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CARRYOVER OF TAX ATTRIBUTES

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17 brother sister corps merged; some had NOLs, and the surviving corporation ... Brother and Sister corps merge; Harry owns all the stock of each. One has an NOL. ... – PowerPoint PPT presentation

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Title: CARRYOVER OF TAX ATTRIBUTES


1
CARRYOVER OF TAX ATTRIBUTES
  • The statutory scheme is found in 382, governing
    net operating losses( NOLs), 383, carry over of
    credits (no longer of much application) and 384,
    Built in losses (BILs) and Built in gains (BIGs)
  • In addition,269 prohibits the use of an NOL
    where tax avoidance is the principal motive of an
    acquisition.
  • A third set of rules not found in the code but
    present in the regulations applies to
    parent-subsidiary corporations filing
    consolidated returns.

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3
LIBSON SHOPS
  • 17 brother sister corps merged some had NOLs,
    and the surviving corporation reduced its post
    merger income by the NOL IRS challenges that
    deduction.
  • The court bought the IRS argument that the NOLs
    can only be used against the future income of the
    corporations that produced the loss.
  • The congressional committee reports issued when
    the last revisions to 382 were enacted state
    that Libson Shops has been overruled, and it has
    except its theory still exists in the
    consolidated return area.

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5
STANGE COMPANY V CIR
  • There was no ownership change here, but merely a
    tax avoidance scheme. For that reason only 269
    applies.
  • MGI corporation (with NOLs) and April,
    brother-sister corporations, were merged each
    had substantially the same stockholders. IRS
    said the motive was tax avoidance, but the tax
    court found some business reasons. Looks weak to
    me.
  • Court found that tax avoidance, while present,
    was not the principal motive. Other motives
    included supplying capital to MGI, economy of
    administration and serving as an acquisition
    vehicle.

6
382 LIMITATIONS
  • There are two type of changes that trigger the
    limits on NOLs of 382.
  • Ownership changes, that is, purchases which
    includes
  • Purchase for cash from target stockholders
  • 351 contributions for stock when the new
    stockholders have 80 control
  • Exercise of stock conversion rights, or,
  • Redemptions

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8
382 LIMITS, CONT
  • The other kind of change of ownership is called
    equity structure shifts. i.e.,acquisitive
    reorganizations
  • Equity structure shifts are any one of the
    following
  • Mergers, that is A reorganizations
  • Stock for stock acquisitions, that is B
    reorganizations
  • Assets for stock, that is C reorganizations.
  • Non-divisive D reorganizations, as in Ringwalt
    and Berghash, p. 757.

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10
EXAMPLES OF THE UTILIZATION OF NOLs
  • A loss corporation acquires profitable assets
    and uses its losses against future income. There
    is no limit on the use of the net operating
    losses.
  • Brother and Sister corps merge Harry owns all
    the stock of each. One has an NOL. Could be a
    problem under 269 which requires a business
    purpose for the merger. This is the fact
    situation of the Stange case.
  • A loss corporation acquires a profitable
    corporation and uses its NOL against future
    income of the group no matter how organized.
    There is no limit on the use of the NOL by the
    Loss corporation.
  • A profitable corporation acquires a loss
    corporation in a B reorg, and pumps profitable
    assets into Loss. 382 will limit the amount of
    the yearly NOL.

11
EXAMPLES CONTINUED
  • A profitable corporation acquires a loss
    corporation and they file a consolidated return.
    The consolidated return regulations limit the use
    of the NOL in much the same manner as the court
    held in Libson Shops.
  • The change in ownership, be it a cash purchase
    or a reorganization, must exceed 50 or there is
    no 382 adjustment.
  • To make the adjustment, you simply value the loss
    corporation and then multiply that value by the
    IRS announced tax exempt interest rate the
    result is the yearly limit on the use of the NOL.
    Unused amounts carry over to future years until
    the NOL expires.

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13
PROBLEM 13-1, 2 AND 3
  • 13-1 a Yes, if the sale occurs within 3 years.
    b no, the sale to a third party is ignored.
  • 13-2 no, if it was a failed reorganization it
    would be treated like a cash acquisition.
  • 13-3 no, Greggs interest shrinks from 100 to
    40 so there has been an ownership change.

14
Ltr. Rul. 9226030 AND 200245006
  • The first letter ruling not in this edition
    holds that a father and son are a single person
    for ownership shift status so no change occurs
    when dads stock is all redeemed and son becomes
    the sole shareholder. Accordingly there is no
    limit on any NOL.
  • The second ruling announces that an ownership
    shift occurs when a brother sells all his stock
    to another brother. There is no family
    attribution between siblings in 318. The area
    is not without confusion, for if one of their
    parents were alive there probably would be
    attribution land the brothers would be treated as
    a single person.

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16
PROBLEM 13-5 p. 642
  • Answers are as follows
  • a.1. yes his interest shrinks from 100 to 10
  • 2. No a peculiar rule, and seldom seen.
  • 3. No there is no ownership change
  • b.1. i. Yes, Jay goes from 100 to 20 Kay now
    has 80
  • ii. No, Jay goes from 100 to 60, Kay
    has 40.
  • 2. i. No.
  • ii. No. The form of the reorg is
    immaterial.

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18
PROBLEM 13-5 CONT
  • 3. i. Yes Jay goes from 100 to 20 Kay has
    80
  • ii. No Jay goes from 100 to 60 Kay has
    40.
  • 4. Jay and Kay, father and son, would be treated
    as a single person and there would be no
    ownership change in any of these examples.
  • c Gratuitous transfers are ignored, such
    as gifts, inheritances and divorce awards.

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20
PROBLEM 13-6,7 p 644
  • In year 6 the limit is the total earnings,
    100,000 so only that amount can be used. In
    year 7, the disallowed amount is carried over, so
    the total allowed in year 7 is
    200,000100,000300,000
  • Problem 13-7 Assume the NOL is from year 19.
  • (a) 1 2 none the acquiring corporation must
    use assets for 2 years. 3. 210,000, i.e. the
    full allowable amount the 2 years have elapsed
    since the acquisition. (b) none, in year 23, as
    the NOL has expired.

21
PUBLIC GROUPS AND THE 5 RULE
  • Few problems arise in this area, as virtually all
    such acquisitions involve closely held
    corporations.
  • Say a publicly held corporation has an NOL, and
    merges with Loss corporation and no shareholder
    has 5 or more of the stock.
  • Still, there will be an ownership change unless
    the stockholders of the loss corporation have 50
    or more of the surviving corporation. All loss
    shareholders are treated as a single person.

22
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23
BUILT IN GAINS LOSSES
  • The amount of any built-in-gain BIG increases
    the yearly net operating loss limitation when the
    BIG asset is sold.
  • If a company acquires a loss corp with a BIG, it
    cannot use the NOL against the BIG for 5 years.
    Anppraisal of the assets at the time a target is
    acquired is important
  • The amount of any BIL is allowed only up to the
    value of the corporation. See also, Canaveral v
    CIR, 61 TC 520 (1974) In that case a corporation
    owned a yacht with a basis of 769,000 the
    corporation was acquired in a B by a Canaveral,
    Inc. for stock worth about 170,000. \Canaveral
    later sold the yacht for 250,000 and claimed a
    loss of 519,000. The tax court held that the
    basis of the yacht was the value of the
    Canaverals stock used to acquire the yacht
    corporation. The case was decided before the
    384 limits were enacted.

24
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25
CONSOLITATED RETURNS
  • If a parent owns a subsidiary corporation that
    has an NOL, the parent could liquidate the
    subsidiary tax free (332) and the loss, subject
    to any 382 limits, will inure to the parent
    corporation.
  • Another way to use the loss is to file
    consolidated returns, an election available when
    the parent has 80 control of the subsidiary
    brothersister corporations cannot file
    consolidated returns.
  • Each of the parent-subsidiary corporations must
    elect to file consolidated returns the parents
    taxable year becomes the taxable year for the
    group.

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27
CONSOLIDATED RETURNS
  • Intercompany transactions, like sales, rents, and
    dividends are eliminated in calculating the
    income of the consolidated group. Essentially
    the entire group is treated like a single
    corporation. One result of consolidated returns
    is a 100 dividend received deduction.
    Actually, the dividends are eliminated from the
    parent's income.
  • The parents basis in the stock of the subsidiary
    will increase with the subsidiarys income, and
    decrease with the subsidiarys losses.
  • Most eligible Parent-Subsidiary groups elect
    consolidated return reporting.

28
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29
CONSOLIDATED RETURNS, NOL LIMITS
  • There are two kinds of limits on the use of NOLs
    following the formation of a consolidated group.
    These limitations are known as Consolidated
    Return Change of Ownership (CRCOs) and Separate
    Return Year Limitation (SRYLs).
  • Say a parent acquires a sub on August 1 the sub
    had losses from January 1 to August 1. The parent
    and subsidiary elect to file consolidated
    Returns on August 1 the loss up to August 1 can
    only be used against the subs income for that
    year and future years, like in Libson Shops.
    This is a CRCO.

30
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31
SEPARATE RETURN YEAR LIMITATION (SRYL)
  • A 100 controlled subsidiary corporation filed a
    separate return for last year reporting a loss of
    1 million.
  • On January 1 of this year consolidated return
    filing is elected the NOL from last year is
    only allowed against the subsidiarys future
    income. Again this is identical to the Libson
    Shops doctrine which Congress said it repealed.
  • These rules (CRCOs SRYLs) do not come from the
    statute, but from IRS regulations concerning
    consolidated return reporting that predate the
    enactment of 382.

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34
BERCY INDUSTRIES
  • Bercy, Inc. is the target, to be acquired by
    Beverly corp. Beverly forms a subsidiary and the
    subsidiary merges with Bercy on April 23. The
    subsidiary is the surviving corporation in the
    merger it is called New Bercy. From that date
    to the end of the year the subsidiary incurs a
    loss on the Bercy assets, and carries the loss
    back to Old Bercys pre-merger income despite a
    statute to the contrary, the court allows the
    carryback.

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36
BERCY CONTINUED
  • Had Old Bercy survived the merger, the loss would
    have been allowed by the code i.e., it would
    have been a reverse triangular merger. Perhaps
    the court had this in mind when it refused to
    follow the literal language of the statute.
  • Note the reference to disallowing a carryback in
    a CERT acquisition, footnote 5, p.657. This is
    Congress's response to junk bond acquisitions.
    Corporate Equity Reduction Transaction CERT
    means that junk bonds were used to buy out the
    stockholders, like in the RJR Nabisco example I
    used. The interest on those bonds cannot create
    a carry back loss, but can create a carry forward
    loss.

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38
ACQUISITION OF AN S OR OTHER ENTITY
  • Can a taxpayer save on his taxes by acquiring an
    S corporation or a partnership with a history
    of losses? Why not?
  • What if Larry Loser enters into matrimony with
    Mary Moneybags, and he brings an NOL into the
    marriage. Can Mary deduct Larrys NOL against
    her post-marriage income on their joint income
    tax return?
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