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?

Question

Quizplus · Accepted Answer

The maximum amount that Brain can use of Heart's NOL is limited by the Section 382 limitation, which is based on the value of Heart at the time of the ownership change. In this case, the value of Heart is $1 million, and the long-term tax-exempt rate is 5%, so the Section 382 limitation is calculated as follows:

$1 million x 5% = $50,000

Brain's discount factor is 10%, which is higher than the long-term tax-exempt rate, so the amount of Heart's NOL that can be used is limited to 45% of the Section 382 limitation:

$50,000 x 45% = $22,500

However, since Heart has an NOL of $250,000, Brain can use the entire NOL in the current year, subject to any other limitations that may apply. Therefore, the maximum amount that Brain can use of Heart's NOL this year is $250,000. However, this amount may be limited in future tax years based on the Section 382 limitation.

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