How did Louisiana limit an acquired loss corporation's net operating loss carryover after a corporate ownership change?

Plain-English summary

A Louisiana corporation acquiring a loss corporation had to limit the acquired Louisiana net operating loss under the federal § 382 framework, adjusted to measure the acquired corporation's value within Louisiana.

The annual federal limit was the loss corporation's value immediately before the ownership change multiplied by the long-term tax-exempt rate. For Louisiana, the Department used the acquired corporation's in-state value instead of its total value.

Because the statute did not prescribe one method for measuring Louisiana value, the ruling offered three methods and allowed the taxpayer to choose the one that most accurately served the limitation's purpose.

The three Louisiana methods

Apportionment-ratio method

Multiply the loss corporation's value by its Louisiana apportionment ratio, then multiply that Louisiana value by the long-term tax-exempt rate.

Louisiana-income-ratio method

Multiply the loss corporation's value by the ratio of Louisiana income to federal income from all sources on a Louisiana basis, then multiply by the long-term tax-exempt rate.

Proportional-NOL method

Multiply the available Louisiana NOL by the ratio of the transferor's federally allowed NOL to its total available federal NOL for the year.

Alternative methods

If another method more accurately reflected Louisiana income, the taxpayer could petition the Secretary to approve it. The ruling said those requests would be decided case by case.

Carryover period stated in the ruling

The document compared the federal 20-year NOL period then discussed with a Louisiana 15-year period for the transferor's state-limited carryover. Those periods are historical statements from the 2006 ruling.

Common questions

Q: Did Louisiana ignore IRC § 382?

A: No. La. R.S. 47:287.86(I) made the acquired NOL subject to federal law and its limitations.

Q: Was there one mandatory Louisiana valuation method?

A: The ruling provided three methods and allowed the taxpayer to select the most accurate one.

Q: Could a taxpayer propose a fourth method?

A: Yes, by petitioning the Secretary and showing that another method more accurately reflected Louisiana income.

Q: Why was there an annual limit?

A: The ruling says the ownership-change limit prevents companies from being bought and sold solely for their tax attributes.

Citations and references

• La. R.S. 47:287.86(I) — succession to and limitation of acquired NOL carryovers
• IRC § 382 — federal ownership-change limitation
• LAC 61:III.101.C — Revenue Ruling authority and reliance statement

Source

• Landing page: Louisiana Department of Revenue Policies
• Original PDF: LA Revenue Ruling 06-008

Original ruling text

Revenue Ruling No. 06-008
May 31, 2006
Corporate Income Tax
Limitation on Net Operating Losses following Corporate Ownership Change
Purpose
The purpose of this Revenue Ruling is to provide guidance to Revenue employees and taxpayers
in determining to what extent Louisiana will limit a net operating loss (NOL) carryover from an
acquired corporation with a net operating loss to the surviving acquiring corporation in a merger.
Background/Analysis
Revised Statute 47:287.86(I) states that the acquiring corporation in an ownership change will
succeed to the aggregate net operating loss carryovers of the distributors or transferor
corporation subject to federal law and the limitations provided therein. Internal Revenue Code
(IRC) Section 382 explains the federal limitation on NOL carryovers after a corporate ownership
change. This limitation is necessary to avoid the buying and selling of companies solely for their
tax attributes.
After determining that a NOL carryover is allowed for a taxable year, IRC § 382 limits the
amount of the carryover for any post-change year to the value of the loss corporation multiplied
by the long-term tax-exempt rate. The federal statute defines the value of the loss corporation as
the value of the stock of the loss corporation immediately before the ownership change. The
long-term tax-exempt rate is defined in the statute as the highest of the adjusted federal longterm rates in effect for any month in the three-month period ending with the calendar month in
which the change date occurs. The acquiring corporation can use up to this amount of § 382
NOL carryover each year for the remainder of the transferor corporation's 20-year NOL
carryover period.
For Louisiana income tax purposes, taxpayers are bound by the federal limitation found in IRC §

382. A corporation that acquires a loss corporation will be limited in the amount of Louisiana
     NOL carryover from that loss corporation that it will be allowed to use each year. Similar to the
     federal provisions, Louisiana taxpayers will be allowed each year to use the state limited NOL
     carryover from the transferor corporation for the remainder of the transferor's 15-year NOL
     carryover period.
     For federal purposes the limitation on the amount of NOL from an acquired corporation that can
     be taken in a year is:
     (value of the acquired corporation) x (long-term tax-exempt rate)
     On a state basis the limitation would be:
     (value of the acquired corporation within the state) x (long-term tax-exempt rate)

Revenue Ruling No. 06-008
Page 2
May 31, 2006
The difficulty is in determining the value of the acquired corporation within the state. The statute
provided no guidance on this question, and there is no obviously superior method for
determining the value within the state. Therefore, the taxpayer will be allowed to choose the
method that most accurately reflects the value.
Ruling
Corporations that acquire a loss corporation are generally required to limit the allowed Louisiana
NOL carryover from an acquired corporation using one of the following three methods:

1. The NOL from the transferor corporation that the acquiring corporation is allowed to
   deduct each year is limited to (value of the loss corporation X LA apportionment ratio) X
   long-term tax-exempt rate,
2. The NOL from the transferor corporation that the acquiring corporation is allowed to
   deduct each year is limited to [the value of the loss corporation X (LA income/federal
   income from all sources on a LA basis)] X long-term tax-exempt rate, or
3. The NOL from the transferor corporation that the acquiring corporation is allowed to
   deduct each year is limited to LA NOL available from the acquired corporation for the
   year X (NOL from the transferor corporation allowed for federal purposes/federal NOL
   available from the transferor corporation for the year)
   Each individual taxpayer is allowed to choose the method from above that most accurately
   achieves the purpose of the limitation. If taxpayers believe that another method more accurately
   reflects their Louisiana income, they can petition the Secretary of the Department of Revenue to
   use that method in place of one of the three listed above. The Secretary of the Department of
   Revenue will make those determinations on a case-by-case basis.
   Cynthia Bridges
   Secretary

A Revenue Ruling is issued under the authority of LAC 61III.101.C. A Revenue Ruling is written to provide
guidance to the public and to Department of Revenue employees. It is a written statement issued to apply principles
of law to a specific set of facts. A Revenue Ruling does not have the force and effect of law and is not binding on
the public. It is a statement of the department's position and is binding on the department until superseded or
modified by a subsequent change in statute, regulation, declaratory ruling, or court decision.