March 24, 2020
Falling Valuations Can Trigger “Change in Ownership” Problems
Posted by COVID-19 Rapid Response Team
In the current environment, the combination of a decline in company values along with the need to raise money can create Section 382 “change in ownership” problems.
Further compounding the issue are current low interest rates (Sec. 382 applicable federal rate) that post-ownership change annual limits are based on, and newly enacted proposed regulations (January 2020) that, once issued as final, will eliminate the benefit of Notice 2003-65 (utilization of “deemed recognized built-in gains”). Both factors will have a significant effect on the annual utilization of tax attributes following a Section 382 “ownership change.
We recommend all companies assess the impact that an additional funding round, or other share activity, might have towards incurring a potential ownership change and the resultant loss of tax attributes.
For those companies with the potential of experiencing an ownership change, we recommend the following:
- Plan to avoid the impact of the newly issued proposed regulations; some of our clients are planning to trigger an ownership change sooner, before final regulations are issued, rather than later.
- Consider implementing an NOL “poison pill” which acts as a deterrent in triggering an ownership change, or a charter amendment which could guarantee avoiding an ownership change.
- If a change occurs, assess the existence of built-in gain on an asset-by-asset basis. Appreciated inventory or other appreciated “for sale” assets would result in actual recognized built-in gain upon sale, increasing the annual limit dollar for dollar.
- Also, consider a “closing of the books” election which would shift more income to pre-change periods allowing unlimited use of tax attributes.
- For public companies, the effect of a control premium on share values should be considered. Control premiums in excess of 20% are common.
- Monitor the provisions of the tax stimulus bills currently being considered by Congress, including:
- Net operating loss carryback: Would allow a 5-year carryback of net operating losses generated in 2018, 2019 or 2020.
- Suspension of net operating loss limitation: Would allow temporary removal of the 80% net operating loss utilization limitation.
- Other Considerations: Section 165(i) allows taxpayers to claim a deduction for losses attributable to presidentially declared disasters (including COVID-19) on the prior year’s original or amended return. Examples of such losses include the cost of M&A deals that have been abandoned, closure of store or facility locations, disposal of inventory that has become unsaleable, worthless securities, and loss from sale or exchange of property.
We’re Here to Help
We’re closely monitoring the hour-by-hour changes, and we will send out updates as they become available. Reach out to our COVID-19 Response Team if you need further information on this topic:
These are unprecedented times. And we know you, your families and your organizations need support, now more than ever. Our top priority as your trusted advisor is to ensure we’re helping you through these tough times. Visit COVID-19 Rapid Response Resource Center for our crisis management resources and contact information for our COVID-19 Rapid Response Team Leaders.