Replies to post #297 on WorldSpace Inc fka WRSPQ

[hang ten]

Protecting Your NOL Carryforward with a Poison Pill

Tuesday, June 09, 2009

As a result of the recent downturn in the economy, many companies have been incurring significant operating and tax losses. At the same time, corporate stock values have plunged. This confluence of events creates the potential for a company to lose the potentially valuable future tax benefits that may be realized from federal tax net operating loss (NOL) carryforwards.

Over an extended period of economic weakness, NOL carryforwards can become one of the largest assets on a company’s balance sheet. Under normal circumstances, the NOLs can serve to offset future taxable income, resulting in tax savings as the company begins to be profitable. However, current tax laws impose significant limits on the ability to use NOLs to offset taxable income in the event of an ownership change. Thus, a company can be in a situation in which one of its largest assets can become impaired if ownership changes. Recent steep declines in equity markets have made it less expensive for investors to acquire significant percentages of a company’s publicly traded stock, aggravating the risk of a possible limitation.

Section 3821 limits a loss corporation’s ability to use its tax net operating losses following an "ownership change." An ownership change is triggered if one or more 5-percent shareholders of the loss corporation increases their ownership in the aggregate by more than 50 percentage points during a testing period.2 Once an ownership change has occurred, the amount of NOLs that the corporation may use to offset taxable income in any year is limited to the "Section 382 limitation" resulting from the ownership change.3 Thus, corporations with large NOL carryforwards are concerned with monitoring shareholder shifts that might trigger an ownership change and impair the NOL asset on their books. Boards of directors of publicly traded companies with large NOL carryforwards are increasing their efforts to protect this asset, and some companies are adopting "poison pill" plans to restrict the ability of shareholders to take actions that could trigger a Section 382 ownership change.4

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