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NOL’s, Section 382 and Bankruptcy Rules

NOL’s, Section 382 and Bankruptcy Rules. Corporate Restructuring Timothy Thompson. Net Operating Losses. A corporation with a NOL this tax year may carry back or carry forward to offset the loss against taxable income 2 years back (used to be 3) 20 years forward (used to be 15)

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NOL’s, Section 382 and Bankruptcy Rules

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  1. NOL’s, Section 382 and Bankruptcy Rules Corporate Restructuring Timothy Thompson

  2. Net Operating Losses • A corporation with a NOL this tax year may carry back or carry forward to offset the loss against taxable income • 2 years back (used to be 3) • 20 years forward (used to be 15) • Company can elect not to carry back • AMT rules reduce some of benefit

  3. Simple example

  4. Capital losses • Capital losses can only be offset by capital gains • Carry back three years • Carry forward five years

  5. IRC Section 382 • IRS wants the NOL’s to stay only with the company that lost the money • In most ownership changes, NOL’s of a loss company are limited • Section 382 limitation • Following a “more than 50%” ownership change, corporations ability to deduct pre-ownership change NOL’s is limited, annually, to fair market value of equity (one month prior to ownership change) times the Section 382 rate. • Special rules may mitigate the limitation in bankruptcy

  6. Example • Company has NOL’s of 115 • Goes through an ownership change • C’s equity one month prior was $90 • Annual deduction = 90*5% = 4.5M • Even if you can take all over 20 years • 20(4.5) = 90M • PV (@ 10%) = 4.5(8.51) = 38.3M • Vs. taking all of 115 next year 115/1.1 = 104.5M

  7. What is an ownership change? • Ownership change • Occurs if, during a three-year period, the ownership of stock of the corporation by “5% holders” increases by more than 50% • In taxable or tax free transaction

  8. Section 382 in bankruptcy reorganizations • If the ownership change occurs in a bankruptcy case • The calculation of the annual limitation is based on the value of the corporation immediately after the ownership change • Since this calculation is usually after significant debt relief, the equity value is higher, more NOL’s • Special bankruptcy exception, however!

  9. Example • Chapter 11 reorganization plan • Old stock cancelled, many old liabilities replace with stock, equity value will be used to calculate loss limitation • Had reorganization been outstide Chapter 11, lose all NOL’s

  10. Special bankruptcy exception • If the ownership change occurs in Chapter 11 and • At least 50%of the stock of the corporation, after the ownership change, is owned by its existing shareholders, creditors that held debt of the corporation for at least 18 months prior to announcement of the bankruptcy case, or ordinary business creditors • Then no Section 382 limitations on NOL’s apply.

  11. Tough to get special exception • If there has been trading of troubled debt, then may not qualify • Acquisition of more than 50% of the stock by an acquirer • Even if you get it, it is reduced by last three years of interest paid or accrued on debt converted into stock. • No ownership changes for next two years, or NOL’s gone.

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