Heart Corporation has net assets valued at $1 million and an NOL of $250,000. On December 31 of last year, Heart is acquired by Brain Corporation, a calendar year taxpayer, in a restructuring qualifying as a tax-free reorganization. Heart shareholders receive 45% of Brain's shares in exchange for all of the Heart stock. Assuming that the Federal long-term tax-exempt rate is 5% and Brain's discount factor is 10%, what is the maximum amount that Brain can use of Heart's NOL this year?
A)$12,500
B)$50,000
C)$100,000
D)$250,000
E)None of the above

Question

Quizplus · Accepted Answer

The maximum amount of NOL that Brain can use is limited by the Section 382 limitation, which is calculated as the value of the loss corporation's stock immediately before the ownership change multiplied by the long-term tax-exempt rate. Here, the value of Heart's net assets is $1 million, and the rate is 5%, so the limitation is $50,000 ($1,000,000 * 5%).

Heart Corporation Has Net Assets Valued at $1 Million and an NOL