I guess it depends; say, If a parent C corp acquires a company with a large NOL and that NOLis no longer allowed, then the parent C corp's equity would be reduced, and the reduction in equity would be an NOL for the parent C corp. To understand what happens to NOL carryforwards when the ownership of a corp changes, you really
have to read Secs. 382 and 383 and the regulations under those
sections.A corp that has unused NOLs is an "old loss corp." If it undergoes a change of ownership ,it becomes a "new loss corp." The new loss corp may be
the same entity as the old loss corp, or it may be a different entity that has acquired the old loss corp by purchasing its
stock and liquidating it, by merger, or by some other form of reorganization. So it really doesn't matter whether the buyer
purchases the target's stock and continues to operate it as a subsidiary, or merges it into an existing corp or a Newco.
It's the change of ownership of the target's stock that creates the
limitation.A change of ownership occurs if there is any change in the stock
ownership of the old loss corp (target), and if that change increases or decreases the percentage owned by any person who owns more than 5% of the stock either before or after the change.
If there is a change of ownership, the new loss corp can utilize the NOLs of the old loss corporation, subject to this
limitation: The maximum amount of NOL that can be utilized in any
year is calculated by multiplying the value of the old loss corp immediately before the change of ownership by the federal
long-term tax-exempt rate that was in effect at the date of change.
The idea is to limit annual utilization of the loss to the income the old loss corp would have earned if it had sold all its assets
and invested the proceeds in long-term tax-exempt securities.The long-term tax-exempt rate is published monthly by the IRS. The rate for November 2008, for example, is 4.94%. So, for example, if
the value of the old loss corporation at the date of change is
$100k, and the change of ownership occurs in Nov. 2008, the
maximum NOL amount that can be utilized by the new loss corporation in
any year is $4,940. If the new loss corp does not have enough income in a year to absorb the maximum amount, the excess is carried over and can be utilized in following years.In addition to the dollar limitation, the new loss corp must continue the business enterprise of the old loss corporation for at
least 2 years after the change date. If not, the NOL utilization
amount for any year is zero.
There are many more complexities to these rules, particularly if the
old loss corp has built-in losses (i.e., property that is worth
less than its tax basis) or built-in gains. But knowing how to
calculate the maximum allowable annual deduction gives you a quick and
dirty method to evaluate a proposed transaction. If you are really
going to do something, you should be sure to consult a IRS Enrolled Agent or a CPA doing taxes in your local area.
There were limitations on NOL utilization after change of ownership
before 1986; however, they were less restrictive than the current
state rules are different from state to state