ECONOMIC ANALTSIS:

Thinking About Numbers

You see, it has been said the only two things in life that are certain are death and taxes! Because of original sin, you die. Because you must render onto Caesar that which is Caesar’s, you pay taxes. The stories on Page One and the network NEWS have been chronicling the business losses, failures, and takeovers. Uncle $ugar (via the US Treasury and the FED) has been attempting a fix and turnaround by bailouts, repurchase agreements to warehouse worth-less and worthless securities, guarantees, low cost loans, and out and out “gifts” of the people’s money. These are already running in the TRILLIONs! Yet, no one has zeroed in on the costs to the public purse by the impact of the merged NOLs on past and future business tax revenues. There haven’t been answers given, because nobody is asking the questions!

TH*NK of this as the latest hybrid of “don’t ask, won’t tell” – so much for the promised transparency!

When one business entity acquires/ mergers/ consolidates with another. This marriage of sorts is more than a combining of assets and liabilities - getting the assets, and assuming the liabilities. The tax implications both going backward and forward are tremendous. Depending on how the assumption agreements, the pre-deal determinations and structuring, and the post-deal tax filings are made; the acquiree’s business losses can shelter (as in make tax free) the acquirer’s business profits - dollar for dollar. In the current scenarios, we are talking about huge amounts of money running into the hundreds of BILLIONs (even possibly TRILLIONs). Each deal/ situation is different and requires the utmost in careful planning and structuring. The corporate tax attorneys and tax accountants will quarterback these plays to maximize the yardage (make that the cash flow) gains for their clients.

In this environment, the tax professionals should literally become businesses most intimate and best friends. They will earn every penny of their salaries, fees, and billings by analyzing and maximizing by MEGA MULTIPLES the financial benefits of the consolidated tax return filings. To say the tax laws are complex is a gross understatement, and they keep changing! In my professional career, allowable carry back horizons have been 2, 3, 4, or 5 years while the carry forward horizons have been 7, 10, 15 or 20 years. I’d be willing to bet that the coming Obama Administration and the coming next Congress will change them again before this current calendar year’s business tax returns are due March 15th.

The complexity of the acquiree’s NOLs consolidations with the acquirer’s operating taxable income is further complicated when you toss in tax considerations for the respective states. While a number piggy back off of Uncle $ugar’s rules, requirements, and guidelines; the majority of states set their own limitations and carry back/ carry forward horizons. States are hurting financially now and don’t have the luxury of deficit financing like Uncle. Almost all are required by their state constitutions to balance their budgets. Most don’t want to allow carry backs which would require them to refund taxes they have already collected (and spent) with money they don’t have. They also don’t cozy to the idea of limiting their future tax income streams by being overly generous with allowable NOL carry forwards.

The implications of potentially lost future tax revenues (not to mention digging into federal and state coffers to underwrite any refunds) of this NOL consolidation time bomb are enormous. I wish I could give you a stadium figure as to how much is on the table with bailout merger/ takeovers already consummated, but I cannot. The information just is simply not publicly out there. (To be continued.)

I’m Fred Cederholm and I’ve been thinking. You should be thinking, too.

Copyright 2008 Questions, Inc. All rights reserved. Fred Cederholm is a CPA/CFE, a forensic accountant, and writer. He is a graduate of the University of Illinois (B.A., M.A. and M.A.S.). He can be reached at asklet@rochelle.net.