White Corporation has net assets with a fair market value of $14 million and an NOL carryforward of $2 million.White's shareholders receive 70% of Brown stock in a transaction qualifying as a reorganization.The merger takes place on July 1 of the current year when the long-term tax-exempt rate is 9%.What is the maximum amount of White's NOL available to offset Brown's $2,000,000 income for the year?

Question

Quizplus · Accepted Answer

When there is a qualifying reorganization, the NOL carryforward of the acquired corporation can be used to offset the taxable income of the acquiring corporation.

In this case, White Corporation's NOL carryforward of $2 million can be used to offset Brown Corporation's taxable income. Since the fair market value of White's net assets is $14 million, the proportionate share of White's assets received by Brown's shareholders is 70% x $14 million = $9.8 million.

According to the Section 381 rules, Brown Corporation can use up to $9.8 million of White's NOL carryforward. However, this amount is limited by the Section 382 limitation, which is the long-term tax-exempt rate (LTTER) multiplied by the value of Brown's stock immediately before the reorganization.

Assuming Brown's stock is valued at $40 per share, the value of Brown's stock before the reorganization is $40 x the number of outstanding shares. If Brown has 500,000 outstanding shares, the value of its stock before the reorganization is $20 million.

Therefore, the Section 382 limitation is 9% x $20 million = $1.8 million. This means that Brown can only use up to $1.8 million of White's NOL carryforward to offset its taxable income.

Since White's NOL carryforward is $2 million and Brown can only use $1.8 million of it, the maximum amount of White's NOL available to offset Brown's $2,000,000 income for the year is $1,000,000 (Choice C).

White Corporation Has Net Assets with a Fair Market Value