Preserving NOLs and credit carryovers in an M&A transaction or … · 2020-04-17 · Preserving...
Transcript of Preserving NOLs and credit carryovers in an M&A transaction or … · 2020-04-17 · Preserving...
Mergers and Acquisitions Tax Services
Past losses, future gains
Tax attributes such as net operating losses and
built-in losses (assets with a tax basis higher
than value) can provide a tax shield against
future taxable income. These tax attributes
will be referred to as NOLs in this discussion.
Whether you are a strategic or financial buyer,
protecting and maximizing the value of those
NOLs is a key consideration in the economics
of any transaction. Even if you don’t plan on
utilizing NOLs currently, your ability to utilize the
tax benefits of an NOL is an important part of
financial reporting, and your failure to properly
determine the benefit could result in negative
financial statement consequences.
Even companies not involved with traditional
change-in-control transactions may find their
NOLs at risk through ownership changes
triggered by day-to-day stock trading or
fundraising activity. S corporations changing to
C corporation status also need to be aware of the
impact of an equity issuance or change in control.
Why? Congress enacted Internal Revenue Code
section 382 to prevent trafficking in losses. But
the rules surrounding section 382 are quite
complex, often misunderstood, and driven by the
unique facts and circumstance surrounding each
particular company and transaction.
Complex rules require careful analysis
If you are acquiring a company with NOLs, annual
utilization of that company’s NOLs is generally
limited to the value of the loss corporation
multiplied by the adjusted federal long-term
tax-exempt rate. But the analysis does not
stop there.
Having a full understanding of a company’s status
as a Net Unrealized Built-in Gain (NUBIG) or Net
Unrealized Built-in Loss (NUBIL) corporation is
critical. The annual utilization of NOLs can be
increased significantly if the acquired company
is a NUBIG corporation. But, if the company is a
NUBIL corporation, even post-ownership change
losses may be treated as if they were recognized
prior to the ownership change, thereby further
limiting the ability to utilize NOLs.
Determining the annual utilization is further
complicated by bargain sales, distressed
transactions and leveraged buy-outs.
In acquisitions, it is not only the acquiring party
that will need to understand the target’s NOLs.
Sellers wishing to be compensated for the
value of the loss corporation’s NOLs should also
understand and document future availability
of NOLs. acquirers leave that assessment and
documentation up to the seller.
Section 382 Analyses
Preserving NOLs and credit carryovers in an M&A transaction or other equity transaction
Do you know if any of your
tax attributes are subject
to limitation?
Do you know if your
company has undergone an
ownership change?
Do you understand the
complexities of section 382?
Acquisitions are not the only concern
Companies thinking that the section 382
rules are only a concern during acquisitions
are incorrect. Stock trading, capital raising
and even recapitalizations can trigger
ownership changes under section 382 – and
companies with multiple classes of stock face
particularly complex concerns.
Not all the news is bad, nor is a change in
ownership always a negative event. Companies
often overlook planning opportunities as well
as risks. Companies that are highly leveraged or
have significant self-created intangible assets
at the date of an ownership change may have
built-in gains that can lead to enhanced NOL
utilization. As a result, incurring a change in
ownership does not necessarily mean that you
are unable to fully offset current taxable income
or that a reserve must be booked for financial
statement purposes.
Multiple classes of stock
The application of section 382 is further
complicated when the company has multiple
classes of stock outstanding. Ownership under
section 382 is based upon stock value, and
therefore, when there are multiple classes of
stock involved, determining value becomes a
more complicated exercise than when there
is only a single class. Further, a shareholder’s
ownership may change over time merely due
to value fluctuation. This fluctuation may
cause ownership shifts unrelated to any stock
purchases, sales or other transactions.
Because of value fluctuation, taxpayers are
permitted to apply one of two methods when
performing a section 382 analysis– either, the
full value methodology or the hold constant
principle. Understanding which method to
apply can be of great benefit to taxpayers, as one
method may yield a more favorable outcome
than the other.
Section 382 is not new to us
Whether your company is considering an
acquisition or other equity transaction, section
382 concerns may be new to you. They are not
new to McGladrey. Our national M&A tax group
has helped companies across all industries
plan for and address NOL concerns involved
in acquisitions and other ownership changes.
We are experienced, in deals of all sizes, from
strategic trasactions by large publicly held
companies to portfolio deals for private equity
firms to acquisitions involving privately held
start-up companies. Based on our knowledge
and experience, we can help you examine the
specifics of your situation and work with you to
plan for and structure transactions ranging from
acquisitions to stock offerings in ways that best fit
your strategic goals while still helping to maintain
the tax benefits associated with your losses or
those of a target company.
888.811.1023 www.mcgladrey.com
Disclaimer This document contains general information, may be based on authorities that are subject to change, and is not a substitute for professional advice or services. This document does not constitute assurance, tax, consulting, business, financial, investment, legal or other professional advice, and you should consult a qualified professional advisor before taking any action based on the information herein. McGladrey LLP, its affiliates and related entities are not responsible for any loss resulting from or relating to reliance on this document by any person.
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