Your Loss Is Your Gain

Uncle Sam has extended the time frame for loss carrybacks. Should you take advantage?

• For Schnitzer Steel Industries, a combination of the carryback extension and a manufacturing tax break effectively reduced the company’s 2009 tax rate by 12.8%. Schnitzer, which reported $2 billion in revenues last year, claimed a $49 million tax refund.

Pier 1 Imports was quick to file its carryback with the IRS and received a tax refund in January of $56 million.

• Jewelry purveyor Zale carried back operating losses from 2009 and filed for a $17 million refund.

• Recreational vehicle maker Winnebago Industries wasn’t able to carry back all of its 2009 net operating losses until the government extension, which allowed the company to realize an additional refund of $4.8 million.

Bank of Granite estimated that the benefit of the extended carryback could “approximate $4.0 million,” adding that “the refund will also supplement the Bank’s liquidity.”

William Lyon Homes is “considering” applying its 2009 losses to its 2004 taxable year. To maximize those losses (and, therefore, the refund), the company said it also might defer booking “cancellation of indebtedness” income that resulted from its repurchase of its own bonds during 2009.

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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