That means that it would be Northwest’s pre-change NOL which would be subjected to the Section 382 limitation. No limits would be placed on the use of Delta’s copious NOL because it would not, as a result of the merger, have undergone an ownership change.
To be sure, the Northwest group — the five percent shareholder identified under Reg. Section 1.382-2T(j)(2) — would have enjoyed less than a 50 percentage point increase in ownership with respect to Delta. And, as indicated, an ownership change necessitates a more than 50 percentage point increase in ownership of the loss corporation’s stock by one or more of its five percent shareholders.
So, assuming the deal is structured as a merger of equals, and such merger qualifies as a reorganization, it would appear that Delta’s NOL would emerge unscathed and that Northwest’s much more modest NOL would be subject to the rigors of the Section 382 limitation.**
Contributor Robert Willens, founder and principle of Robert Willens LLC, writes a weekly tax column for CFO.com.
*If there is a transaction to which Section 381(a)(2) applies that identifies the loss corporation as a “party,” each direct public group that exists immediately after the transaction shall be segregated so that each (direct public group) that existed immediately before the Section 381(a)(2) transaction is treated separately from the direct public group that acquires stock in the transaction.
**In fact, such NOL may be effectively eliminated if in connection with Northwest’s emergence from bankruptcy its ownership change qualified under Sec. 382(l)(5)(A) for the so-called “bankruptcy exception.” In these cases, the occurrence of a second ownership change within the two-year period beginning on the date of the ownership change that took place as a result of the bankruptcy has the effect of eliminating the NOL that arose prior to the first ownership change. See Section 382(l)(5)(D). If Northwest’s ownership change qualified for the bankruptcy exception, and it appeared that Northwest was heading towards a second ownership change within the period specified in Section 382(l)(5)(D), the airline would, undoubtedly, “elect out” of the bankruptcy exception. This would have the effect of subjecting its NOL arising prior to the first ownership change to the Section 382 limitation; an outcome that is certainly preferable to the elimination of the NOL that Section 382(l)(5)(D) imposes.