Replies to post #28642 on Sears Holdings Corp. (fka SHLDQ)

[justthefactsmam]

MEHDI,

how do you reconcile the article indicating if there is a 363 sale of assets that tax benefits remain with the debtor when in this case, the 363 buyer (lampert) seems to clearly be in control of the nols and tax credits.

the linked article doesn't mention 368(a)(1)(G) in conjunction with a 363 sale. this seems confusing based on what seem to be going on in the particular case between shc and lampert.

thoughts?

[~ Blue ~]

very informative link Mehdi, thank you

[north007]

Thank you for this informative document.
As per your document

A debtor may also consider the sale of the debtor’s stock to achieve a significant tax benefit. Preservation of the debtor’s income tax attributes, including the possible use of net operating losses (“NOLs”) to offset future tax liability, will determine which structure the debtor and the purchaser agree upon.

Generally speaking, if the purchaser is interested in preserving the tax attributes of the debtor, a stock purchase may be beneficial. This is because the buyer takes with the debtor’s tax basis equal to the amount paid for the stock. Upon a subsequent sale, the buyer may have a substantial gain, and thus taxable income, resulting from the sale. The initial stock sale may preserve NOLs or net capital losses in the acquiring company to offset any gain.

On the other hand, where the buyer purchases the assets, the debtor retains its tax attributes and such attributes do not carry over to the acquiring corporation. The purchaser receives the tax basis in the acquired assets based on the purchase price. This “step-up” in depreciable tax basis of the acquired assets could, over the long term, provide the buyer future depreciation or amortization income tax deductions. In this scenario, the buyer would rather pursue an asset sale if assets have appreciated significantly over the course of the debtor’s ownership because the purchaser would get a larger tax basis in the acquired assets. That is, the debtor will get the tax basis equal to the fair-market value of the acquired assets.

However, there are limitations on the purchaser’s right to use certain tax attributes that may influence the structure of the sale. One particular limitation relates to the change of control provisions as they relate to the purchaser’s use of NOLs to offset gain. In general, section 382 of the Internal Revenue Code (the “Tax Code”) requires corporations with NOLs and certain tax attributes to review their equity holders over a rolling three-year period of time (or less in some cases) to determine if they have undergone an “ownership change.” If an ownership change has occurred, then the amount of “pre-change” NOLs that can be used by the corporation will be limited.

Nevertheless, a buyer may benefit from section 382(l)(5) the Tax Code, which provides that if an ownership change occurs while a corporation is under the protection of title 11, a “limitation” on the use of the NOLs will not occur if the debtor corporation’s historic
shareholders and/or creditors prior to the ownership change receive more than 50 percent of the newly reorganized corporation pursuant to the plan of reorganization. If this section is applied, the NOLs are reduced for certain interest payments made within the past three years made to the creditors that become the new shareholders of the company and certain amounts related to cancellation of indebtedness income. However, this exemption would not be applicable to a third party purchaser that was not a prior shareholder or creditor of the debtor, and consequently, such a buyer would be subject to the limitation on the use of the tax attributes .

[north007]

Nevertheless, a buyer may benefit from section 382(l)(5) the Tax Code, which provides that if an ownership change occurs while a corporation is under the protection of title 11,


a “limitation” on the use of the NOLs will not occur if the debtor corporation’s historic
shareholders and/or creditors prior to the ownership change receive more than 50 percent of the newly reorganized corporation pursuant to the plan of reorganization.


If this section is applied, the NOLs are reduced for certain interest payments made within the past three years made to the creditors that become the new shareholders of the company and certain amounts related to cancellation of indebtedness income.

However, this exemption would not be applicable to a third party purchaser that was not a prior shareholder or creditor of the debtor, and consequently, such a buyer would be subject to the limitation on the use of the tax attributes .