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Net Operating Losses During Bankruptcy

Frank Schmid's Profile

I have a very basic question put to me by a colleague.

If a public company with venture capital backing files bankruptcy, what happens to the NOL's? How about if it is purchased or taken over by another company prior to bankruptcy?
After bankruptcy?

Thank you
 

Answers

Gary Wilfert
Title: Chief Operating Officer
Company: SkyGuard, Inc
(Chief Operating Officer, SkyGuard, Inc) |

It depends upon the chnange in the ownership and the type of corporation. If the corporation is a flow thru entity, they are lost. If the change in ownership is greater than 51% they must be amortized over a protracted time. You will need someone calcualte that period.

Robert Honeyman
Title: CFO
Company: Advanced Predictive Analytics
(CFO, Advanced Predictive Analytics) |

Frank,

I'm guessing that your question is really about the ability to use NOLs as offsets against future taxable income. Take a look at Section 382 of the IRS code (or talk to your auditors or tax advisor). Unless you're Wachovia , change in control under 382 is triggered (very roughly speaking) whenever a stockholder or class of stockholders (employees, for example, in the case where there is an equity incentive plan in place) holding more than 5% of the company experiences a 50% increase or decrease in their ownership interest.

I was shocked when my auditors threw that out at me one year. As for bankruptcy, I think the 382 concern is how you fund the exit. If it's with equity, you may have a problem (I'm guessing here) but if not, my limited knowledge guesses you'll be able to hold onto the NOL. If the company is sold, that will probably trigger 382, killing the ability to use the NOLs on future tax returns.

Be sure you do your own checking on this. I'm no expert and I am not at all up on the details and nuances of 382. But I believe what I've said is directionally correct.

Don't you just *hate* cya disclaimers?!? :7)

Robert Fleck
Title: Controller
Company: Integrated Parking Solutions
(Controller, Integrated Parking Solutions) |

My understanding is that if bankruptcy occurs before the transfer of the NOL's, any forgiveness of debt associated with the bankruptcy will be used to reduce the amount of NOL's available for future use.

If the company is sold, I believe that the NOL's need to be utilized by a similar type business. A business cannot be acquired for the main purpose of utilization of the NOL's.

Same disclaimer as the last person responding.

Robert Nale
Title: Tax Director
Company: in-between
(Tax Director, in-between) |

Section 382 typically limits the use of NOLs by the acquiring corporation where there is a 50% ownvership change. However, this is not necessarily the case in bankruptcy situations. As long as the corporation was under jurisdiction in a title 11 or similar case and the former shareholders and creditors remain in "control" after the bankruptcy, then the limitations of Sec. 382 do not apply.

Feel free to contact me with any specific facts/additional questions.

Robert Nale, CPA MST
robertnaleatsbcglobal [dot] net

Jeff Johnson
Title: Partner
Company: Johnson & Garrison, LLC
(Partner, Johnson & Garrison, LLC) |

The good news is that Section 382 in bankruptcy can give you a better result than outside of bankruptcy. A couple of things to keep in mind - 1) You must first consider the impact of the cancellation of debt income realized in bankruptcy - the income can be excluded from taxable income, but there is a giveback in the form of reduced tax attributes such as NOLs; 2) If you experience an ownership change under Section 382 as a result of a bankruptcy reorganization, there are two approaches to Section 382 that are available - (l)(5) and (l)(6) - these can provide very different results depending on your fact pattern.

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