Hello, This is very complicated issue. First here is the simple explanation:
A company buying another entity that has an NOL carryforward will certainly place a high value on the NOL carryforward, and may even buy the entity strictly in order to use its NOL carryforward. To curtail this type of behavior, the IRS has created the Section 382 limitation, under which there is a limitation on the use of an NOL carryforward if there is at least a 50% change in the ownership of an entity that has an unused NOL. The limitation is derived through a complex formula that essentially multiplies the acquired corporation’s stock times the long-term tax exempt bond rate. Now here is the IRS code on the issue http://www.irs.gov/irb/2003-40_IRB/ar17.html . Basically it saying that you would take in effect of gains that were incurred if the company is sold outright and you calculated the gains based on the sales price of the company and you would offset some of the on books NOL. I know this is confusing but there is not any easier way to explain. Thanks Tom
50% change in ownership over what timeframe (the period of the NOL?) If Company x buys less than 50% how can they benefit in reduced taxes (I can see the P&L impact, but ont on the tax side. sounds like I need to consider if present / past investors used their proportional share in prior years?
Hello, a loss from a C Corp would not have been passed on to individuals. If it was an S-corp in tha past than that loss has already passed through to the owners. Once a change in ownership reaches more than 50% than the rule kicks in. If Company X buys less than 50% and it is a C- corp that benefit doesn't pass to the new corporation. It is treated as an investment only. Thanks Tom