Acquirers of Net Operating Losses in U.S. Loss Corporations: Buyer Beware
8 Pratt's Journal of Bankruptcy Law 278 (2012)
16 Pages Posted: 23 Sep 2011 Last revised: 23 Jun 2014
Date Written: September 23, 2011
Net Operating Losses (NOLs) in a loss corporation can be valuable to an acquiring company as well as to the loss corporation itself. However, IRC Section 382 places a limitation on the availability to an acquirer of pre-discharge NOL carryovers. A bankruptcy court may wish to enjoin the sale of large blocks of shares in the debtor on the ground that if too many shares of stock are turned over, the NOLs may be lost. Such a loss is arguably not the loss corporation’s concern as the stock is in the hands of a separate entity, the estate, once the bankruptcy petition is filed. Nonetheless, it is the loss corporation’s concern where the stock’s fate can play a significant role in determining whether the loss corporation may ultimately emerge from bankruptcy.
The central issue is whether the debtor corporation’s potential ability to carry over pre-bankruptcy petition NOLs is protected by the automatic stay from the acquirer’s attempt to deduct the loss corporation’s worthless stock. While several courts have addressed the matter, this paper attempts to review their treatment along with the relevant Internal Revenue Code sections in order to recommend prudential standards for future courts to follow. Such considerations must include any failure by the acquirer to make a bona fide effort to fall within the more valuable of IRC Section 382(l)(6) or within IRC Section 382(l)(5)’s exception to the reduction of NOL carryover amounts. Additionally, an acquirer’s failure to respect the automatic stay’s preservation of NOLs as property of the estate should also affect judicial determinations.
Keywords: NOL, net operating loss, reorganization, tax, claims trading, creditor, debtor, bankruptcy
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