The 2020 Coronavirus Aid, Relief, and Economic Security (CARES) Act provides a potential opportunity for all taxpayers, including taxpayers who engaged in the sale or acquisition of a corporation, to generate cash flow with U.S. federal income tax refunds by applying net operating losses (NOLs) to tax years as far back as 2013. We previously discussed the basics of the CARES Act’s temporary five-year net operating loss (NOL) carryback here, but set forth below is an example of an opportunity for certain taxpayers who engaged in the sale or acquisition of a corporation to maximize and monetize NOLs.

• Who may potentially benefit from this opportunity?
  
  
  • Persons who completed sales or acquisitions of corporations (or LLCs or other entities classified as corporations for U.S. federal income tax purposes) that at the time of such transaction had, or that generated post-acquisition, NOLs arising in 2018, 2019, or 2020
    
    
• Prior to the CARES Act:
  
  
  • Taxpayers with NOLs arising in 2018, 2019, or 2020 were not permitted to carryback such NOLs to prior years, and instead could only carryforward such NOLs
    
    
• The CARES Act’s NOL Carryback Opportunity
  
  
  • NOLs arising in 2018, 2019, and 2020 may be “carried back” to the preceding five tax years to offset taxable income in the preceding tax year(s), and as a result, taxpayers may claim tax refunds to the extent such NOLs reduce prior year taxes
    
    
  • Since carrybacks are made to the earliest of the tax years with taxable income first, this potentially allows a taxpayer to “recoup” taxes paid at a 35% federal income tax rate during 2013-2017, notwithstanding the fact that since 2018 the corporate rate has been only 21%
    
    
  • The CARES Act also extends until July 25, 2020 the ability of a taxpayer to apply for a so-called “quickie” refund to claim refunds attributable to NOLs now allowed to be carried back or to make or revoke an election not to carryback NOLs
    
    
• Analyzing Acquisitions from 2018, 2019, and 2020 and Currently Pending Acquisitions
  
  
  • Parties to a business acquisition in this time period in which the target has significant NOLs should consider whether it is possible to maximize those NOLs by taking advantage of the CARES Act NOL carryback opportunity
    
    
  • Parties who either sold or acquired a corporation during this time frame, or who are involved in currently pending acquisitions, should examine and analyze the governing acquisition agreement to determine if there are any restrictions that prevent or allow the carryback of NOLs and if there are any provisions that allocate pre-closing tax refunds or NOL tax benefits
    
    
  • Depending on the terms of the underlying acquisition agreement, a party seeking to obtain a benefit from the carryback of an NOL to a pre-closing period may need to seek an amendment to the acquisition agreement or consent by the other parties to permit the NOL carryback or to allocate the rights to some or all of the corresponding tax refunds
    
    
  • This opportunity in connection with acquisitions could generally apply to entity sales or acquisitions where the target is a corporation (or an LLC or other entity classified as a corporation for U.S. federal income tax purposes), but these new NOL rules apply to income of all taxpayers generally and not just those party to an acquisition
    
    
  • In particular, this strategy may be particularly beneficial where the target’s NOLs became subject to usage limitations for post-transaction tax years due to a Section 382 ownership change
    
    
  • This reallocation and monetization strategy may also be even more useful to find value in current pricing negotiations (including parties seeking to bridge valuation gaps) or as a negotiating chip to settle disputes on currently underperforming earnouts or indemnities
    
    
  • This increased value of NOLs should also be considered when taking certain corporate measures, including the adoption of poison pills, restrictive bylaws, or bankruptcy orders
    
    
• “De-Risking” through Tax Insurance
  
  
  • Tax insurance providers have developed policies that are intended to provide certainty of receiving cash for the tax refund claimed under this CARES Act opportunity
    
    
  • These policies may help mitigate the risk that the refunds may later be challenged by the IRS

While not all taxpayers will be able to take advantage of this particular strategy, this NOL carryback opportunity is an example of a way in which taxpayers may apply the CARES Act changes in a creative manner to potentially maximize their tax benefits, reduce their tax obligations, and obtain additional liquidity. Additionally, before electing to carryback NOLs, all taxpayers need to carefully consider and analyze the impacts of such NOL carrybacks on their overall tax position, including the interaction of such NOL carrybacks with respect to their international tax attributes and position, such as foreign tax credits, global intangible low-taxed income (GILTI), foreign derived intangible income (FDII), base erosion and anti-abuse tax (BEAT), and the Section 965 transition tax, among others.

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