The Taxand Global Guide to M&A Tax 2013 answers the top questions dealmakers need to consider when undertaking any buy or sale across 35 countries. Our publication highlights the opportunities and pitfalls affecting multinationals globally.
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Interplay between IRC section 382 & the States - a curious game
As the economy continues to heat up and businesses are putting into play long-held cash, entities that acquire corporations with significant net operating losses (NOLs) need to be aware of the interplay between Internal Revenue Code Section 382 and state tax laws. Section 382 provides for the limitation on net operating loss carryforwards and certain built-in losses following an ownership change. Taxand USA focuses on some of the state tax consequences of such an ownership change.
An NOL can be a significant attribute for a purchaser when evaluating a transaction. NOLs, and subsequent Section 382 limitations, are prevalent in the corporate landscape and regularly pop up in mergers and acquisitions. Therefore, it is important to understand that Section 382 for federal income tax purposes does not always align with the related state rules. Generally speaking, Section 382 can affect the value of certain tax attributes acquired by a purchaser, including NOLs, by limiting a corporation's ability to use an NOL carryover following an ownership change.
As an overview, a Section 382 limitation is the result of an ownership change, typically as the result of a merger or acquisition. An ownership change occurs if one or more five percent shareholders increase their ownership in the loss corporation's stock, in the aggregate, by more than 50 percentage points during a three-year testing period. That said, an ownership change under Section 382 can be triggered by an assortment of shareholder activities that may leave a corporation's structure intact, but ultimately result in an ownership change, whether expected or not.
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As demonstrated above, determining the application of Section 382 in a state context is not always straightforward and can be a complicated exercise as a result of the wide array of differences in state taxing jurisdictions. That said, if your business is considering acquiring a loss corporation or has an ownership change that triggers Section 382, remember to review the rules in all applicable states to correctly determine any potential state Section 382 limitations and the true value of the acquired asset.