NOL CarryOver to Buyer

[Duane Anderson]

My client ( a C corporation) and 100% owner is selling his business and the buyer wants to buy stock rahter than assets.

Will the accumulated Net Operating Loss transfer to the buyer?

Thanks, Duane E. Anderson

[veritas]

I don't believe so

unless they were bailed out like GM.

[Maribeth]

unless they were bailed out like GM.

It's a C corporation. The tax attributes on a stock sale will stay with the corporation. The NOL will stay with the corporation.

Maribeth

[veritas]

From TTB

Ownership change can limit NOL. If a corporation with cumulative
losses undergoes a significant ownership shift, the amount
of NOL carryforward yearly deduction is limited to the value of
the old corporation times the long-term tax-exempt rate. A significant
ownership shift occurs when there is more than a 50 percentage
point change in ownership by one or more 5% owners.
The purpose of the limitation is to discourage purchase of a corporation
for purposes of deducting a tax loss. (IRC §382)

[dsi]

Value of the old corporation? Would that be FMV? Book value? Something else?

[Snaggletooth]

More Definitions

Not only the "value of the old corporation" but also the "long-term exempt rate" seem to go over the top of my head. I have a hypothetical client with a large NOL carryforward, and would be interested to knowing what is supposed to happen.

Veritas' explanation is essentially verbatim from TTB.

Maybe an example would help...

[taxxcpa]

Does anyone know what a "long-term tax exempt rate" is?

[Duane Anderson]

Value of Corporatiion

The value of thecorporation (FMV) is about $250,000 which includes all the equipment and any goodwill. The NOL is approximately the same. I do not know why the buyer wants to buy stock rather than assets but the buyer will receive all assets, etc. as part of the sale.

Thanks, Duane Anderson

[jimmcg]

Does anyone know what a "long-term tax exempt rate" is?

Long term tax exempt rate for a particular month, used under Sec 382 to compute the annual limitation on the utilization of corporate net operating loss carryovers following any "significant change in ownership" during such month is equal to the highest Adjusted Long Term Rate for that month and prior two months........See Code Sec 382.

[veritas]

Why doesn't the buyer

wish to buy the assets?

It would seem to me to be a win win situation.

The seller (corp) has an asset sale and uses the nol to wipe out the gains.

The buyer gets a stepped up basis.

[ttbtaxes]

IRC 382 will essentially allow the NOL to carryover but significantly limits the annual amount of NOL carryover you can use each year against the buyer's current income.

Take a look at example 3.5:

http://macabacus.com/taxes/attributes

You'll need to know when the acquired NOLs expire and do not forget about the continuity of business enterprise requirement of IRC 382. The buyer must continue to use the seller's assets for the 2 years following acquisition.

[Bees Knees]

My client ( a C corporation) and 100% owner is selling his business and the buyer wants to buy stock rahter than assets.

There is no tax advantage for a buyer to buy the stock rather than the assets in a corporation. Buying the stock means the cost is capitalized until the buyer eventually sells. Buying the assets means the buyer can recover the cost through depreciation and the cost of goods sold deduction. Buying stock also means assuming all prior liabilities of the corporation, including unforeseen product liability claims against the corporation.

Any ability to deduct NOLs is greatly overshadowed by the fact that the cost of the stock is non-deductible to the buyer.

The problem I would have in representing the seller is the buyer is eventually going to realize the stupid mistake he/she just made. He/she could file a malpractice lawsuit against his/her advisor. Anytime there is a lawsuit, other people get dragged into it, including you and your client for not disclosing the alleged liability the buyer thinks he/she got stuck with. My advice to you is to tell your client to tell the buyer he/she should hire a qualified tax professional for advice, and make a reasonable attempt to offer to sell the assets of the corporation rather than the stock for the buyer's own good.

[Roland Slugg]

The IRS publishes the long-term tax-exempt rate every month, in a Rev Rul. The rate for November 2011 is 3.77%, so if the sale were to take place this month, the NOL usable this year would be $9,425 ($250,000 × 3.77%. The "value of the corporation" would be the amount being paid for the common stock, assuming an arm's length deal. No value is assigned to preferred stock, if any.

I agree with the above post regarding the sale of the corp's assets to the buyer. If the corp is worth $250k and the NOL is also $250k, it's a no-brainer. The gain on the sale of the corp's assets will be fully absorbed by the corp's NOL, resulting in no taxable income to the selling corp. The corp could then be liquidated, resulting in capital gain to the old shareholder ... the same as if he had sold his shares.

All this may be moot, because if the buyer is being represented (or at least advised) by a qualified adviser ... presumably a tax lawyer ... then he is probably planning to use a corporation as the buyer, then liquidating the newly acquired corporation and making a §338 election and filing F-8023.

It is inconceivable to me that an informed buyer would NOT be planning to do this. However, if the buyer is (1) an individual, and (2) wishes to buy the stock, not the assets, I would proceed cautiously. The seller's own lawyer will certainly realize this and take steps to document that the buyer either has representation or has been advised to seek representation from a qualified person.

[Golden Rocket]

Don't Disagree, but

There is no tax advantage for a buyer to buy the stock rather than the assets in a corporation. Buying the stock means the cost is capitalized until the buyer eventually sells. Buying the assets means the buyer can recover the cost through depreciation and the cost of goods sold deduction.

Don't disagree from the perspective of the buyer. However, there is a widely held belief that the SELLER (whether the corporation or owners via secondary transactions) will have to pay additional tax on the inflation-adjusted selling price of the assets themselves.

If assets are depreciable equipment, inflation adjusted prices are not so much a factor exclusive of recapture. If assets are long-held real estate, there is a much greater risk of having to pay capital gains tax. (The last few recession years being a possible exception).

Of course, stock has basis in the hands of the seller too. Doesn't make sense to sell the stock to avoid taxes on inflated asset values if the stock itself has an extremely low basis.

[veritas]

Nice post

The IRS publishes the long-term tax-exempt rate every month, in a Rev Rul. The rate for November 2011 is 3.77%, so if the sale were to take place this month, the NOL usable this year would be $9,425 ($250,000 × 3.77%. The "value of the corporation" would be the amount being paid for the common stock, assuming an arm's length deal. No value is assigned to preferred stock, if any.

I agree with the above post regarding the sale of the corp's assets to the buyer. If the corp is worth $250k and the NOL is also $250k, it's a no-brainer. The gain on the sale of the corp's assets will be fully absorbed by the corp's NOL, resulting in no taxable income to the selling corp. The corp could then be liquidated, resulting in capital gain to the old shareholder ... the same as if he had sold his shares.

All this may be moot, because if the buyer is being represented (or at least advised) by a qualified adviser ... presumably a tax lawyer ... then he is probably planning to use a corporation as the buyer, then liquidating the newly acquired corporation and making a §338 election and filing F-8023.

It is inconceivable to me that an informed buyer would NOT be planning to do this. However, if the buyer is (1) an individual, and (2) wishes to buy the stock, not the assets, I would proceed cautiously. The seller's own lawyer will certainly realize this and take steps to document that the buyer either has representation or has been advised to seek representation from a qualified person.

I believe you covered the issue succinctly.