Transcript 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.

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)
Company can elect not to carry back
AMT rules reduce some of benefit
Simple example
Year
Income
1998
-1.2M
After NOL
Income
0
After 2nd
NOL Inc
1999
1.6M
0.4M
2000
2.5M
0
2001
4.0M
0
2002
-8.2M
0
1.7 more
Capital losses

Capital losses can only be offset by
capital gains


Carry back three years
Carry forward five years
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
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
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
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!
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
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.
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.