Blitzer Corporation is the parent corporation of a 10-member group that has filed consolidated tax returns for a number of years. Last year, the group sold all the stock of Wolf Corporation to Jerry Jensen. This year, Wolf Corporation reported a $300,000 NOL. Wolf's taxable income while a group member averaged $200,000 annually for the past five years but is expected to be only $50,000 next year

Question

due to start-up costs that will be incurred with the introduction of a new product line. Profits are expected to increase in each succeeding year. What issues should Blitzer have considered when trying to value Wolf's NOL prior to its sale? What tax issues should Wolf now consider when deciding how to use its NOL

What will be an ideal response?

Answer 1

• What alternatives exist for using the NOL?
• Can the separate-return NOL of Wolf be carried back to a consolidated tax year of the Blitzer affiliated group?
• If so, what special limitations (if any) is the NOL subject to?
• What is the projected tax refund if the NOL is carried back to a prior consolidated return year?
• Who files for the tax refund? Who receives the refund from the IRS?
• Was any provision made for Wolf receiving the NOL refund payment from the Blitzer affiliated group in the stock purchase agreement should a separate NOL be carried back?
• What is the projected taxable income of Wolf Corporation in the future?
• What is the projected tax refund if the NOL is carried forward to a separate return year(s)?
• What special limitations (if any) is the NOL subject to (e.g., Sec. 382 restrictions following a change in ownership)?
• How is the election to forgo the NOL carryback made?
• What effect does the low taxable income in the future years and the Sec. 382 limitation have on the valuation of the NOL? The company?

A larger tax refund should be available to Wolf Corporation by carrying the NOL back to the prior tax years of Blitzer Corporation. The marginal tax rate for the earlier tax years appears to be 39% while Wolf has a 15% rate for the near future. The separate-return NOL is an SRLY loss when carried back, and its use is subject to the SRLY limitations. The entire loss carryback should be absorbed within the two-year carryback period since Wolf reported separate-return profits of $200,000 annually when part of the affiliated group, Wolf files for the refund based on the carryback. A carryover of the NOL is likely subject to the Sec. 382 loss limitations. We do not know enough about Wolf's new owners to be able to reach a definite conclusion about the Sec. 382 issue. The tax refund from an NOL carryback will be paid to Blitzer. As such, Blitzer may be reluctant to pay the refund to Wolf unless such an event was agreed upon at the time of the sale. From Wolf's perspective, the sales agreement should include a provision requiring Blitzer to pay the refund to Wolf Corporation.