Presenting a live 110 ‐ minute teleconference with interactive Q&A Section 382 Limits on NOL Usage Following an Ownership Change Following an Ownership Change Navigating Restrictions on Loss Carryforwards to Maximize Tax Benefits WEDNESDAY, SEPTEMBER 21, 2011 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Jeffrey Kelson Partner-In-Charge Domestic Tax EisnerAmper Edison N J Jeffrey Kelson, Partner In Charge, Domestic Tax, EisnerAmper , Edison, N.J. Todd Reinstein, Tax Partner, Pepper Hamilton , Washington, D.C. Robert Liquerman, Principal, KPMG LLP , Washington, D.C. For this program, attendees must listen to the audio over the telephone. Please refer to the instructions emailed to the registrant for the dial-in information. Attendees can still view the presentation slides online. If you have any questions, please contact Customer Service at1-800-926-7926 ext. 10 .
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Section 382 Limits on NOL Usage F ll Following an Ownership Change i O hi Ch Seminar Sept. 21, 2011 Todd Reinstein, Pepper Hamilton Robert Liquerman, KPMG reinsteint@ pepperlaw.com rliquerman@ kpmg.com Jeffrey Kelson, EisnerAmper jeffrey.kelson@ eisneramper.com
Today’s Program What Causes An Ownership Change Slide 7 – Slide 14 [T dd R i [Todd Reinst ein] t i ] Calculating The Limitation Slide 15 – Slide 23 [Robert Liquerman] Notice 2003-65 And Built-in Gains Slide 24 – Slide 33 [Jeffrey Kelson] Notice 2010-50 And Fluctuations In Value Slide 34 – Slide 39 [Todd Reinst ein] Notice 2010-49 And Treatment Of Non-5% Shareholders Slide 40 – Slide 45 [Robert Liquerman] Investment Advisors Slide 46 – Slide 48 [Jeffrey Kelson]
Todd Reinstein, Pepper Hamilton WHAT CAUSES AN WHAT CAUSES AN OWNERSHIP CHANGE
Wh S Why Sec. 382 Matters 8 M Purchase price modeling should account for limits on NOLs. • Equity transactions should be monitored to make sure • ownership changes do not inadvertently trip Sec. 382. Cumulative annual limitations may be less than the NOL • carryforward. y ― Deferred tax asset 8
S Sec. 382 Basics 8 B i Limits a “loss corporation” Limits a loss corporation • • That undergoes an “ownership change” • ― An ownership change occurs if immediately after an owner shift or an equity structure shift; the percentage by value of stock of the loss corporation owned by one or more 5 % shareholders has increased by more than 50 y percentage points over the lowest percentage ownership of such shareholders. During a three-year “testing period” During a three year testing period • From utilizing “pre-change losses” or other tax attributes • Against “post-change” income • 9
S Sec. 382 Definitions 8 D fi i i Loss corporation • ― NOL, tax credit, capital loss or other attribute carryforward ― Net unrealized built in loss Net unrealized built-in loss 5% shareholders • ― Any person holding 5% or more during the testing period Testing period • ― Begins on the first day of the tax year in which carryforward begins carryforward begins ― Three-year “rolling” period, unless change occurs ― Shorter period when an ownership change occurs 10
E Equity i Common stock Common stock • • Convertible preferred stock • Voting preferred stock • 11
N Not Equity E i Plain vanilla preferred stock [Sec 1504(a)(4) stock] Plain vanilla preferred stock [Sec. 1504(a)(4) stock] • • ― Not entitled to vote ― Not convertible ― Limited and preferred as to dividends ― Does not participate in corporate growth ― Redemption and liquidation rights do not exceed issue Redemption and liquidation rights do not exceed issue price Most stock options • ― But, must test under the option attribution rules Debt, including most convertible debt • ― The convertibility feature creates an option to acquire The convertibility feature creates an option to acquire stock. 12
D t Determining 5% Shareholders i i % Sh h ld • Any individual who owns directly or indirectly an amount of the loss corporation stock that aggregates to a 5% ownership interest by value • • • Include indirect 5% shareholders ― Trying to get to “arms and legs” A C A is indirect 5% shareholder of LossCo 30% A sells 30% of X stock to C 24% shift in LossCo (30% multiplied by ( p y 80%) even though shareholder X still X B owns 80% 80% 80% 20% LossCo 13
SEC Filers SEC Fil “Reliance” on the existence or absence of Schedules 13D & • 13G ― What about Schedule 13F? No obligation to inquire or to determine whether actual facts No obligation to inquire or to determine whether actual facts • are consistent with the ownership ― IRS has moved away from this view in recent PLRs and is now requiring more inquiry. “Actual knowledge” can always be taken into account. • Other SEC information: Other SEC information: • ― Forms 3 and 4 ― DEF 14A – Proxy Statement ― 10-Qs ― 10-Ks 14
Robert Liquerman, KPMG CALCULATION THE CALCULATION THE LIMITATION
A Annual Limitation l Li i i In general, Equity value immediately before ownership change (Special adjustments) (Special adjustments) Adjusted equity value x AFR for ownership changes in given month x AFR for ownership changes in given month Basic annual limitation Direct adjustments to annual Sec. 382 limitation under certain conditions 16
Determining Value Of Loss Corporation Value of loss corporation is the value of the stock of such • corporation immediately before the ownership change. Sec. 382(e)(1) TAM 200513027 TAM 200513027 • Taxpayer hired an accounting firm to value P and T in • lieu of using a market capitalization approach. Average high/low trading prices on the ownership • change date (market capitalization) An adjustment for control premium may be appropriate. An adjustment for control premium may be appropriate. • No control premium was added to the market • capitalization approach for acquisition of T . A control premium for the P market capitalization • approach may be appropriate. 17
S Sec. 382 Limitation 8 Li i i Redemptions or other corporation contractions • [Sec 382(e)(2)] [Sec. 382(e)(2)] Certain capital contributions [Sec. 382(l)(1)] p [ ( )( )] • Extent of non-business assets [Sec. 382(l)(4)] • Continuity of business enterprise [Sec. 382(c)] • 18
C Capital Contributions i l C ib i Capital contributions within two years [Sec. 382(l)(1)] C it l t ib ti ithi t [S 382(l)(1)] • Part of a plan a principal purpose of which is to avoid or Part of a plan, a principal purpose of which is to avoid or • • increase a Sec. 382 limitation 19
C Capital Contributions (Cont.) i l C ib i (C ) Received by LossCo within two years of ownership change • “Irrebutably” presumed to be part of a plan to increase • LossCo value for computing limitation p g Relief from “irrebutable presumption” under certain • conditions, based on committee reports and private letter rulings 20
C Capital Contributions (Cont.) i l C ib i (C ) “ Exceptions” to irrebutable presumption Contributions in connection with LossCo formation • Contributions prior to LossCo becoming a loss corporation p g p • Working capital expenditures • ― Meeting daily operating expenditures ― If If a contribution is the result of capitalized debt, certain t ib ti i th lt f it li d d bt t i PLRs have supported treating debt under the working capital exception, based on (i) debt proceeds used for working capital, (ii) proximity of incurring debt and working capital, (ii) proximity of incurring debt and capitalizing debt, and (iii) intent to convert debt to equity or to raise equity to repay debt. 21
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