However, according to the tax code, applicable interest deductions should, in no event, exceed (1) the amount allowable as a deduction for interest paid or accrued by the taxpayer during the loss limitation year that is more than (2) the average of such amounts for the three tax years preceding the tax year in which the CERT takes place.
MSA and ED
The key term, CERT, refers to either a “major stock acquisition” or an “excess distribution.” A major stock acquisition encompasses a purchase that follows a corporate plan and involves the buying of stock in a target corporation that represents 50% or more (by either voting power or value) of the shares in the target. For this purpose, all acquisitions during any 24-month period are treated as pursuant to one corporate plan.
An excess distribution is defined as the excess of the aggregate distributions (including redemptions of stock) made during a tax year by a corporation with respect to its stock that is more than the greater of either 150% of the average of the distributions made during the three prior tax years5 or 10% of the value of the stock of the corporation as of the beginning of the tax year.
The CERT rules were enacted back in 1987, in the wake of the legendary RJR Nabisco leveraged buyout, at the behest of then–Sen. Lloyd Bentsen (D-Tex.). Bentsen was concerned that LBOs were being funded, at least in part, by tax refunds that the buyout sponsors could obtain from carrying back debt-induced NOLs of the target corporations. Moreover, these rules cover the case in which the target, to fend off an unwanted suitor, engages in a “self-LBO.” This explains the provision classifying excess distribution CERTs.
Therefore, if a corporation with the NOLs in 2008 or 2009 has recently participated in a CERT, the amount of the NOLs eligible for carryback under the expanded carryback privilege to years preceding the CERT year may be somewhat limited.
Contributing editor Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for CFO.com.
1 See Sec. 172(b)(1)(H).
2 An applicable corporation is a C corporation that acquires stock, or the stock of which is acquired, in a major stock acquisition or a C corporation making distributions with respect to, or redeeming, its stock in connection with an excess distribution.
3 The taxable year in which the CERT occurs and each of the two succeeding years.
4 As expanded by Sec. 172(b)(1)(H).
5 The amount determined under the aggregate distribution and 150% of the average distribution shall be reduced by the aggregate amount of stock issued by the corporation during the applicable period in exchange for money or property other than stock of the corporation.