• Palm said its total potential tax benefit from the carryback would amount to $200 million. — M.L.
Pill Poppers
Companies covet net operating losses (NOLs), which can be used up to 20 years into the future to reduce the amount of income subject to taxes. But thanks to Section 382 of the Internal Revenue Code, much of their benefit can be wiped out if a company is acquired.
Last year, Citigroup enacted a poison pill in hopes of protecting $44 billion worth of NOLs from acquisition. A year earlier, homebuilder Hovnanian crafted a poison pill to shield $392 million in NOLs.
When a company is acquired, the amount of income it can offset with existing NOLs becomes subject to a cap, which is calculated by multiplying the company's market capitalization by the long-term tax-exempt rate as prescribed by the tax code (which in January was 4.14%). That means a target company with a $1 billion market cap on the day of an ownership change could use NOLs to offset only $41.4 million of income in any subsequent years.
Section 382 is a "harsh" rule put in place to prevent "the trafficking of losses," says tax expert Robert Willens. He says the IRS didn't like the idea that a financially fit company could buy companies with huge operating losses just to get their hands on a target company's NOLs. "The rule makes NOLs neutral in an acquisition," adds Willens.
Neutral, that is, unless the government itself is the acquirer. General Motors and Chrysler effectively sold themselves to the government when they accepted bailout funds from the Treasury Department's Automotive Industry Financing Program. That should have wiped out most of their NOLs, but the IRS issued guidance last April saying the bailout would not trigger Section 382 restrictions for the carmakers. Meanwhile, Ford Motor Co., which took no government money, was forced to turn to a poison pill to protect its $19 billion worth of NOLs. — M.L.
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