Question

Corporation P acquired the stock of Corporation T for $40 Million from T shareholders. No Section 338 election was made. Corporation T has assets with a fair market value of $25 Million and an adjusted basis of $22 Million. Corporation T also has a net operating loss carryover of $10 Million. The federal long term tax exempt rate at the date of acquisition is 4%.

A) What is P’s basis in T’s assets and what is the annual limitation on the use of T’s net

operating loss?

B) Briefly explain the rules for corporate net operating losses arising after 2017.

Answer 1

(A) Price paid $ 40 million, Assets acquired 25 million, Tax losses 10 million, also has adjusted basis of $22 million

P is paying $40 million for getting assets of worth $ 3 million (25-22) and a opportunity to lower down his taxable income in future by $ 10 million. Hence the $ 27 million paid by P as a premium to acquire the company.

Annual Limitation on use of NOl of target company when NO section 338 election was made is

Purchase price of the target company stock x long term tax Exemption rate.

in present case it is 40 million x 4% = $1.6 million per annume.

(b) rule for Corporate Net operating losses arises in future year:

Since the acquisition has done without election of sec 338 hence section 382 limit will be apply which is $1.6 million per Year to set off current year income .

• if in any year, company has a loss, then in such case $1.6 million limit also carrv forward and in next year limit will be $1.6 x 2= $3.2 million. It means in next year the limit for set-off will be $1.6 million(current year allowance) plus the amount of last year which was not set-off due to insufficiency of profit.
• This $10 million NOL which is acquired in acquisition can be carry forward and set-off up to next 20 year

Thanks.