Emergency Loan Program under CARES Act Preserves Use of Net Operating Losses by Borrowers

COVID-19 Update

The Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) includes a $2 trillion COVID-19 relief package that authorizes the Treasury Department to make or guarantee loans to companies with losses that are tied to the pandemic and that threaten their continued operation. The measure provides that the Treasury Department must enter into contracts that would ensure the federal government benefits from company or stockholder gains and contemplates that Treasury Department loans could include warrants, stock options, common or preferred stock, or other equity instruments.

Under Section 382 of the Internal Revenue Code, upon a change in ownership of a corporation with net operating losses (generally where 50% of the stock is acquired by new owners), the use of net operating losses and other tax attributes by the company after the change can be severely limited. For these purposes, stock acquired by government entities or lenders as part of a loan or guarantee program can constitute a transfer of stock.

The legislation directs the Secretary of the Treasury to prescribe such regulations or guidance as may be necessary or appropriate to exempt companies that issue warrants, stock options, common or preferred stock, or other equity in connection with loans under the emergency loan program from the change of ownership rules under Section 382 of the Internal Revenue Code of 1986. This offers a significant potential opportunity to recapitalize a company without risking future use of net operating loss carryforwards.

How Manatt Can Help: We are available to advise clients regarding strategies for making effective use of net operating losses in 2020 and subsequent tax years.     

For More Information: Contact Robert Duran, partner, Manatt Tax, at rduran@manatt.com or 310.312.4274, or Jeffrey A. Mannisto, partner, Manatt Tax, at jmannisto@manatt.com or 310.312.4212.



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