I picked this up from a Tax blog. Im sure it can be argued but it sheds some light on the tax rules regarding NOLS.
"The current version of IRC Sec. 382, which includes the limitation on
NOL carryforwards to which you refer, dates back to the Tax Reform Act
of 1986. It has been amended several times since, but the basics are
the same as the '86 Act version. To understand what happens to NOL
carryforwards when the ownership of a corporation changes, you really
have to read Secs. 382 and 383 and the regulations under those
sections.
Here's a short version: A corporation that has unused NOLs is an "old
loss corporation." If it undergoes a change of ownership (see below),
it becomes a "new loss corporation." The new loss corporation may be
the same entity as the old loss corporation, or it may be a different
entity that has acquired the old loss corporation by purchasing its
stock and liquidating it, by merger, or by some other form of
reorganization. So it really doesn't matter whether the buyer
purchases the target's stock and continues to operate it as a
subsidiary, or merges it into an existing corporation or a Newco.
It's the change of ownership of the target's stock that creates the
limitation.
A change of ownership occurs if there is any change in the stock
ownership of the old loss corporation (target), and if that change
increases or decreases the percentage owned by any person who owns
more than 5% of the stock either before or after the change.
If there is a change of ownership, the new loss corporation can
utilize the NOLs of the old loss corporation, subject to this
limitation: The maximum amount of NOL that can be utilized in any
year is calculated by multiplying the value of the old loss
corporation immediately before the change of ownership by the federal
long-term tax-exempt rate that was in effect at the date of change.
The idea is to limit annual utilization of the loss to the income the
old loss corporation would have earned if it had sold all its assets
and invested the proceeds in long-term tax-exempt securities.
The long-term tax-exempt rate is published monthly by the IRS. The
rate for November 2008, for example, is 4.94%. So, for example, if
the value of the old loss corporation at the date of change is
$100,000, and the change of ownership occurs in November 2008, the
maximum NOL amount that can be utilized by the new loss corporation in
any year is $4,940. If the new loss corporation does not have enough
income in a year to absorb the maximum amount, the excess is carried
over and can be utilized in following years.
In addition to the dollar limitation, the new loss corporation must
continue the business enterprise of the old loss corporation for at
least 2 years after the change date. If not, the NOL utilization
amount for any year is zero.
There are many more complexities to these rules, particularly if the
old loss corporation has built-in losses (i.e., property that is worth
less than its tax basis) or built-in gains. But knowing how to
calculate the maximum allowable annual deduction gives you a quick and
dirty method to evaluate a proposed transaction. If you are really
going to do something, you should be sure to consult a competent tax
advisor who is thoroughly conversant with Subchapter C of the IRC
before you make any commitments.
There were limitations on NOL utilization after change of ownership
before 1986; however, they were less restrictive than the current
rules.
"
