Using Appraisal to Protect Net Operating Loss Carryforwards

22 Pages Posted: 22 Apr 2012

Date Written: April 20, 2012


The Internal Revenue Service’s net operating loss rules enable corporations to use one year’s losses to offset their tax liability in future years. However, a corporation’s ability to do so depends on its maintaining the same ownership: if enough of a corporation’s stock changes hands, it loses the ability to take advantage of all of its prior losses. In response to the threat of ownership changes, corporations have enacted particularly strict “poison pills,” which are designed to prevent stock from changing hands. However, a side effect of these poison pills is that they ameliorate the threat of hostile takeovers, thereby reducing managers’ incentives to maximize corporate welfare. In this Comment, I suggest using the appraisal mechanism to alleviate the need for poison pills and ownership-change restrictions by enabling corporations to pursue damages against shareholders who trigger the devaluing of their net operating losses. The proposed appraisal regime properly balances the interests of tax law and corporate law by ensuring that net operating losses will not be freely transferred but will also not serve as an excuse for allowing managerial incentives to deviate from the proper goal of shareholder wealth maximization.

Suggested Citation

Siegal, Peter B., Using Appraisal to Protect Net Operating Loss Carryforwards (April 20, 2012). Northwestern University Law Review, Vol. 106, No. 2, 2012, Available at SSRN:

Peter B. Siegal (Contact Author)

Northwestern University - Pritzker School of Law ( email )

375 E. Chicago Ave
Chicago, IL 60611
United States

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