an annuity contract is exchanged for another annuity contract or a contract of endowment insurance which provides for regular payments beginning at a date not later than the date payments would have begun under the contract exchanged, or a combination thereof.
(C) Indirect transfers.— No gain or loss in the total distribution of the benefits acquired in a life insurance contract, endowment or annuity contract shall be recognized if the total amount received is paid within sixty (60) days following the receipt of the distribution for the purchase or acquisition of another insurance contract, as provided in this paragraph.
(i) In the case of a total distribution of a life insurance contract, the total amount distributed is paid for the purchase of another life insurance, endowment, or annuity contract or any combination thereof;
(ii) in the case of a total distribution of an endowment contract, the total distributed amount is paid for the purchase of another endowment contract that provides for regular payments beginning on a date not later than the date payments would have begun under the exchanged contract, an annuity contract or any combination thereof, and
(iii) in the case of a total distribution of an annuity contract, the total distributed amount is paid for the purchase of another annuity contract or an endowment contract that provides for regular payments beginning on a date not later than the date payments would have been made under the exchanged contract, an annuity contract or any combination thereof.
(D) Exchanges and transfers involving nonresidents.— Paragraphs (B) and (C) of this clause shall not apply in the case of any indirect exchange or transfer resulting from the transfer of property to a nonresident individual of Puerto Rico. The Secretary is hereby empowered to prescribe exceptions through regulations to such effect.
(10) Deferral of gain or loss from the sale, assignment, exchange or transfer of eligible securities.—
(A) No gain or loss shall be recognized on the sale, assignment, exchange or transfer of eligible property when the total proceeds from the transaction is invested in eligible securities within one (1) year after the sale assignment, exchange or transfer of eligible property.
(B) Securities.— For purposes of this clause, the term “securities” means any:
(i) Promissory notes, notes, common or preferred stock, treasury stock, security futures, bonds;
(ii) interest of any kind as owner, member, or partner in a limited liability company or any kind of partnership;
(iii) evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, investment contract, preorganization certificate or subscription;
(iv) privilege on any security or on any group or index of securities (including any interest therein or based on the value thereof); or
(v) any instrument commonly known as a “security”, or any certificate of interest or participation in, or right to subscribe to or purchase, any of the foregoing.
(C) Eligible securities.— For purposes of this clause, “eligible securities” shall be:
(i) Securities issued by a qualified real estate investment trust under the provisions of § 30401(a) of this title; or
(ii) securities issued by an exempt investment trust that complies with the provisions of § 30522 of this title.
(D) Proceeds from the transaction.— For purposes of this clause, proceeds from the sale, assignment, exchange, or transfer of eligible property shall be:
(i) The total amount of cash realized in such transaction; minus
(ii) the amount of the debt secured by the eligible property and paid within thirty (30) days following the transaction;
(iii) provided that such debt has been incurred prior to November 1, 2013.
(E) Eligible property.— For purposes of this clause, “eligible property” shall be:
(i) Real property located in Puerto Rico; or
(ii) securities owned by Puerto Rico residents or United States citizens who are not Puerto Rico residents. However, in the case of stock issued by a corporation, eligible property shall only be the stock of a corporation engaged in trade or business in Puerto Rico and that derived more than fifty percent (50%) of its gross income for the three (3) taxable years immediately preceding the sale, assignment, or transfer, from the active conduct of its trade or business in Puerto Rico.
(F) Rules to prevent abuse.— The Secretary may impose through regulations, circular letter, or order the necessary rules to prevent the provisions of this Section from being used for the main purpose of evading taxes without making the corresponding investment in eligible securities of business actively involved in investments that comply with the provisions of §§ 30401 and 30522 of this title. However, such rules shall allow the sale and alienation of eligible securities in accordance with paragraph (G) of this clause, provided that such transactions are subject to taxation under this Code.
(G) Sale or alienation of eligible securities.— The sale of eligible securities (including the sale to the issuer of such securities acquired in the transaction described in paragraph (A) of this clause) shall not render void an election of non-recognition of gain or loss made under such paragraph. A resale agreement between the taxpayer and the issuer of such securities entered into simultaneously with a transaction described in paragraph (A) of this clause shall not impair the application of the provisions of said subsection with respect to the recognition of gain or loss in the sale of eligible property. A gain or loss shall only be recognized for eligible securities that have been sold, assigned, alienated or transferred.
(H) Basis and period of ownership of new property acquired.— When the acquisition or construction of new property does not result, under this clause, in recognized gain the adjusted basis of the new property shall be reduced by the gain not recognized in accordance with this clause. The ownership period for purposes of this part shall include the period during which the sold, assigned, exchanged, or transferred property subject to the provisions of this clause was possessed.
(c) Gain from exchanges not solely in kind.—
(1) If an exchange would be within the provisions of clauses (1), (2), (3), (5) or (9) of subsection (b), of the provisions of subsection (l) or of § 30144(s) of this title if it were not for the fact that the property received in exchange consists not only of property permitted by the provisions of subsection (l) or of § 30144(s) of this title to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.
(2) If a distribution made in pursuance of [a] reorganization plan would be within the provisions of clause (1) of this subsection, but results in the distribution of a taxable dividend, then the amount of the gain recognized under clause (1) shall be taxable as a dividend for each of the distributees to the extent that does not exceed the distributees’ share ratable to the undistributed commodities and benefits of the corporation accrued after February 28, 1913. The remainder, if any, of the gain recognized under clause (1) shall be taxable as a gain in the exchange of property.
(d) Property in exchange for stock or securities and other property or money in case of reorganization.— If an exchange would be within the provisions of clause (4) or (8) of subsection (b) if it were not for the fact that the property received in exchange consists not only of stocks or securities permitted by such clause to be received without the recognition of gain, but also of property or money, then:
(1) If the corporation receiving such other property or money distributes them in compliance with the reorganization plan, no gain on the exchange shall be recognized to the corporation, but
(2) if the corporation receiving such other property or money does not distribute them in compliance with the reorganization plan, the gain for the corporation, if any, shall be recognized but in an amount not in excess of the sum of such money and the fair market value of such other property so received and undistributed.
(e) Loss from exchanges not solely in kind.— If an exchange would be within the provisions of clauses (1), (2), (3), (4), (5), (8) or (9) of subsection (b), or within the provisions of clause (1), if it were not for the fact that the property received in exchange consists not only of property permitted by such provisions to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized.
(f) Involuntary conversions.— If property, as a result of its destruction in whole or in part, theft, seizure, or requisition or condemnation or threat or imminence thereof, is compulsorily or involuntarily converted:
(1) Conversion into similar property.— Into property similar or related in service or use to the property so converted, no gain shall be recognized.
(2) Conversion into money.— Into money or into property not similar or related in service or use to the converted property, the gain, if any, shall be recognized except to the extent hereinafter provided in this clause:
(A) Nonrecognition of gain.— If the taxpayer during the period specified in paragraph (B), for the purpose of replacing the property so converted, purchases other property similar or related in service or use to the property so converted, or purchases stock in the acquisition of control of a corporation owning such other property, or invests in the purchase of stocks of corporations that are engaged in industry or hotels (as hotel owner or operator) in Puerto Rico, or in the purchase of bonds of the Government of Puerto Rico or any of its instrumentalities or political subdivisions, or in the construction of buildings to be leased to nonprofit entities for hospitals, convalescent homes, and complementary facilities for said hospitals, clinics or convalescent homes, and complementary physical facilities at the election of the taxpayer the gain shall be recognized only to the extent that the amount realized upon such conversion (regardless of whether such amount is received in one or more taxable years) exceeds the cost of such other property, stock or bonds. Such election shall be made at such time and in such manner as the Secretary may prescribe by regulations. Notwithstanding the provisions of any other law, the gain not recognized in this manner shall be recognized in any subsequent sale or other disposition of such property, stock or bonds thus acquired.
For purposes of this clause:
(i) No property, stock or bond acquired before the disposition of the converted property shall be considered to have been acquired for the purpose of replacing such converted property unless held by the taxpayer on the date of such disposition, and
(ii) the taxpayer shall be considered to have purchased property, stock or bond only if, but for the provisions of § 30142(a)(9) of this title, the unadjusted basis of such property, stock or bond would be its cost within the meaning of § 30142(a) of this title.
(B) Period within which property must be replaced.— The period referred to in paragraph (A) shall be the period beginning with the date of the disposition of the converted property, or the earliest date of the threat or imminence of requisition or condemnation of the converted property, whichever is the earlier, and ending:
(i) One year after the close of the first taxable year in which any part of the gain upon the conversion is realized, or
(ii) subject to such terms and conditions as may be specified by the Secretary, at the close of such later date as the Secretary may designate on application by the taxpayer. Such application shall be made at such time and in such manner as the Secretary may prescribe by regulations.
(C) Time for assessment of deficiency attributable to gain upon conversion.— If a taxpayer has made the election provided in paragraph (A), then
(i) the statutory period for the assessment of any deficiency, for any taxable year in which any part of the gain on such conversion is realized, attributable to such gain shall not expire prior to the expiration of three (3) years from the date the Secretary is notified by the taxpayer (in such manner as the Secretary may prescribe by regulations) of the replacement of the converted property or of an intention not to replace, and
(ii) such deficiency may be assessed before the expiration of such three (3) year period notwithstanding the provisions of § 33002(f) of this title or the provisions of any other law or rule of law which would otherwise prevent such assessment.
(D) Time for assessment of other deficiencies attributable to election.— If the election provided in paragraph (A) is made by the taxpayer and such other property or such stock was purchased before the beginning of the last taxable year in which any part of the gain upon such conversion is realized, any deficiency, to the extent resulting from such election, for any taxable year ending before such last taxable year may be assessed (notwithstanding the provisions of § 33001 of this title or the provisions of any other law or rule of law which would otherwise prevent such assessment) at any time before the expiration of the period within which a deficiency for such last taxable year may be assessed.
(3) Impossibility to acquire similar property.— When the taxpayer is an individual and proves that he/she has been unable to acquire a similar property within the term prescribed by this part to the satisfaction of the Secretary, the gain, if any, shall be considered as if it were a long-term capital gain as said term is defined in § 30141(a)(4) of this title.
(4) Definition.— For purposes of clause (2), the term “disposition of the converted property” means the destruction, theft, seizure, requisition, or condemnation of the converted property, or the sale or exchange of such property under threat or imminence of requisition or condemnation.
(5) For purposes of this subsection, it shall also be understood that an involuntary conversion has occurred in every case in which a dealer receives from his/her principal or determined grantor payment for the modification, damage or conclusion of his/her dealer contract, but only if the dealer had a substantial investment of capital in his/her dealer business. In such case, and for purposes of clause (2)(A), no gain shall be recognized as to any part of that so received that the taxpayer invests during the period prescribed in paragraph (B), on property related to service or in use in his/her dealer business. If said payment is received through agreement with the principal or grantor in exchange of said contract, in order to apply the provision of this paragraph, the taxpayer shall prove, to the satisfaction of the Secretary, that said agreement was carried out under threat or imminence of damage or involuntary conclusion of said contract.
(6) This subsection shall not apply in the case of property used by the taxpayer as his/her principal residence.
(g) Definition of reorganization.— As used in this section (except in subsection (b)(8) and in clause (1) of this subsection) and in § 30142 of this title (except in subsection (a)(15)):
(1) The term “reorganization” means:
(A) A statutory merger or consolidation; or
(B) the acquisition by a corporation, in exchange solely for all or a part of its voting stock (or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation), of stock of another corporation if, immediately after the acquisition, the acquiring corporation has control of such other corporation (whether or not such acquiring corporation had control immediately before the acquisition); or
(C) the acquisition by a corporation, in exchange solely for all or a part of its voting stock (or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation), of substantially all of the properties of another corporation, but in determining whether the exchange is solely for voting stock the assumption by the acquiring corporation of a liability of the other, or the fact that the acquired property is subject to a liability, shall be disregarded; or
(D) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transferor, or one or more of its shareholders (including persons who were shareholders immediately before the transfer), or any combination thereof, is in control of the corporation to which the assets are transferred; but only if, immediately after the transfer and in pursuance of the plan of reorganization, stock or securities of the transferee are distributed in a transaction which qualifies under subsections (b)(3) or (s) of this section; or
(E) a recapitalization, or
(F) a mere change in identity, form, or place of organization of a corporation, however executed.
(2) Special rules for clause (1):
(A) Any transaction otherwise qualifying under paragraphs (A), (B), or (C) of clause (1) shall not be disqualified by reason of the fact that part or all of the assets or stock acquired in the transaction are transferred to a corporation (transferee corporation) controlled by the corporation acquiring such assets or stock in the transaction. No gain or loss shall be recognized to the transferee corporation on receipt of the assets or stock in the transaction herein described. In determining the basis of the assets or stock received by the transferee corporation in the transaction, refer to § 30142(a)(7)(B) of this title.
(B) The acquisition by one corporation, in exchange for stock of a corporation referred to in this clause as “controlling corporation”, which is in control of the acquiring corporation of substantially all of the properties of another corporation, shall not disqualify a transaction under clause (1)(A) if:
(i) No stock of the acquiring corporation is used in the transaction, and
(ii) such transaction would have qualified under clause (1)(A) had the merger been into the controlling corporation.
(C) A transaction otherwise qualifying under clause (1)(A) shall not be disqualified by reason of the fact that stock of a corporation (controlling corporation) which before the merger was in control of the merged corporation is used in the transaction, if:
(i) After the transaction, the corporation surviving the merger holds substantially all of its properties and of the properties of the merged corporation (other than stock of the controlling corporation distributed in the transaction), and
(ii) in the transaction, former shareholders of the surviving corporation exchanged, for an amount of voting stock of the controlling corporation, an amount of stock in the surviving corporation which constitutes control of such corporation.
(D) A transaction shall fail to meet the requirements of clause (1)(C) unless the acquired corporation distributes the stock, securities, and other properties it receives, as well as its other properties, in pursuance of the plan of reorganization. For purposes of the preceding sentence, if the acquired corporation is liquidated pursuant to the plan of reorganization, any distribution to its creditors in connection with such liquidation shall be treated as pursuant to the plan of reorganization.
(E) Reorganizations qualifying under paragraphs (C) and (D) of clause (1).— If a transaction is described in both paragraphs (C) and (D) of clause (1), then, for purposes of this section (other than paragraph (A)), such transaction shall be treated as qualifying only under clause (1)(D).
(F) Additional considerations for certain cases under clause (1)(C).— If:
(i) A corporation acquires substantially all properties of another corporation,
(ii) the acquisition shall qualify under clause (1)(C) but for the fact that the acquiring corporation transfers money or other property in addition to voting stocks, and
(iii) the acquiring corporation acquires, solely in exchange for voting stocks described in clause (1)(C), property of the other corporation whose fair market value is at least eighty percent (80%) of the fair market value of all the property of the other corporation, then such acquisition shall (subject to the provisions of paragraph (E) of this clause) be treated as qualifying under clause (1)(C).
Only for purposes of determining the applicability of this subparagraph applies, the amount of any liability assumed by the acquiring corporation shall be treated as money paid for the property.
(G) Requirement for clause (1)(D) of this subsection.— Section 30144(b)(3) of this title shall apply to an exchange in pursuance of a plan of reorganization within the meaning of clause (1)(D) only if:
(i) The transferee corporation substantially acquires all the properties of the transferor corporation, and
(ii) the stocks, securities and other assets received by the transferor and the other properties of the transferor are distributed in pursuance of a plan of reorganization.
(H) Transactions under § 30144(b)(5) of this title and clause (1)(C).— If a transaction is described in § 30144(b)(5) of this title and clause (1)(C), such transaction shall be treated as qualifying only under clause (1)(C).
(3) Party to a reorganization.— As used in this section:
(A) The term “a party to a reorganization” includes a corporation resulting from a reorganization, and including both corporations, in the case of a reorganization resulting from the acquisition by one corporation of stock or properties of another.
(B) In the case of a reorganization qualifying under paragraph (B) or (C) of clause (1), if the stock exchanged for the stock or properties is stock of a corporation which is in control of the acquiring corporation, the term “a party to a reorganization” includes the corporation controlling the acquiring corporation.
(C) In the case of a reorganization qualifying under paragraph (A), (B), or (C) of clause (1), or by reason of clause (2)(A), the term “a party to a reorganization” includes the corporation controlling the corporation to which the acquired assets or stock are transferred.
(D) In the case of a reorganization qualifying under clause (1)(A) by reason of clause (2)(B), the term “a party to a reorganization” includes the “controlling corporation” referred to in such clause.
(E) In the case of a reorganization qualifying under clause (1)(A) by reason of clause (2)(C), the term “party to a reorganization” includes the “controlling corporation” therein referred to.
(h) Control defined.—
(1) General rule.— Except as provided in clause (2), as used in this part, except as otherwise provided, the term “control” means the ownership of stock possessing at least eighty percent (80%) of the total combined voting power of all classes of stock entitled to vote and at least eighty percent (80%) of the total number of shares of all other classes of stock of the corporation.
(2) Special rule to determine compliance with § 30144(g)(1)(D) of this title.— For the purpose of determining if a transaction qualifies under the provisions of subsection (g)(1)(D):
(A) In the case of a transaction in respect to which the requirements of § 30144(b)(3) of this title are met, the term “control” means the ownership of stock possessing at least fifty percent (50%) of the total combined voting power of all classes of stock entitled to vote and at least fifty percent (50%) of the number of shares of all other classes of stock of the corporation.
(B) In the case of a transaction in respect to which the requirements of § 30144(s) of this title (or provided in § 30144(c)(1) of this title, as relates to § 30144(s) of this title) are met, the fact that shareholders of the distributing corporation dispose of all or part of the distributed stock, or the fact that the corporation whose stocks was distributed issues additional stock, shall not be taken into account.
(i) Foreign corporations.—
(1) General rule.— If, in connection with any exchange described in clause (3), (4), (5) or (6) of subsection (b), or provided in subsection (c) as relates to clause (3) or (5) of subsection (b), or of subsection (d), a Puerto Rico person transfers property (other than stock or securities of a foreign corporation a party to an exchange or a reorganization) to a foreign corporation, the foreign corporation shall not, for purposes of determining the extent to which gain shall be recognized on such transfer, be considered to be a corporation, except that said corporation, by documentation to such effect, attests to the satisfaction of the Secretary and in accordance with the regulations prescribed by him/her, within a period of one hundred eighty-three (183) days after the exchange was made, that it does not have the purpose of evading income taxes of the Government of Puerto Rico.
(2) The Secretary shall also establish through regulations to such effect, the cases in which it shall not be a requirement to submit the documentation described in clause (1).
(3) Definition of person of Puerto Rico.— For the purpose of clause (1), the term “person of Puerto Rico” means a domestic corporation or resident corporation.
(j) Installment liabilities.— The nonrecognition of gain or loss in the case of installment liabilities shall be governed by § 30175(e) of this title.
(k) Assumption of liability not recognize.— Where, by virtue of an exchange, a taxpayer received, as part of the consideration to the taxpayer, property allowed by clause (4), (5) or (8) of subsection (b) to be received without recognition of gain if said property were the only consideration, and as part of the consideration another party to the exchange assumed a liability of the taxpayer or acquired from the taxpayer property subject to a liability, such assumption or acquisition shall be considered as “other property or money” received by the taxpayer within the meaning of subsections (c), (d) or (e), and shall not prevent the exchange from being within the provisions of clause (4), (5) or (8) of subsection (b); except that if, taking into account the nature of the liability and the circumstances under which the arrangement for the assumption or the acquisition were made, the main purpose of the taxpayer in respect to the assumption or the acquisition appears to be the evasion of income taxes of the Government of Puerto Rico on the exchange, or rather, such purpose was not one that served a bona fide purpose of the business, such assumption or acquisition (in the amount of the liability) shall be, for purposes of this section, considered as money received by the taxpayer on the exchange. In any lawsuit or proceeding where the taxpayer has the burden of proving that such assumption or acquisition is not to be considered as money received by him/her, such fact shall not be deemed as proven unless the taxpayer attests to it by clear preponderance of evidence.
(l) Exchange by security holders in respect to certain corporate reorganizations.— No gain or loss shall be recognized in an exchange consisting of the relinquishment or extinguishing of stock or securities in a corporation whose plan of reorganization was approved by a court in any proceeding described in subsection (b)(8), in consideration of the acquisition solely of stock or securities in a corporation organized or made use of to effectuate such plan or reorganization.
(m) Gain from sale or exchange of residence.—
(1) Nonrecognition of gain.— If a property (hereinafter in this subsection “old residence”) used by the taxpayer as his/her main residence is sold by him/her and, within a period beginning two (2) years prior to the date of such sale and ending two (2) years after such date, another property located in Puerto Rico (hereinafter in this subsection “new residence”) is purchased and used by the taxpayer as his/her main residence, gain, if any, from such sale shall be recognized only to the amount that the taxpayer’s adjusted sales price of the old residence exceeds the taxpayer’s cost of purchasing the new residence. For purposes of these provisions, the term “adjusted sales price” means the amount realized, as such term is defined in § 30143(b) of this title, reduced by the amount of the costs incurred by the taxpayer for work performed on the old residence in order to make it marketable. The adjusted sales price shall only apply to expenses:
(A) For work performed during the ninety (90)-day period ending on the date on which the contract of sale of the old residence is entered into;
(B) which are paid on or before thirty (30) days after the date of the sale of the old residence, and
(C) which are not allowable as a deduction in computing net income under § 30105 of this title and are not taken into account in computing the amount realized from the sale of the old residence.
(2) Rules for application of this subsection.— For purposes of this subsection:
(A) An exchange by the taxpayer of his/her residence for other property shall be considered as a sale of such residence, and the acquisition of a residence on the exchange of property shall be considered as a purchase of such residence.
(B) If the taxpayer’s residence, as a result of its destruction in whole or in part, theft, or seizure, is compulsory or involuntarily converted into property or into money, such destruction, theft or seizure shall be considered as a sale of the residence, and if the residence is so converted into property which is used by the taxpayer as his/her residence, such conversion shall be considered as a purchase of such property by the taxpayer.
(C) In the case of an exchange or conversion described in paragraph (A) or (B), in determining the extent to which the sales price of the old residence exceeds the taxpayer’s cost of purchasing the new residence, the amount realized by the taxpayer upon such exchange or conversion shall be considered the sales price of the old residence.
(D) A residence, any part of which was constructed or reconstructed by the taxpayer, shall be considered as purchased by the taxpayer. In determining the taxpayer’s cost of purchasing a residence, there shall be included only so much of the cost as is attributable to the acquisition, construction, reconstruction, and improvements made which are properly chargeable to capital account, during the period specified in clause (1).
(E) If a residence is purchased by the taxpayer prior to the date of his/her sale of the old residence, the purchased residence shall not be treated as his/her new residence if sold or if otherwise disposed of by the taxpayer prior to the date of the sale of the old residence.
(F) If the taxpayer, during the period described in clause (1), purchases more than one residence which are used by him/her as his/her principal residences at some time within two (2) years after the date of the sale of the old residence, only the last of such residences so used by him/her after the date of such sale shall constitute the new residence. If within the two (2) years referred to in the preceding sentence, the property used by the taxpayer as his/her principal residence is object of destruction, theft, seizure, requisition or condemnation, or is sold or exchanged under threat or imminence thereof, then for purposes of the preceding sentence, such two (2) year period shall be considered as ending on the date of such destruction, theft, seizure, requisition, expropriation, sale or exchange.
(3) Limitation.— The provisions of clause (1) shall not be applicable in respect to the sale of the taxpayer’s residence if within two (2) years prior to the date of such sale, the taxpayer sold at a gain other property used by him/her as his/her principal residence, and any part of such gain was not recognized by reason of the provisions of clause (1). For purposes of this clause, the destruction, theft, seizure, requisition or condemnation of property or the sale or exchange of property under threat or imminence thereof, shall not be considered as a sale of such property.
(4) Basis of new residence.— Where the purchase of a new residence results in the nonrecognition of gain on the sale of an old residence, under clause (1), in determining the adjusted basis of the new residence as of any time following the sale of the old residence, the adjustments to basis shall include a reduction by an amount equal to the amount of the gain not so recognized on the sale of the old residence. For this purpose, the amount of the gain not so recognized on the sale of the old residence includes only so much of such gain as is not recognized by reason of the cost, up to such time, of purchasing the new residence.
(5) Participating partner in a cooperative housing association.— For purposes of this subsection, § 30142(b)(1)(F), and § 30141(i)(7), both of this title, references to property used by the taxpayer for his/her principal residence and references to the residence of a taxpayer, shall include shares held by a participating partner in a housing cooperative or association, as these terms are defined in § 30135(a)(2)(B) of this title if:
(A) In the case of stock sold, the house or apartment which the taxpayer was entitled to occupy as such stockholder was used by him/her as his/her main residence, and
(B) in the case of stock purchased, the taxpayer used for his/her principal residence, the house or apartment he/she was entitled to occupy as such stockholder.
(6) Exception.— The provisions of this subsection shall not be applicable to the amount of the gain realized from the sale of a residence which may have been acquired in accordance with § 30392(d)(6) of this title up to the amount upon which the taxation was deferred under said section because of the purchase or construction of the residence.
(7) Statute of limitations.— If during a taxable year the taxpayer sells at a gain property used by him/her as his/her principal residence, then:
(A) The statutory period for the assessment of any deficiency attributable to any part of such gain shall not expire prior to the expiration of three (3) years from the date the Secretary is notified by the taxpayer (in such manner as the Secretary may prescribe by regulations) of:
(i) The taxpayer’s cost of purchasing the new residence which the taxpayer claims results in non-recognition of any part of such gain,
(ii) the taxpayer’s intention not to purchase a new residence within the period specified in clause (1), or
(iii) the failure to make such purchase within such period, and
(B) such deficiency may be assessed prior to the expiration of such three (3) year period, notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment.
(8) Coordination with other provisions.— For the exclusion available to individuals sixty (60) years of age or older, refer to § 30102(a)(16) of this title.
(n) Gain or loss from the sale or exchange of all trade or business assets of certain individuals.—
(1) Nonrecognition of gain.— If an individual sells, exchanges or otherwise disposes of all assets used in a trade or business carried on in his/her individual capacity (“sole proprietorship”) and, within a period of twelve (12) months beginning immediately after the date of such sale, exchange or disposition, he/she purchases another property located in Puerto Rico to be operated by him/her as a sole proprietorship, the gain, if any, from such sale, exchange or disposition shall be recognized only to the extent that the sales price of the assets of the first sole proprietorship exceeds his/her cost of purchasing the new business. This provision shall be applicable to any sale, exchange or disposition, covered by the same, but for those that the taxpayer elects not to be applicable. This election shall be made according to the regulations prescribed by the Secretary.
(2) Applicability of the provisions of subsection (m).— The nonrecognition of gain in the sale or exchange of a sole proprietorship shall be subject to the provisions of clauses (2), (3), (4) and (7) of subsection (m) of this section, as they may be applicable. For these purposes, the phrases “old residence” and “new residence” shall be substituted by the phrases “first sole proprietorship” and “new sole proprietorship”.
(3) Eligible businesses.— The term “sole proprietorship” shall not include businesses carried out by a corporation, partnership or other type of organization. The Secretary shall establish by regulations the requirements for a business to qualify as a “sole proprietorship”.
(4) Regulations.— The Secretary shall determine by regulation the application of this section when the assets object of the disposition are of a different nature or character and the treatment to be given to the gains and losses attributable thereto.
(o) Nonrecognition of gain or loss on the receipt of money or other property in exchange for certain stock.— No gain or loss shall be recognized by a corporation on the receipt of money or other property,
(1) In exchange for stock (including treasury stock) of such corporation, or
(2) in exchange for stock of a corporation that is a “party to a reorganization” as defined in § 30144(g)(1) of this title.
(p) Nonrecognition of gain or loss on distribution (not in total liquidation) of property.—
(1) General rule.— Except as otherwise provided in clause (2), no gain or loss shall be recognized by a corporation on the distribution of property (other than a distribution in total liquidation) in respect to its stock.
(2) Distributions of appreciated property.— If:
(A) A corporation distributes property (other than stock of such corporation or rights to acquire said stock) to a shareholder, and
(B) the fair market value of such property at the time of the distribution exceeds its adjusted basis in the hands of the distributing corporation, then the gain shall be recognized to the distributing corporation as if such property were sold to the shareholder at its fair market value.
(3) For purposes of this subsection, if any property distributed is subject to a liability, or the shareholder assumes a liability of the distributing corporation in connection with the distribution, it shall be understood that the fair market value of such property shall be an amount equal to such value or the amount of such liability, whichever is greater.
(4) The provisions of clause (2) shall not apply to a distribution of property to:
(A) A corporation that is a party to a reorganization in compliance with a plan of reorganization,
(B) a corporation that has an election in effect under § 30581 or § 30582 of this title for the taxable year in which the distribution was made.
(C) An international insurer or an international insurer holding company that complies with § 4342 of Title 26.
(5) Distributions in total liquidation.— In respect to the treatment of a distribution of property in total liquidation of a corporation, see subsection (q) of this section.
(q) Gain or loss recognized on property distributed in total liquidation of a corporation.—
(1) General rule.— Except as otherwise provided in clauses (2) and (3), gain or loss shall be recognized to a corporation on the distribution of property in total liquidation as if such property were sold to the shareholder at its fair market value.
(2) For purposes of this subsection, if any distributed property is subject to a liability or the shareholder assumes a liability of the liquidating corporation in connection with the distribution, the fair market value of such property shall be an amount equal to such value or the amount of such liability, whichever is greater.
(3) Distributions in liquidation under § 30144(b)(6) of this title.— No gain or loss shall be recognized to the corporation on the distribution of property in total liquidation to a distributee to which § 30144(b)(6) of this title applies in respect to such distribution. If a corporation is liquidated in a transaction to which § 30144(b)(6) of this title applies, and on the date of adoption of the plan of liquidation it has outstanding debts or liabilities to the distributee corporation, any transfer of property to the distributee in satisfaction of such debts or obligations shall be treated as a distribution in liquidation.
(4) Exception.— No gain or loss shall be recognized to a corporation that is:
(A) A party to a reorganization on the distribution of property to its shareholders in compliance of a plan of reorganization; or
(B) a corporation that has an election in effect under § 30562 or § 30582 of this title for the taxable year in which the plan of liquidation is adopted.
(C) an international insurer or a international insurer holding company that complies with § 4342 of Title 26.
(r) Sales of stock to employee stock ownership plans.—
(1) Nonrecognition of gain.— If:
(A) The taxpayer elects in such form as the Secretary may prescribe, the application of this subsection with respect to any sale of qualified securities (as defined in clause (3)(A) of this subsection),
(B) the taxpayer purchases qualified replacement property (as defined in clause (3)(C) of this subsection) within the replacement period (as defined in clause (3)(B) of this subsection), and
(C) the requirements of clause (2) are met with respect to such sale, then the gain (if any) on such sale, which would be recognized as long-term capital gain, shall be recognized only to the extent that the amount realized on such sale exceeds the cost to the taxpayer of such qualified replacement property.
(2) Requirements to qualify for nonrecognition.— A sale of qualified securities meets the requirements of this clause if:
(A) The qualified securities are sold to an employee stock ownership plan (as defined in § 30391(h)(1) of this title), or
(B) the plan specified in paragraph (A) owns (after the application of § 30044(e)(1) of this title) immediately after the sale,
(i) not less than ten percent (10%) of all the classes of outstanding stock of the corporation (other than stock not entitled to vote; limited and preferred as to dividends, does not participate in corporate growth to any significant extent; or has redemption and liquidation rights which do not exceed the issue price of such stock except for a reasonable redemption or liquidation premium, and is not convertible into another class of stock), or
(ii) at least ten percent (10%) of the total value of (outstanding) stock of such corporation (except for any above described stock), or
(iii) such lower stock holding percentage authorized by the Secretary when to his/her judgment it is justified.
(C) The employer whose employees are covered by the plan described in paragraph (A) shall file with the Secretary a written sworn statement consenting to the application of clauses (7) and (8).
(3) Definitions; special rules.— For purposes of this subsection:
(A) Qualified securities.— The term “qualified securities” means employer stock (as defined in § 30391(h)(2) of this title), which:
(i) Are issued by a domestic corporation or by a foreign corporation that has derived at least eighty percent (80%) of its gross income from sources within Puerto Rico or in connection with the active conduct of its trade or business in Puerto Rico during the period between three (3) taxable years ending with the close of the preceding taxable year as of the date in which the stock is sold to an employee stock ownership plan and that has no stock outstanding that is readily tradable on an established securities market before July 1, 1995, and
(ii) were not received by the taxpayer in a distribution from a plan described in § 30391(a) of this title, or a transfer pursuant to an option or other right to acquire stock in consideration with the services rendered to the corporation by the taxpayer or by any reason in connection with his/her employment.
(B) Stock trading in the stock exchange.—
(i) The employer’s stock (as defined in § 30391(h)(2) of this title) shall not be considered qualified securities under the above paragraph (A) unless that at least twenty percent (20%) of the equity of the company is offered to investors through a recognized stock exchange or a stock exchange in Puerto Rico as of July 1, 1998, not later than the third anniversary of the effective date of the plan of stock acquisition for employees of the company or business.
(ii) The Secretary may authorize the extension of the three (3) year term provided in subparagraph (i) for up to one (1) additional year, when in his/her judgment it is justified.
(iii) Any corporation that fails to comply with this requirement shall be subject to denial of any tax benefits granted in connection with the plan.
(C) Replacement period.— The term “replacement period” means the period beginning three (3) months prior to the date on which the sale of qualified securities occurs and which ends twelve (12) months after the date of such sale.
(D) Qualified replacement property.—
(i) In general.— The term “qualified replacement property” means any security issued by an “operating corporation” which did not have, for the taxable year preceding the taxable year in which such security was purchased, passive investment income in excess of twenty-five percent (25%) of the gross receipts of the preceding taxable year, and is not the corporation that issued the qualified securities which stock is replacing, or a member of the same controlled group of corporations (within the meaning of § 30044(a)(1) of this title) of which the corporation that issued the qualified securities is a member. For purposes of this subparagraph, the term “passive investment interest” means the total amounts received which are derived from royalties, fees, dividends, interests, annuities, and the sale or exchange of stock or securities (limited in the case of such sales or exchanges up to the amount of the gains obtained in such sales or exchanges), except for what is prescribed otherwise by the Secretary through regulations.
(ii) Operating corporation.— The term “operating corporation” means:
(I) A domestic corporation or a foreign corporation that has derived at least eighty percent (80%) of its gross income from sources within Puerto Rico or in connection with the active conduct of its trade or business in Puerto Rico during the period of three (3) taxable years ending with the close of the preceding taxable year before the security was purchased;
(II) that at the time the security was purchased or before the close of the replacement period, more than fifty percent (50%) of the assets were used in the active conduct of the trade or business, and
(III) the term “operating corporation” shall include any financial institution (as described in § 30137(f)(4) of this title), and any insurance company.
(iii) For purposes of this paragraph, if the corporation issuing the security owns stock representing control of one or more corporations, or one or more corporations own stock representing control of the corporation issuing the security, or both, then all such corporations shall be treated as one corporation. For purposes of this subparagraph, the term “control” means the ownership of stock with at least fifty percent (50%) of the total voting right combined of all the stocks entitled to vote, or at least fifty percent (50%) of the total value of all the classes of stock of the corporation. In determining control, any qualified replacement property of the taxpayer with respect to this section shall be disregarded.
(iv) Meaning of security.— For purposes of this paragraph, the term “security” means a share of stock in a corporation; a right to subscribe for, or to receive, a share of stock in a corporation; or a bond, debenture, note, or certificate, or other evidence of indebtedness, issued by a corporation with interest coupons or in registered form.
(E) No sale of qualified securities by an underwriter to an employee stock ownership plan or eligible worker-owned cooperative in the ordinary course of his/her trade or business as an underwriter, whether or not guaranteed, shall be treated as a sale for purposes of this subsection.
(F) Time for filing election.— An election under clause (1) of this subsection shall be filed not later than the last day prescribed by law (including extensions thereof) for filing the income tax return for the taxable year in which the sale occurs.
(4) Basis of qualified replacement property.— The basis of the taxpayer in qualified replacement property purchased by the taxpayer during the replacement period shall be reduced by the amount of gain not recognized by reason of such purchase and the application of clause (1). If more than one item of qualified replacement property is purchased, the basis of each of such items shall be reduced by an amount determined by multiplying the total gain not recognized by reason of such purchase and the application of clause (1) by a fraction the numerator of which is the cost of each item of property, and the denominator of which is the total cost of all such items of property.
(5) Recapture of gain on disposition of qualified replacement property.—
(A) If a taxpayer disposes of any qualified replacement property, then, notwithstanding any other provision of the Code, the gain (if any) shall be recognized to the extent of the gain which was not recognized under clause (1) by reason of the acquisition by the taxpayer of such qualified replacement property.
(B) If a corporation issuing qualified replacement property disposes of a substantial portion of its assets other than in the ordinary course of its trade or business, and any taxpayer owning stock representing control (within the meaning clause (3)(D)(iii) of this subsection) of such corporation at the time of the disposition, holds any qualified replacement property of such corporation at such time, then the taxpayer shall be treated as having disposed of such qualified replacement property at that time.
(C) Paragraph (A) shall not apply to any transfer of qualified replacement property:
(i) In any corporate reorganization (within the meaning of subsection (g) of § 30144 of this title) unless the person making the election under clause (1) of this subsection owns stock representing control in the acquiring or acquired corporation and such property is substituted basis property in the hands of the transferee,
(ii) by reason of the death of the person making such election,
(iii) by gift, or
(iv) in any transaction to which clause (1) applies.
(6) Statute of limitations.— If any gain is realized by the taxpayer on the sale or exchange of any qualified securities and there is in effect an election under clause (1) with respect to such gain, then:
(A) The statutory period for the assessment of any deficiency with respect to such gain, shall not expire before the expiration of four (4) years from the date the Secretary is notified by the taxpayer (in such manner as the Secretary may prescribe by regulations) of:
(i) The taxpayer’s cost of purchasing qualified replacement property, which the taxpayer claims results in nonrecognition of any part of such gain;
(ii) the taxpayer’s intention not to purchase qualified replacement property within the replacement period, or
(iii) a failure to make such purchase within the replacement period, and
(B) such deficiency may be assessed before the expiration of such four (4) year period notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment.
(7) Tax on certain dispositions by employee stock ownership plans.—
(A) If during the three (3) year period after the date on which an employee stock ownership plan (as defined in § 30391(h)(1) of this title) acquired any qualified securities (as defined in clause (3)(A) of this subsection in a sale to which clauses (1)—(6) of this subsection apply, or said plan disposes of any of the qualified securities and:
(i) The total number of shares held by the plan after such disposition is less than the total number of employer securities (as defined in § 30391(h)(2) of this title) held immediately after the sale, or
(ii) except to the extent provided by regulation, the value of qualified securities held by such plan after the disposition is less than ten percent (10%) of the total value of all the employer securities as of such disposition, a special tax equal to ten percent (10%) of the amount realized in such disposition is hereby imposed.
(B) The amount realized taken into account under paragraph (A) shall not exceed that portion allocable to qualified securities acquired in the sale to which the provisions of clauses (1)—(6) of this subsection applied.
(C) The amount realized on any distribution to an employee for less than fair market value shall be determined as if the qualified security had been sold to the employee at fair market value.
(D) The tax herein imposed shall be paid by the employer that filed the written statement described in clause (2)(C) of this subsection.
(E) This section shall not apply with respect to any distribution of qualified securities (or the sale thereof) realized by reason of:
(i) The death of the employee;
(ii) the retirement of the employee after the employee has attained the age of fifty-nine and one-half (591/2),
(iii) the disability of the employee (within the meaning of § 30392(q)(2)(A) of this title, or
(iv) the separation of the employee from service for any period which results in a one (1) year break in service, during which the employee has not completed more than five hundred (500) hours of service.
(F) In the case of any exchange of qualified securities in any reorganization described in § 30144(g)(1) of this title for stock of another corporation, such exchange shall not be treated as a disposition for purposes of this section.
(G) This clause shall apply to any disposition of qualified securities under § 30391(a)(10) of this title.
(H) For purposes of this clause, the term “disposition” shall include any distribution.
(8) Tax on certain prohibited allocations of qualified securities.—
(A) If there is a prohibited allocation of qualified securities (as defined in clause (3)(A) of this subsection) by any employee stock ownership plan, (as defined in § 30391(h)(1) of this title) there is hereby imposed a tax on such allocation equal to fifty percent (50%) of the amount involved.
(B) For purposes of this section, the term “prohibited allocation” means:
(i) Any allocation of qualified securities acquired in a sale to which the provisions of clauses (1)—(6) of this subsection apply which violates the provisions of § 30391 of this title, and
(ii) any benefit which accrues to any person in violation of the provisions of § 30391(h)(1)(B)(iv) of this title.
(C) The tax herein imposed shall be paid by the employer that filed the written statement described in clause (2)(C) of this subsection.
(D) The terms used in this clause shall have the same respective meaning as when used in clause (7) of this subsection.
(s) Distribution of stock and securities of a controlled corporation.—
(1) Effect on distributees.—
(A) No gain or loss shall be recognized to (and no amount shall be includible in the income of) a shareholder or security holder on the receipt of such stock or securities, if:
(i) A corporation (referred to in this section as the “distributing corporation”):
(I) Distributes to a shareholder, with respect to its stock, or
(II) distributes to a security holder, in exchange for its securities, solely stock or securities of a corporation (referred to in this section as “controlled corporation”) which it controls immediately before the distribution,
(iii) as part of the distribution, the distributing corporation distributes:
(I) All of the stock and securities in the controlled corporation held by it immediately before the distribution, or
(II) an amount of stock in the controlled corporation constituting control within the meaning under § 30144(h) of this title, and it is established to the satisfaction of the Secretary that the retention by the distributing corporation of stock (or stock and securities) in the controlled corporation was not in pursuance of a plan having as one of its principal purposes evading Puerto Rico income tax, and
(iv) the requirements of clause (2) are met.
(2) Requirements as to active trade or business.—
(A) General rule.— The requirements of this clause shall be deemed met only if:
(i) The distributing corporation, and the controlled corporation (or, if stock of more than one controlled corporation is distributed, each of such corporations), is engaged immediately after the distribution in the active conduct of a trade or business, or
(ii) the distributing corporation had no assets other than stock or securities in the controlled corporations and each of the controlled corporations is engaged immediately after the distribution in the active conduct of a trade or business.
(B) Definition.— For purposes of paragraph (A), a corporation shall be treated as engaged in the active conduct of a trade or business if and only if:
(i) It is engaged in the active conduct of a trade or business,
(ii) such trade or business has been actively conducted throughout the five (5) year period ending on the date of the distribution,
(iii) such trade or business was not acquired within the period described in subparagraph (ii) in a transaction in which gain or loss was recognized in whole or in part, and
(iv) control of a corporation which (at the time of acquisition of control) was conducting such trade or business:
(I) Was not acquired by any distributee corporation directly (or through one (1) or more corporations) within the period described in subparagraph (ii) and was not acquired by the distributing corporation directly (or through one (1) or more corporations) within such period, or
(II) was acquired by any such corporation only by reason of one or more transactions in which gain or loss was not recognized, in whole or in part, or only by reason of such transactions combined with acquisitions before the beginning of such period.
For purposes of this subparagraph, all distributee corporations, which are members of the same affiliated group under § 30044 of this title, shall be treated as a single distributee corporation.
(3) Coordination with § 30142(a)(6) of this title.— For purposes of § 30142(a)(6) of this title and the basis pro rata rule therein established, if a distribution that qualifies under this subsection is realized without the surrendering of stock or securities by the distributee in exchange for the stocks or securities of the controlled corporation, the distribution shall be treated as if such exchange has been made, and for such purposes the stocks and securities of the distributing corporation which are retained by the shareholder shall be treated as transferred to the distributing corporation and once again received in the exchange.
(4) Taxability of corporation on distribution.—
(A) In general.— Except as provided in paragraph (B), no gain or loss shall be recognized to a corporation on any distribution to which this subsection applies and which is not in pursuance of a plan of reorganization.
(B) Distribution of appreciated property:
(i) In general.— If:
(I) In a distribution referred to in paragraph (A), the corporation distributes property other than qualified property, and
(II) the fair market value of such property exceeds its adjusted basis in the hands of the distributing corporation, then a gain shall be recognized to the distributing corporation as if such property were sold to the distributee at its fair market value.
(ii) Qualified property.— For purposes of subparagraph (i), the term “qualified property” means any stock or securities in the controlled corporation. Notwithstanding the above, and except as provided through regulations, the term “qualified property” shall not include stock or securities distributed as part of a plan (or a series of transactions) whereby one (1) or more persons acquire directly or indirectly stock representing fifty percent (50%) or more of the interest in the distributing corporation or any controlled corporation.
(iii) Treatment of liabilities.— If any property distributed in the distribution referred to in paragraph (A) is subject to a liability or the shareholder assumes a liability of the distributing corporation in connection with the distribution, then, for purposes of subparagraph (i), the fair market value of such property shall be treated as not less than the amount of such liability.
(C) Coordination with subsections (o) and (p).— Subsections (o) and (p) of this section shall not apply to a distribution referred to in paragraph (A).
(ii) it is established to the satisfaction of the Secretary, that the transaction was not used principally as a device for the distribution of the earnings and profits of the distributing corporation or the controlled corporation or both (but the mere fact that subsequent to the distribution stock or securities in one or more of such corporations are sold by all or some of the distributees (other than pursuant to an arrangement negotiated or agreed upon prior to such distribution) shall not be construed to mean that the transaction was used principally as such a device),
(t) Carryovers in certain corporate acquisitions.—
(1) General rule.— In the case of the acquisition of assets of a corporation by another corporation:
(A) In a distribution to such other corporation to which the provisions of § 30144(b)(6) of this title (relating to liquidations of subsidiaries) apply, or
(B) in a transfer to which the provisions of § 30144(b)(4) of this title (relating to nonrecognition of gain or loss to corporations) apply, but only if the transfer is in connection with a reorganization described in paragraph (A), (C), (D), or (F) of § 30144(g)(1) of this title. The acquiring corporation shall succeed to and take into account, as of the close of the day of distribution or transfer, the items described in clause (3) of the distributor or transferor corporation, subject to the conditions and limitations specified in clauses (2) and (3). For purposes of the preceding sentence, a reorganization shall be treated as meeting the requirements of § 30144(g)(1)(D) of this title only if the transferee corporation substantially acquires all of the assets of the transferor corporation.
(2) Operating rules.— Except in the case of a reorganization described in § 30144(g)(1)(F) of this title:
(A) The taxable year of the distributor or transferor corporation shall end on the date of distribution or transfer, and
(B) for purposes of this subsection, the date of distribution or transfer shall be the day on which the distribution or transfer is completed; except that, under regulations prescribed by the Secretary, the date when substantially all of the property has been distributed or transferred may be used if the distributor or transferor corporation ceases all operations, other than liquidating activities, after such date.
(3) Items of the distributor or transferor corporation.— The items referred to in clause (1) are:
(A) Net operating loss carryovers.— The net operating loss carryovers determined under § 30134(b) of this title of the distributor or transferor, subject to the following conditions and limitations:
(i) The distribution or transfer is made in taxable years beginning after December 31, 2010.
(ii) The taxable year of the acquiring corporation to which the net operating loss carryovers of the distributor or transferor corporation are first carried, shall be the first taxable year ending after the date of distribution or transfer.
(iii) In determining the net operating loss deduction, the portion of such deduction attributable to the net operating loss carryovers of the distributor or transferor corporation to the first taxable year of the acquiring corporation ending after the date of distribution or transfer, shall be limited to an amount which bears the same ratio to the taxable income (determined without regard to a net operating loss deduction) of the acquiring corporation for that taxable year as the number of days in the taxable year after the date of distribution or transfer bears to the total number of days in the taxable year.
(B) Earnings and profits.— In the case of a distribution or transfer described in clause (1):
(i) The earnings and profits or deficit in earnings and profits, as the case may be, of the distributor or transferor corporation shall, subject to subparagraph (ii), be deemed to have been received or incurred by the acquiring corporation as of the close of the date of the distribution or transfer, and
(ii) a deficit in earnings and profits of the distributor, transferor, or acquiring corporation shall be used only to offset earnings and profits accumulated after the date of transfer. For this purpose, the earnings and profits for the taxable year of the acquiring corporation in which the distribution or transfer occurs shall be deemed to have been accumulated after such distribution or transfer in an amount which bears the same ratio to the undistributed earnings and profits of the acquiring corporation for such taxable year (computed without regard to any earnings and profits received from the distributor or transferor corporation, as described in subparagraph (i) of this paragraph) as the number of days in the taxable year after the date of distribution or transfer bears to the total number of days in the taxable year.
(C) Capital loss carryover.— The capital loss carryover determined under § 30141(d) of this title subject to the following conditions and limitations:
(i) The taxable year of the acquiring corporation to which the capital loss carryover of the distributor or transferor corporation is first carried shall be the first taxable year ending after the date of distribution or transfer.
(ii) The capital loss carryover shall be a capital loss in the taxable year determined under subparagraph (i) but shall be limited to an amount which bears the same ratio to the capital gain net income (determined without regard to a capital loss attributable to capital loss carryover), if any, of the acquiring corporation in such taxable year as the number of days in the taxable year after the date of distribution or transfer bears to the total number of days in the taxable year.
(iii) For purposes of determining the amount of such capital loss carryover to taxable years following the taxable year determined under subparagraph (i), the capital gain net income in the taxable year determined under subparagraph (i) shall be considered to be an amount equal to the amount determined under subparagraph (ii).
(D) Method of accounting.— The acquiring corporation shall use the method of accounting used by the distributor or transferor corporation on the date of distribution or transfer unless different methods were used by several distributor or transferor corporations or by a distributor or transferor corporation and the acquiring corporation. If different methods were used, the acquiring corporation shall use the method or combination of methods of computing taxable income adopted pursuant to regulations prescribed by the Secretary.
(E) Inventories.— In any case in which inventories are received by the acquiring corporation, such inventories shall be taken by such corporation (in determining its income) on the same basis on which such inventories were taken by the distributor or transferor corporation, unless different methods were used by several distributor or transferor corporations or by a distributor or transferor corporation and the acquiring corporation. If different methods were used, the acquiring corporation shall use the method or combination of methods of taking inventory adopted pursuant to regulations prescribed by the Secretary.
(F) Method of computing depreciation allowance.— The acquiring corporation shall be treated as the distributor or transferor corporation for purposes of computing the depreciation allowance under §§ 30127, 30181 and 30182 of this title on property acquired in a distribution or transfer with respect to the amount of the basis in the hands of the acquiring corporation as does not exceed the adjusted basis in the hands of the distributor or transferor corporation.
(G) Installment sale method.— If the acquiring corporation acquires installment obligations (the income from which the distributor or transferor corporation reports on the installment basis under § 30175 of this title) the acquiring corporation shall, for purposes of § 30175 of this title, be treated as if it were the distributor or transferor corporation.
(H) Amortization of bond premium.— If the acquiring corporation assumes liability for bonds of the distributor or transferor corporation issued at a premium, the acquiring corporation shall be treated as the distributor or transferor corporation after the date of distribution or transfer for purposes of determining the amount of amortization allowable with respect to such or premium.
(I) Contributions to qualified plans.— The acquiring corporation shall be considered to be the distributor or transferor corporation after the date of distribution or transfer for the purpose of determining the amounts deductible under § 30129 of this title with respect to pension plans, employees’ annuity plans, and stock bonus and profit-sharing plans.
(J) Recovery of tax benefit items.— If the acquiring corporation is entitled to the recovery of any amounts previously deducted by (or allowable as credits to) the distributor or transferor corporation, the acquiring corporation shall succeed to the treatment under § 30102(a)(8) of this title which would apply to such amounts in the hands of the distributor or transferor corporation.
(K) Involuntary conversions under subsection (f).— The acquiring corporation shall be treated as the distributor or transferor corporation after the date of distribution or transfer for purposes of applying subsection (f).
(L) Certain obligations of distributor or transferor corporation.— If the acquiring corporation:
(i) Assumes an obligation of the distributor or transferor corporation which, after the date of the distribution or transfer, gives rise to a liability, and
(ii) such liability, if paid or accrued by the distributor or transferor corporation, would have been deductible in computing its taxable income, the acquiring corporation shall be entitled to deduct such items when paid or accrued, as the case may be, as if such corporation were the distributor or transferor corporation. However, this paragraph shall not apply if such obligations are reflected in the amount of stock, securities, or property transferred by the acquiring corporation to the transferor corporation for the property of the transferor corporation.
(M) Charitable contributions in excess of prior years’ limitation.— Contributions made in the taxable year ending on the date of distribution or transfer and the four (4) prior taxable years by the distributor or transferor corporation in excess of the amount deductible under § 30130 of this title for such taxable year shall be deductible by the acquiring corporation for its taxable years which begin after the date of distribution or transfer, subject to the limitations imposed by such section. In applying the preceding sentence, each taxable year of the distributor or transferor corporation beginning not later than the date of distribution or transfer shall be treated as a prior taxable year with reference to the acquiring corporation’s taxable years beginning after such date.
(N) Other items prescribed by the Secretary through regulations.
(iv) For the purpose of determining the amount of the net operating loss carryovers under § 30134(b) of this title, a net operating loss for a taxable year (hereinafter in this subsection referred to as the “loss year”) of a distributor or transferor corporation which ends on or before the end of a loss year of the acquiring corporation shall be considered to be a net operating loss for a year prior to such loss year of the acquiring corporation; except that, if the date of distribution or transfer is on a day other than the last day of a taxable year of the acquiring corporation:
(I) Such taxable year shall (for the purpose of this paragraph only) be considered to be two (2) taxable years (hereinafter in this paragraph referred to as the “pre-acquisition part year” and the “post-acquisition part year”);
(II) the pre-acquisition part year shall begin on the same day as such taxable year begins and shall end on the date of distribution or transfer;
(III) the post-acquisition part year shall begin on the day following the date of distribution or transfer and shall end on the same day as the end of such taxable year;
(IV) the taxable income for such taxable year (computed with the modifications specified in § 30134(b)(1) of this title) but without a net operating loss deduction) shall be divided between the pre-acquisition part year and the post-acquisition part year in proportion to the number of days in each;
(V) the net operating loss deduction for the pre-acquisition part year shall be determined as provided in § 30134(c) of this title but without regard to a net operating loss year of the distributor or transferor corporation, and
(VI) the net operating loss deduction for the post-acquisition part year shall be determined as provided in § 30134(c) of this title.
(u) Limitation on net operating loss carry forwards following ownership change.—
(1) General rule.— The amount of the net income of any new loss corporation for any post-change year which may be offset by the pre-change losses shall be equal to ninety percent (90%) of such net income and shall not exceed the limitation of clause (2) of such year.
(2) Limitation.— For purposes of this subsection:
(A) In general.— Except as otherwise provided in this subsection, the limitation for any post-change year is an amount equal to:
(i) The value of the old loss corporation, multiplied by
(ii) the long-term tax-exempt rate, as such term is defined in clause (5) of this subsection.
(B) Carry forward of unused limitation.— If the limitation for any post-change year exceeds the taxable income of the new loss corporation for such year which was offset by pre-change losses, the limitation for the next post-change year shall be increased by the amount of such excess.
(C) Special rule for post-change year which includes change date.— In the case of any post-change year which includes the change date:
(i) Limitation does not apply to taxable income before change.— Clause (1) of this subsection shall not apply to the portion of the taxable income for such year which is allocable to the period in such year ending on the change date. Except as provided through regulations, taxable income shall be allocated ratably to each day in the year.
(ii) Limitation for period after change.— For purposes of applying the limitation of clause (1) to the remainder of the taxable income for such year, the limitation described in paragraph (A) of this clause shall be an amount which bears the same ratio to such limitation (determined without regard to this clause) as:
(I) The number of days in such year after the change date, bears to
(II) the total number of days in such year.
(iii) Carry forwards disallowed if continuity of business requirements are not met.— If the new loss corporation does not continue the business enterprise of the old loss corporation at all times during the two (2) year period beginning on the change date, the limitation described in paragraph (A) of this clause for any post-change year shall be zero.
(3) Pre-change loss and post-change year.— For purposes of this section:
(A) Pre-change loss.— The term “pre-change loss” means:
(i) Any net operating loss carry forward of the old loss corporation to the taxable year ending with the ownership change or in which the change date occurs, and
(ii) the net operating 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 before the change date.
(iii) Except as provided through regulations, the net operating loss shall, for purposes of subparagraph (ii), be allocated ratably to each day in the year.
(B) Post-change year.— The term “post-change year” means any taxable year ending after the change date.
(4) Value of old loss corporation.— For purposes of this subsection:
(A) In general.— Except as otherwise provided in this clause, the value of the old loss corporation is the value of the stock of such corporation immediately before the ownership change.
(B) Special rule in the case of redemption or other corporate contraction.— If a redemption or other corporate contraction occurs in connection with an ownership change, the value under paragraph (A) shall be determined after taking such redemption or other corporate contraction into account.
(C) Treatment of foreign corporations.— Except as otherwise provided in regulations, in determining the value of any old loss corporation which is a foreign corporation, there shall be taken into account only items treated as connected with the active conduct of a trade or business in the Puerto Rico.
(5) Long-term tax-exempt rate.— For purposes of this section:
(A) In general.— The long-term tax-exempt rate shall be the highest of the adjusted federal long-term rates in effect for any month in the three (3) calendar-month period ending with the calendar month in which the change date occurs.
(B) Adjusted federal long-term rate.— For purposes of paragraph (A), the term “adjusted federal long-term rate” means the federal long-term rate as determined monthly by the Secretary of the Federal Treasury, but adjusted for differences between rates on long-term taxable and tax-exempt obligations.
(6) Ownership change.— For purposes of this section:
(A) In general.— There is an ownership change if, immediately after any owner shift involving a five percent (5%) shareholder or any equity structure shift:
(i) The percentage of the stock of the loss corporation owned by one (1) or more five percent (5%) shareholders has increased by more than fifty (50) percentage points, over
(ii) the lowest percentage of stock of the loss corporation (or any predecessor corporation) owned by such shareholders at any time during the testing period.
(B) Owner shift involving five percent (5%) shareholders.— There is an owner shift involving a five percent (5%) shareholder if:
(i) There is any change in the respective ownership of stock of a corporation, and
(ii) such change affects the percentage of stock of such corporation owned by any person who is a five percent (5%) shareholder before or after such change, and
(iii) such change occurs in taxable years beginning after December 31, 2010.
(C) Equity structure shift defined.—
(i) In general.— The term “equity structure shift” means any reorganization (within the meaning of § 30144(g)(1) of this title) made in taxable years beginning after December 31, 2010. Such term shall not include:
(I) Any reorganization described in § 30144(g)(1)(D) of this title unless all assets are substantially transferred, and
(II) any reorganization described in § 30144(g)(1)(F) of this title.
(ii) Certain taxable reorganization-type transactions.— To the extent provided in regulations, the term “equity structure shift” includes taxable reorganization-type transactions, public offerings, and similar transactions.
(D) Special rules for application of subsection.—
(i) Treatment of less than five percent (5%) shareholders.— Except as provided in subparagraphs (ii)(I) and (iii), in determining whether an ownership change has occurred, all stock owned by shareholders of a corporation who are not five percent (5%) shareholders of such corporation shall be treated as stock owned by one (1) five percent (5%) shareholder of such corporation.
(ii) Coordination with equity structure shifts.— For purposes of determining whether an equity structure shift (or subsequent transaction) is an ownership change:
(I) Less than five percent (5%) shareholders.— Subparagraph (i) shall be applied separately with respect to each group of shareholders (immediately before such equity structure shift) of each corporation which was a party to the reorganization involved in such equity structure shift.
(II) Acquisitions of stock.— Unless a different proportion is established, acquisitions of stock after such equity structure shift shall be treated as being made proportionately from all shareholders immediately before such acquisition.
(iii) Coordination with other owner shifts.— Except as provided in regulations, rules similar to the rules of subparagraph (ii) shall apply in determining whether there has been an owner shift involving a five percent (5%) shareholder and whether such shift (or subsequent transaction) results in an ownership change.
(iv) Treatment of worthless stock.— If any stock held by a fifty percent (50%) shareholder is treated by such shareholder as becoming worthless during any taxable year of such shareholder and such stock is held by such shareholder as of the close of such taxable year, for purposes of determining whether an ownership change occurs after the close of such taxable year, such shareholder:
(I) Shall be treated as having acquired such stock on the first day of his/her first succeeding taxable year, and
(II) shall not be treated as having owned such stock during any prior period.
(v) For purposes of subparagraph (iv), the term “fifty percent (50%) shareholder” means any person owning fifty percent (50%) or more of the stock of the corporation at any time during the three (3) year period ending on the last day of the taxable year with respect to which the stock was so treated.
(7) Testing period.— For purposes of this section
(A) Three (3)-year period.— Except as otherwise provided in this section, the testing period is the three (3) year period ending on the day of any owner shift involving a five percent (5%) shareholder or equity structure shift.
(B) Shorter period where there has been recent ownership change.— If there has been an ownership change under this section, the testing period for determining whether a second ownership change has occurred shall not begin before the first day following the change date for such earlier ownership change.
(C) Shorter period where all losses arise after the three (3) year period begins.— The testing period shall not begin before the earlier of the first day of the first taxable year from which there is a carry forward of a loss or of an excess credit to the first post-change year or the taxable year in which the transaction being tested occurs.
(8) Change date.— For purposes of this section, the change date is:
(A) In the case where the last component of an ownership change is an owner shift involving a five percent (5%) shareholder, the date on which such shift occurs, and
(B) in the case where the last component of an ownership change is an equity structure shift, the date of the reorganization.
(9) Definitions and special rules.— For purposes of this section:
(A) Loss corporation.— The term “loss corporation” means a corporation entitled to use a net operating loss carry forward or having a net operating loss for the taxable year in which the ownership change occurs.
(B) Old loss corporation.— The term “old loss corporation” means any corporation:
(i) With respect to which there is an ownership change, and
(ii) which (before the ownership change) was a loss corporation.
(C) New loss corporation.— The term “new loss corporation” means a corporation which (after an ownership change) is a loss corporation. Nothing in this subsection shall be treated as implying that the same corporation may not be both the old loss corporation and the new loss corporation.
(D) Taxable income.— Taxable income shall be computed with the modifications set forth in § 30134(d) of this title.
(E) Value.— The term “value” means fair market value.
(F) Rules relating to stock.—
(i) Preferred stock.— Except as provided in regulations and clause (4), the term “stock” means stock other than stock:
(I) Not entitled to vote,
(II) limited and preferred as to dividends and does not participate in corporate growth to any significant extent,
(III) has redemption and liquidation rights which do not exceed the issue price of such stock, and
(IV) not convertible into another class of stock.
(ii) Treatment of certain rights, etc.— The Secretary shall prescribe such regulations as may be necessary:
(I) To treat options, contracts to acquire stock, convertible debt interests, and other similar interests as stock, and
(II) to treat stock as not stock.
(iii) Determinations on basis of value.— Determinations of the percentage of stock of any corporation held by any person shall be made on the basis of value.
(G) Five percent (5%) shareholder.— The term “five percent (5%) shareholder” means any person holding five percent (5%) or more of the stock of the corporation at any time during the testing period.
(10) Certain additional perating rules.— For purposes of this subsection:
(A) Certain capital contributions not taken into account:
(i) In general.— Any capital contribution received by an old loss corporation as part of a plan a principal purpose of which is to avoid or increase any limitation under this section shall not be taken into account for purposes of this section.
(ii) Certain contributions treated as part of plan.— For purposes of subparagraph (i), any capital contribution made during the two (2) year period ending on the change date shall, except as provided in regulations, be treated as part of a plan described in subparagraph (i).
(B) Ordering rules for application of subsection.—
(i) Coordination with § 30134(b)(1) of this title carryover rules.— In the case of any pre-change loss for any taxable year (hereinafter in this paragraph referred to as the “loss year”) subject to limitation under this section, for purposes of determining under § 30134(b)(1) of this title the amount of such loss which may be carried to any taxable year, taxable income for any taxable year shall be treated as not greater than:
(I) The limitation described in clause (2) for such taxable year, reduced by
(II) the unused pre-change losses for taxable years preceding the loss year.
(ii) Ordering rule for losses carried from same taxable year.— In any case in which:
(I) A pre-change loss of a loss corporation for any taxable year is subject to the limitation described in clause (2), and
(II) a net operating loss of such corporation from such taxable year is not subject to such limitation, taxable income shall be treated as having been offset first by the loss subject to such limitation.
(C) Operating rules relating to ownership of stock.—
(i) Constructive ownership.— Section 30137(b)(2) of this title shall apply in determining ownership of stock with the exceptions and modifications as prescribed by the Secretary through regulations.
(ii) Stock acquired by reason of death, gift, divorce, separation, etc.— If:
(I) The basis of any stock in the hands of any person is determined
a. under § 30142(a)(2) of this title,
b. under § 30142(a)(5) of this title, or
c. under § 30144(b)(7) of this title,
(II) stock is received by any person in satisfaction of a right to receive a pecuniary bequest, or
(III) stock is acquired by a person pursuant to any divorce or separation instrument (within the meaning of § 30112(a)(2)(B) of this title), such person shall be treated as owning such stock during the period such stock was owned by the person from whom it was acquired.
(iii) Certain changes in percentage ownership which are attributable to fluctuations in value not taken into account.— Except as provided in regulations, any change in proportionate ownership which is attributable solely to fluctuations in the relative fair market values of different classes of stock shall not be taken into account.
(D) Reduction in value where substantial nonbusiness assets.—
(i) In general.— If, immediately after an ownership change, the new loss corporation has substantial nonbusiness assets, the value of the old loss corporation shall be reduced by the excess (if any) of:
(I) The fair market value of the nonbusiness assets of the old loss corporation, over
(II) the nonbusiness asset share of indebtedness for which such corporation is liable.
(ii) Corporations having substantial nonbusiness assets.— For purposes of subparagraph (i), the old loss corporation shall be treated as having substantial nonbusiness assets if at least one-third (⅓) of the value of the total assets of such corporation consists of nonbusiness assets.
(iii) Nonbusiness assets.— For purposes of this paragraph, the term “nonbusiness assets” means assets held for investment.
(iv) Nonbusiness asset share.— For purposes of this paragraph, the nonbusiness asset share of the indebtedness of the corporation is an amount which bears the same ratio to such indebtedness as:
(I) The fair market value of the nonbusiness assets of the corporation, bears to
(II) the fair market value of all assets of such corporation.
(v) Treatment of subsidiaries.— For purposes of this paragraph, stock and securities in any subsidiary corporation shall be disregarded and the parent corporation shall be deemed to own its ratable share of the subsidiary’s assets. For purposes of the preceding sentence, a corporation shall be treated as a subsidiary if the parent corporation owns fifty percent (50%) or more of the combined voting power of all classes of stock entitled to vote, and fifty percent (50%) or more of the total value of shares of all classes of stock.
(E) Coordination with alternative minimum tax.— The Secretary shall by regulation provide for the application of this subsection to the alternative minimum tax net operating loss deduction under § 30074(d) of this title.
(F) Predecessor and successor entities.— Except as provided in regulations, any entity and any predecessor or successor entities of such entity shall be treated as one entity.
(G) Certain stock issues by public corporations organized in Puerto Rico.— Notwithstanding what is otherwise provided in this subsection, the provisions thereof shall not apply to a (public or private) stock issue by a corporation or entity organized under the laws of Puerto Rico if:
(i) The purpose of the stock issue is to raise capital for its operations, and
(ii) immediately before the stock issue and for a term of not less than five (5) years following the date of issuance of such stock, the stocks of the corporation or entity organized are traded in one or more recognized stock market.
If the provisions of subparagraphs (i) and (ii) of this paragraph are complied with, new stock issues by said corporation or entity shall not be considered a change in the ownership of stock and said stock issue shall not be considered as to constitute a change in the capital structure for purposes of this subsection, thus, said stock issue shall not constitute a charge of ownership for purposes of clauses (6) of this subsection.
History —Jan. 31, 2011, No. 1, § 1034.04, retroactive to Jan. 1, 2011; Dec. 10, 2011, No. 232, § 41; June 30, 2013, No. 40, § 20; Jan. 24, 2014, No. 20, § 2; Feb. 27, 2015, No. 25, § 2.