NOL Treatment on Federal Corporate and Individual Tax Returns: Challenges for Preparers

Transcription

1 FOR LIVE PROGRAM ONLY NOL Treatment on Federal Corporate and Individual Tax Returns: Challenges for Preparers TUESDAY, JUNE 6, 2017, 1:00-2:50 pm Eastern IMPORTANT INFORMATION FOR THE LIVE PROGRAM This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at x10 (or x10). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. You will have to write down only the final verification code on the attestation form, which will be ed to registered attendees. To earn full credit, you must remain connected for the entire program. WHO TO CONTACT DURING THE LIVE EVENT For Additional Registrations: -Call Strafford Customer Service x10 (or x10) For Assistance During the Live Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.

2 Tips for Optimal Quality FOR LIVE PROGRAM ONLY Sound Quality When listening via your computer speakers, please note that the quality of your sound will vary depending on the speed and quality of your internet connection. If the sound quality is not satisfactory, please immediately so we can address the problem.

3 NOL Treatment on Federal Corporate and Individual Tax Returns June 6, 2017 Amy Chapman, Senior Manager KPMG, Washington, D.C. John R. Dundon, II, EA, President Taxpayer Advocacy Services, Englewood, Colo. Timothy M. Nichols, Esq. KPMG, Washington, D.C.

4 Notice The following information is not intended to be written advice concerning one or more Federal tax matters subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 4

5 NOL s For Individual Taxpayers This portion of the presentation is taught by: John R. Dundon II, EA President, Taxpayer Advocacy Services, Inc. Fellow, National Tax Practice Institute Direct contact information John@JohnRDundon.com (720)

6 NOL s for Individual Taxpayers 4 subtopics include Basic Rules Restrictions and Allowances in Calculating and Using NOLs Pass-through allocations Calculation of NOL carryback and carryover periods, AND NOLD 6

7 Basic Rules In principle, a NOL generally results when a taxpayer's business expenses exceed income from all sources. Per IRC section 172, a taxpayer who sustains this type of loss in one year can spread the loss over several years. This may generate refunds which can provide additional capital. 7

8 To have a NOL, the loss must be caused by: 1. Deductions from a trade or business 2. Deductions for business-related expenses as an employee 3. Deductions for casualty and theft losses, 4. Losses from a partnership or S corporation which flow-through to the partners or shareholders. 8

9 Losses from a partnership or S corporation Partners or shareholders may be able to use their separate shares of the partnership's or S corporation's business income and business deductions to figure their individual NOL. The amount of the loss passed though to the individual s tax return is contingent upon the individual s basis in the entity. Without basis losses are suspended. 9

10 STATUTE OF LIMITATIONS ON CLAIMS A claim for refund relating to a NOL carryback generally must be filed within the later of: 3 years after the due date of the return (including filing extensions) for the loss year; or the period set forth in IRC section 6511(c) as to the loss year (that is, 6 months after the extended date for assessment set forth in an IRC section 6501(c)(4) agreement concerning the loss year). IRC sections 6511(d)(2)(A) and 6511(c). 10

11 Example A 2015 return shows a NOL of $540,000. The due date for filing the 2015 tax return is October 15, 2016, including extensions. The 3-year period for filing a claim for refund expires October 15, Remember that the 2015 return is a loss year due to the NOL. A claim for refund for the year 2012 (relating to a carryback from 2015) filed after October 15, 2016, would normally be untimely. However, there is an exception to the general rule. 11

12 Exception to the general rule Rev. Rul , C.B. 444 states that the special limitations provisions of IRC section 6511(d)(2)(A) apply in addition to the regular limitations periods of IRC section 6511(a). So, even if the special claims statute of IRC section 6511(d)(2)(A) has expired, the IRC section 6511(a) claim statute may still be open on one or more of the carryback (gain) years. 12

13 Rule Exception in Plain Terms The claim statute under IRC section 6511(a) for the carryback (gain) year expires either: 3 years from the date of filing of the carryback year return, or 2 years after the tax is paid, whichever is later. This claim period can be extended by an IRC section 6501(c)(4) agreement as to the carryback year. 13

14 Be Aware 1. IRC section 6511(a) or 6511(c) period as to the carryback year, will not allow a refund if the carryback year has already been disposed of by a Tax Court decision. 2. However, the special limitations provisions of IRC section 6501(c)(4) will allow such a refund as long as the carryback issue was not raised in the Tax Court proceeding. 14

15 STATUTE OF LIMITATIONS ON ASSESSMENT 1. IRC section 6501(h) provides that for deficiencies attributable to the tentative or erroneous allowance of a NOL carryback, the statute for assessment of such deficiencies for the carryback year is determined by the statute of limitations on assessment for the loss year. But, IRC section 6501(h) covers the carryback year ONLY TO THE EXTENT OF THE REFUND generated from the NOL carryback. It does not protect the statute of the carryback year for any other purpose. However, if the refund is attributable to a tentative carryback adjustment under IRC section 6411(a), an assessment (to the extent of the refund) may be based not only on the disallowance of the NOL carryback, but also on other items of income or deduction affecting the taxpayer's tax liability for the carryback year. IRC section 6501(k). 15

16 STATUTE OF LIMITATIONS ON ASSESSMENT 2. If the IRC section 6501(h) statute for the carryback year has expired, the deficiency attributable to a NOL carryback, as well as any other deficiencies, can be assessed if the regular statute of limitation for the carryback year is still open For example, as in the case of: 1. a late filed return, IRC section 6501(c)(4)(A) extension by agreement, or 2. IRC section 6501(c)(1) unlimited statute of limitations for false or fraudulent return. Calumet Industries Inc. v Commissioner., 95 T.C. 257, (1990). 16

17 STATUTE OF LIMITATIONS ON ASSESSMENT 3. The statute of limitations on an assessment of a tentatively or erroneously allowed carryback of a General Business Credit is governed by the year in which the unused credit originated or the year of the net operating loss, the carryback of which released a previously used credit. IRC section 6501(j). 17

18 OVERVIEW OF NOL When a taxpayer incurs a NOL, the loss may be carried back to reduce the tax in prior years. Any excess amounts may be carried forward. Based on the carryback, a taxpayer may request a refund by filing: a. Tentative Carryback Application (Form 1045), or b. Amended U.S. Individual Income Tax Return (Form 1040X). 18

19 OVERVIEW OF NOL Form 1045 differs from Form 1040X: 1. Concerning the time to file, 2. Whether verification is before or after the issuance of the refund, and 3. The method of making audit adjustments. The background, documentation, research, and computations are the same. 19

20 IRS Form ) Form 1045 must be filed within one year of the loss year (IRC section 6411(a)). 2) Refunds based on filing Form 1045 are considered tentative refunds per IRC section After verifying the release of the refund to the taxpayer using the Integrated Data Retrieval System (IDRS), any adjustments can be made using regular audit Report Writing Procedures. The deficiency procedure in IRC section 6213(a) does not apply to assessments arising out of tentative carryback allowances. (IRC section 6213(b)(3)). 20

21 IRS Form 1040X 1. Form 1040X may be filed anytime within the later of: 3 years after the due date (including extensions) of the loss year; or, the date as extended by an IRC section 6501(c)(4) extension agreement for the loss year return; or other periods referred to in Rev. Rul (IRC sections 6511(c) and (d)(2). 2. Refunds based on Form 1040X generally are not released to taxpayers before the Form 1040X enters the audit stream. Any adjustments would be made using the claim processing procedures outlined in IRM

22 *****IMPORTANT**** For both the Form 1045 and the Form 1040X refund requests, the loss year and the carryback/carryover year(s) MUST be kept together. RECORD RETNETION IS PARAMOUNT KEEP ALL RECORDS BACK TO THE ORIGINAL NOL YEAR EVEN IF IT WAS 20 YEARS AGO! 22

23 CALCULATION OF NOL STEP 1: Compute Negative Taxable income To convert the taxpayer's taxable income per return (usually stated at zero) to true negative taxable income: 1. Subtract the standard deduction or the itemized deductions from adjusted gross income. 2. Subtract the exemptions claimed. 3. The net result is negative taxable income. This amount is also referred to as the statutory loss. This step is necessary since the tax return will generally not show negative taxable income. 23

24 CALCULATION OF NOL Negative Taxable Income Computation START: MINUS: MINUS: EQUALS Adjusted Gross Income (AGI) Standard/itemized deductions Exemptions Negative Taxable Income 24

25 CALCULATION OF NOL STEP 2: Add Modifications IRC Section 172(d) Make modifications to arrive at the NOL. These modifications eliminate personal deductions. The net result is a loss resulting solely from business, casualty or theft. IRC section 172(d) requires that certain items be added back to the negative taxable income. 25

26 CALCULATION OF NOL Add back the following items: 1. IRC section 172(d)(1) NOLD No NOLD carried over or back from another year is allowed when NOLD computing the NOL. The NOLD is shown as an adjustment to income on the tax return. A NOLD is the total of any carrybacks and carryovers of NOLs from other years. Since the computation of the net operating loss is for the current year, it is logical to modify items attributable to another year. 26

27 CALCULATION OF NOL Add back the following items: 2. IRC section 172(d)(2) capital gains and losses of taxpayers other than corporations. For purposes of the IRC section 172(c) modifications for the loss year, read IRC section 172(d)(2) in conjunction with IRC section 172(d)(4). Business and nonbusiness capital gains must be identified and two separately applied limitations must be considered. a. The nonbusiness capital losses cannot exceed the nonbusiness capital gains, that is, any excess nonbusiness capital loss cannot offset business capital gain. b. The business capital losses cannot exceed: 1) The sum of the business capital gains and 2) The amount, if any, of the taxpayer's remaining excess nonbusiness capital gains (after offset by nonbusiness capital losses and excess nonbusiness deductions) 27

28 CALCULATION OF NOL Add back the following items: 3. IRC section 172(d)(3) Deduction for Personal Exemptions, as defined by IRC section 151, including those for age and blindness. 28

29 CALCULATION OF NOL Add back the following items: 4. IRC section 172(d)(4) Nonbusiness Deductions of Taxpayers Other Than Corporations. a. Nonbusiness deductions are allowable to the extent of nonbusiness income. b. Nonbusiness capital gains are used to offset excess nonbusiness deductions. 1) Nonbusiness capital gains are first offset against nonbusiness capital losses. 2) Any net nonbusiness capital gain is then used to reduce the excess of the ordinary nonbusiness deductions over ordinary nonbusiness gross income. 3) Any remaining nonbusiness capital gains after the reductions of 1 and 2 are used to offset business capital losses. 29

30 Carryback and Carryover Periods Loss Year After the NOL has been computed, the next step is to determine which year to carry the loss to. For tax years beginning on or before August 5, 1997, IRC section 172(b)(1)(A)(i) provides that the NOL can be carried back 3 years. IRC section 172(b)(1)(A)(ii) provides that any unabsorbed NOL can be carried forward 15 years. For tax years beginning after August 5, 1997, the carryback period is lowered to 2 years and the carryover period is extended to 20 years. 30

31 Carryback and Carryover Periods However, the change from the 3 to 2 year carryback period does not apply to: a. Specific liability losses. IRC section 172(f) b. Casualty on theft losses of individuals. IRC section 172(b)(F)(ii) c. Losses attributable to federally declared disasters for taxpayers engaged in a farming business or small business. IRC section 172(b)(1)(F)(ii) 31

32 Carryback and Carryover Periods IRC section 172(b)(1)(A)(i) requires that the loss be carried to the earliest year first. Any amount not absorbed should be carried to the subsequent year and thereafter until fully absorbed. In addition, a taxpayer may file claims resulting from several carryback loss years to the same gain year. ***UNLESS AN ELECTION IS MADE IN THE YEAR OF THE NOL TO PERMANENTLY FOREGO THE CARRYBACK*** 32

33 Important election under IRC172d(b)(3) If the taxpayer fails to assert the election under IRC 172(b)(3) to permanently forego carrying back the NOL, the IRS default position procedurally is that the taxpayer is disallowed from carrying the NOL forward in any regard. ***MANY GOOD TAX PRACTITIONERS HAVE FAILED TO PROPERLY MAKE THIS ELECTION A VERY COSTLY OVERSIGHT AND ONE REASON TO CARRY INSURANCE 33

34 Election to Forego the Carryback Period IRC section 172(b)(3) provides the taxpayer with an option. The taxpayer may elect to forego the carryback period. The NOL can be carried forward for 15 years or 20 years, depending on the tax year in question. The taxpayer elects to forgo the entire carryback period by filing a written notice attached to a timely filed loss year return (including extensions). This election cannot be revoked; however, for elections with due dates (excluding extensions) that fall on or after October 1, 1992, a special rule applies. For such elections, Rev. Proc , section 4.02, C.B. 490, grants an extension of 6 months from the due date of the return (excluding extensions) to make the election. This includes situations in which a taxpayer files the return without making the election, but takes corrective action within the 6-month period. Corrective action is amending the filed return to perfect the election. 34

35 Election to Forego the Carryback Period If no election to waive the carryback years is made, check IDRS for the carryback years' statutes. If the refunds are barred by the statute of limitations, calculate the amount of NOL which WOULD HAVE BEEN absorbed by the carryback years. No refund can be given to these years due to the barred statutes; however, the amount of NOL available for carryover is reduced by the carryback amount not taken. If the carryback years are open under the refund statute, pick up the available carryback years, and allow any refund which the taxpayer failed to claim. If the taxpayer asserts the election on the return, I usually accept the NOL carryforward without further research. 35

36 Carryback and Carryover Periods MULTIPLE LOSSES. If a NOL occurs in more than one year, the loss occurring in the earlier year is deducted from the income of the other years before the later loss. Although the NOLD is the sum of all carrybacks and carryovers to that year, the earliest loss is used first. If a taxpayer incurs net operating losses in both 2014 and 2015, the 2014 loss is applied first. 36

37 Carryback and Carryover Periods Under certain circumstances, an alternate carryback or carryover period may apply instead of the 3-year/15-year or 2-year/20-year periods as specified under the normal rule. For example, a special 10 year carryback period applies in the case of product liability losses and deferred statutory or tort liability losses. IRC section 172(b)(1)(C). However, the normal 15 or 20-year carryover period applies to such losses. Note: Many taxpayers have filed refund claims based on ten year carrybacks or purported specified liability losses, described in IRC section 172(f)(1)(B), that the Service considers to be invalid. Such refund claims require special attention. 37

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39 The NOL Deduction When an NOL is carried to another year, two possibilities exist. The NOL can either be: 1. fully absorbed or 2. not fully absorbed. 39

40 Fully Absorbed Losses When a NOL is carried back to an earlier year, it is compared to the taxable income. If the taxable income is large enough, the NOL is allowed in full as a deduction from gross income to arrive at adjusted gross income. Remember that the reduction of adjusted gross income by a net operating loss deduction may cause certain deductions or exclusions to change because they are based upon, or limited by, adjusted gross income. 40

41 Fully Absorbed Losses The deductions or exclusions, which may need to be recomputed because of the decreased adjusted gross income, include the following: 1) Deduction up to $25,000 of passive activity losses from rental activities as per IRC section 469(i) 2) Exclusion of social security and Tier 1 railroad retirement benefits as per IRC section 86 3) Deductions for individual retirement accounts as per IRC section 219(g) 4) Exclusion of U.S. Saving Bond interest used for educational purposes as per IRC section 135(b) 5) Medical expense deductions as per IRC section 213(a) 6 Casualty loss deduction as per IRC section 165(h) 7) Miscellaneous itemized deductions as per IRC section 67(a) 8) Total itemized deductions as per IRC section 68(a) 9) Phase out of exemptions as per IRC section 151(d)(3) Regarding items (1) through (4), above, if more than one applies, you re-compute them in the order listed above, using the recomputed AGI after applying the NOL deduction and any previous items on the list above. 41

42 Fully Absorbed Losses The reduction in AGI due to a NOL carryback has no effect on the individual's deduction for charitable contributions. IRC section 170(b)(1)(F) provides that the contribution base for determining percentage limitations is the AGI without regard to any NOL carrybacks. 42

43 LOSS NOT FULLY ABSORBED LOSS NOT FULLY ABSORBED REQUIRES INTERVENING YEAR MODIFICATIONS. 43

44 LOSS NOT FULLY ABSORBED IRC section 172(b)(2) requires that modifications be made to taxable income to determine how much of the NOL is used up in that year, and how much can be carried to the preceding year. The steps to compute the carryover to the second preceding year are as follows: 44

45 Loss Not Fully Absorbed 1) Start with the taxable income for the 2nd or 3rd preceding tax depending on whether the tax year (loss year) began after August 15, For this purpose such taxable income takes into account the NOLDs (carryforwards or carrybacks) from all years prior to the loss year. IRC section 172(b)(2)(B) 45

46 Loss Not Fully Absorbed 2) Ad back the following modifications. IRC section 172(b)(2)(A) a) Personal exemptions b) Net capital loss deduction. Unlike the modifications of IRC section 172(c) which takes into account IRC sections 172(d)(2) and 172(d)(4), the modifications of IRC section 172(b)(2) only take into account IRC section 172(d)(2). Thus, the separate limitations discussed earlier (in the NOL computation for the loss year) do not apply. For purposes of IRC section 172(b)(2), it is simply the net capital loss deduction that is added back. c) Modifications relating to Real Estate Investment Trusts, if they apply. See IRC section 172(d)(6) 46

47 Loss Not Fully Absorbed 3) Make the adjustments to items which are based upon, or limited by, a modified AGI. a) Adjustments to exclusions or deductions based on or adjusted by AGI (rental loss passive activity exclusion, taxable social security and Tier 1 retirement benefits, deductions for contribution to an IRA exclusion of savings bond interest discussed earlier). b) Itemized deductions (1) The following itemized deductions will need to be recomputed based upon the modified AGI computed above: medical expenses (10 percent floor), casualty and theft loss (10 percent floor), miscellaneous itemized deductions (2 percent floor) and total itemized deductions (phaseout). (2) Charitable contributions may also need to be adjusted but this involves some special rules. The percentage limitations for charitable contributions are based upon a contribution base which is defined as the AGI computed without regard to any NOL carrybacks to the taxable year. IRC section 170(b)(1)(F). 47

48 Loss Not Fully Absorbed Any NOL carryback deduction would not be taken into account for the purpose of computing the charitable contribution deduction. In contracts, to determine modified taxable income for purposes of absorbing an NOL in a carryover year, the charitable contribution deduction must be recomputed based on what AGI would have been without the NOL (or any NOLs from taxable years subsequent to the loss year). IRC section 170(d)(1)(B) provides a special rule for determining the contribution carryover where NOLs are involved. The computation that is required in such instances is quite complicated and is beyond the scope of this class. See Treas. Regs. Sections (a)(2)(ii) and 1.170A-10(d)(2). 48

49 Loss Not Fully Absorbed 4) The result is the modified taxable income of the 3rd preceding year. 5) The modified taxable income is subtracted from the NOL calculated for the loss year. The balance, if any, is the NOL carryover to the 2nd preceding year. 6) The above process is again applied to determine the modified taxable income of the 2nd preceding year and such amount is subtracted from the NOL carryover to see if there is any excess to be carried to the 1st preceding year. 7) This process is repeated until there is no remaining NOL carryover. 49

50 Loss Not Fully Absorbed Example Jan Smith runs a small clothing store. In 2015, she has a NOL of $36,000 that she chooses to carryback to She has no other carrybacks to Jane's original 2012 return contained the following income and deductions: Wages $30,000 Capital loss ($1,000) Adjusted gross inccome $29,000 Itemized deductions Medical Expenses $ 550 Charitable contributions $ 1,450 Total taxes $ 1,650 Home mortgage interest $ 1,125 TOTAL ($ 4,775) Exemption ($ 2,300) TAXABLE INCOME $21,925 Jane's $36,000 carryback NOL will eliminate her positive 2012 taxable income. She uses Form 1045 Schedule B to calculate the amount of the NOL absorbed in 2012, and the amount that should be carried over to

51 John R. Dundon II, EA President, Taxpayer Advocacy Services, Inc. Fellow, National Tax Practice Institute (720)

52 Corporations

53 Overview of Presentation NOL Carryovers for C Corporation Taxpayers Basic Rules Corporate Equity Reduction Transactions (the CERT Rules) Section 382 Ownership Change Calculation Impact of an Ownership Change Not Covered Consolidated Return Issues 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 53

54 NOL Basics

55 Carryback and Carryforward Rules Section 172(a): There shall be allowed as a deduction for the taxable year and amount equal to the aggregate of (1) the net operating loss carryovers to such year, plus (2) the net operating loss carrybacks to such year. Section 172(c): the term net operating loss means the excess of the deductions allowed by this chapter over the gross income. General Rule: NOL is carried back to the 2 taxable years preceding the loss year and carried forward to the 20 taxable years following the loss year. The NOL is utilized in the earliest taxable year with any unused portion carried forward. Section 172(b)(1)(A). Example: An NOL from Year 3 is carried back to Year 1; any unused portion is utilized in Year 2; any unused portion is utilized in Year 4, etc. Section 172(b)(3): Can elect to waive carryback period KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 55

56 Section 381 Transactions When Applicable: acquisition of the assets of a corporation ( Target ) by a corporation ( Acquirer ) in (i) a tax-free section 332 subsidiary liquidation or (ii) a section 361 transfer as part of a tax-free asset reorganization. Section 381(a). If Applicable: Acquirer succeeds to NOLs of the Target, subject to certain limitations. Section 381(a). Section 381(b)(3): Except for F Reorganizations, cannot carry back an NOL for a taxable year ending after the date of distribution or transfer to a taxable year of the Target. Can carry back post-acquisition NOLs against preacquisition Acquirer taxable years KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 56

57 Section 381 Transactions 361 Reorganization T SH 332 Liquidation P Liquidation P Merger T S Section 368(a)(1)(A) 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 57

58 Corporate Equity Reduction Transactions ( CERTs )

59 Overview of Rules Applicable to a Corporate Equity Reduction Transaction ( CERT ) Section 172(b)(1)(A) allows an NOL incurred by a taxpayer in a taxable year to be carried back or carried forward to other taxable years of that taxpayer. Carry backs are limited to the 2 years prior to the year of the NOL; and Carry forwards are limited to the 20 years after the year of the NOL. Section 172(b)(1)(D) prohibits an applicable corporation from carrying back a portion of an NOL (the CERIL) incurred in any loss limitation year (a LLY) to those taxable years that precede the taxable year in which a CERT occurs. The purpose of the CERT limitation is to prevent taxpayers from claiming a refund of a prior year tax payment for the purpose of funding the cost of post- CERT year interest expense allocable to certain corporate acquisitions and distributions. See H.R. Rep. No (1989) KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 59

60 What is a CERT (corporate equity reduction transaction)? As provided in 172(g)(3) a CERT is defined as either a major stock acquisition or an excess distribution. Major Stock Acquisition ( MSA ): An acquisition by a corporation of 50% or more (by vote or value) of the stock in another corporation. A stock acquisition for which a 338 election is made is not an MSA KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 60

61 What is a CERT? (cont.) Excess Distribution ( ED ): Current year corporate distributions (including redemptions whether or not dividend equivalent), provided the amount exceeds the greater of 150% of the average of such distributions during the 3 taxable years immediately preceding the taxable year of the potential ED, or 10% of the fair market value of the stock of such distributing corporation, measured at the beginning of such current year. Adjustments are made for certain stock issuances and certain contributions for, distributions on, and redemptions of, plain vanilla preferred stock KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 61

62 Examples of a CERT MSA ED P T stock $ SH $ SH T T X Section 172(g)(3)(B) Note: distribution must exceed both the 150% (3-year look-back) and 10% (fair market value) thresholds in 172(g)(3)(C) to constitute an ED KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 62

63 What is an Applicable Corporation? An applicable corporation is: An acquiring C corporation in an MSA. A target C corporation in an MSA. The C corporation making the distribution in an ED. A successor to an applicable corporation KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 63

64 Identifying the Applicable Corporation in a CERT MSA ED P $ T stock SH $ SH T T X = applicable corporation Section 172(b)(1)(D)(iii) 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 64

65 What taxable years are the LLYs (Loss Limitation Years)? The LLYs are the tax year in which the CERT occurred and, generally, each of the two following tax years. LLYs CERT Corporation T engages in a CERT during its taxable year ending December 31, Year 4. T s LLYs are Year 4, Year 5, and Year 6. Section 172(b)(1)(D)(ii) 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 65

66 How is the CERIL Computed? The applicable corporation s CERIL (Corporate Equity Reduction Interest Loss) is the difference between its NOL for the taxable year and the NOL for the taxable year reduced by its Allocable Interest Deduction ( AID ). The applicable corporation s AID is the portion of its NOL that is generated by interest deductions allocable to a CERT. Interest deductions are allocable to a CERT based on the UNICAP model Treas. Reg A-9, but subject to certain limitations: Section 172(g)(2)(B) prohibits direct allocation of interest expense to non-cert activity. AID cannot exceed the excess (if any) of (i) the interest deductions in the year at issue minus (ii) average interest deductions for the three years preceding the CERT (the Interest Cap ). AID under $1 million is disregarded under a de minimis rule KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 66

67 How is the CERIL Computed? (cont.) Rules in Treas. Reg A-9 regarding measurement dates, computation periods, etc. for purposes of the avoided cost method. (Very) Simplified CERIL Computation Steps Step 1 Calculate CERT costs MSA CERT costs FMV of the stock acquired and other related costs ED CERT costs FMV of excess distributions and other related costs The Proposed Regulations include borrowing costs that facilitate a CERT as CERT costs. Step 2 Calculate the Weighted Average Interest Rate ( WAIR ) (see Treas. Reg A-9) Step 3 Multiply WAIR by CERT costs to calculate AID If this amount is less than $1 million, CERT rules do not apply Step 4 Calculate Interest Cap Step 5 CERIL is the lesser of the AID or the Interest Cap 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 67

68 CERIL Calculation Simplified Example Assume CERT on first day of Year 5 CERT costs of $1,000 Weighted average interest rate (WAIR) of 4% Year 5 interest deductions of $65 Prior interest payments of $10 (Year 2), $20 (Year 3), and $60 (Year 4) Calculation CERT costs of $1,000 * 4% WAIR = $40 AID for Year 5 Prior three-year interest average of ( )/3 = $30 Year 5 Interest Cap = $65 $30 = $35 CERIL is the lesser of AID ($40) or the Interest Cap ($35) CERIL of $35 for Year 5. Taxpayer cannot carryback $35 of Year 5 NOL to tax years preceding the year of the CERT KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 68

69 Proposed CERT Rules On September 13, 2012, the IRS and Treasury issued proposed regulations addressing CERTs. The proposed regulations are prospective only. The proposed regulations address: General CERT rules Identification of CERT costs Application to tax-free transactions Interaction of EDs and MSAs Calculation of lookback period items Successor rules Consolidated CERT rules Guidance on single vs. separate entity Treatment of intercompany transactions CERT status Allocation of CERT attributes Carryback Waivers Avoidance of CERT taint 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 69

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71 Section 382 Ownership Change Calculation

72 Section 382 Section 382 provides that if a Loss Corporation experiences an Ownership Change, then the amount of the Loss Corporation s taxable income for any postchange year (or period) that can be offset by its prechange losses cannot exceed the Section 382 Limitation for that year 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 72

73 Section 382 Ownership Change A Loss Corporation is any corporation having an NOL carryover, capital loss carryover, net unrealized built-in loss, general business credit carryover, AMT carryover, foreign tax credit carryover A Loss Corporation has an Ownership Change if, on a testing date, the percentage by value of stock of the Loss Corporation owned by one or more 5 percent shareholders has increased by more than 50 percentage points over the lowest ownership percentage of such shareholders at any time during the testing period. A testing date is any date on which the percentage ownership of a 5 percent shareholder changes or on which an equity structure shift, such as a merger, occurs. (See exceptions in Notices and ) The testing period is generally a rolling three-year period ending on the testing date KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 73

74 5-percent shareholders Type Individuals Corporations Partnerships Trusts ESOPs Governments Investment advisors If ownership % > 5% 5% shareholder Attribute ownership to shareholder Attribute ownership to partners Attribute ownership to trustee/beneficiary 5% shareholder (some exceptions) 5% shareholder (some exceptions) Treatment depends on economic owner 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 74

75 Aggregation S B T R Q VC Corp. F P Public E C D O M N 30% K 8% 62% VC Corp. 40% J A 40% I B B 20% H G F LossCo F Public E C D E C D LossCo 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 75

76 Coordinated Acquisitions A group of persons who have a formal or informal understanding among themselves to make a coordinated acquisition of stock are treated as an entity ; A principal element in determining if such an understanding exists is whether the investment decision of each member of a group is based on the investment decision of one or more other members 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 76

77 Segregation Segregation rules treats certain groups of shareholders as a new public group, separate from any pre-existing public group These typically include: o Issuances by Loss Corp to public o Redemptions by Loss Corp from public o Acquisitions/dispositions of Loss Corp stock by 5-percent shareholders from or to public o Reorganizations qualifying as equity structure shifts o First or higher-tier transactions 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 77

78 Segregation Rule Example: Issuance Example: LossCo (calendar year taxpayer) was formed in Year 1 by Individual A (300 shares) and a number of less-than-5-percent shareholders (600 shares). In Year 2, LossCo issued 1000 shares of common stock to less-than-5- percent shareholders in exchange for debt. A 33% 67% LossCo Public A ~16% ~32% LossCo Public ~53% LossCo Seg. Public LossCo LossCo Beginning of testing period Issuance of stock to public in exchange for debt 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 78

79 Segregation Rule Example: Redemption Example: LossCo was formed in Year 1 by a number of less-than-5-percent shareholders. In Year 2, LossCo redeems 60% of its outstanding stock. LossCo Public LossCo Public LossCo Seg. Public 100% 40% 100% 60% LossCo LossCo Beginning of testing period Redemption of 60% of the stock of LossCo 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 79

80 Segregation Rules Exceptions These exceptions may allow a Loss Corp to issue shares with no or a reduced corresponding increase in cumulative owner shift Small issuance exception Reg (j)(2) - Generally treats small issuances by Loss Corp as issued to existing direct public groups on a pro-rata basis Cash issuance exception Reg (j)(3) - Generally treats a portion of shares issued by Loss Corp solely for cash as issued to existing direct public groups 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 80

81 Cash Issuance Exception Example Example: LossCo (calendar year taxpayer) was formed in Year 1 by Individual A (5 shares) and a number of less-than-5-percent shareholders (95 shares). In Year 2, LossCo issued 1000 shares of common stock to less-than-5- percent shareholders in exchange for cash. Segregation Rule if there were no Cash Issuance Exception A 5% 95% LossCo Public A <1% ~9% LossCo Public ~91% LossCo Seg. Public LossCo LossCo Beginning of testing period Issuance of stock to public in exchange for cash 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 81

82 Cash Issuance Exception Example (continued) Example: LossCo (calendar year taxpayer) was formed in Year 1 by Individual A (5 shares) and a number of less-than-5-percent shareholders (95 shares). In Year 2, LossCo issued 1000 shares of common stock to less-than-5- percent shareholders in exchange for cash. Under the Cash Issuance Exception A 5% 95% LossCo Public A <1% ~52% LossCo Public ~48% LossCo Seg. Public LossCo LossCo Beginning of testing period Issuance of stock to public in exchange for cash 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 82

83 Small Shareholder Exceptions to the Segregation Rules New Small Shareholder Regulations apply to testing dates occurring on or after October 22, 2013 (with some flexibility for testing periods that begin before October 22 and end after) Secondary transfer exception to segregation rules for sales by 5-percent shareholders to public Small redemption exception to segregation rules (similar to current small issuance exception) Exception for certain transactions involving the stock of first tier entities or higher tier entities Anti-avoidance rule 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 83

84 Notice Between 2008 and 2010, the Service issued a number of Notices, including Notice to address certain federal income tax implications of the issuance of instruments by loss corporations to Treasury under the Emergency Economic Stabilization Act of 2008 ( EESA ). Notice provides guidance to corporate issuers with respect to the treatment of stock issued to Treasury (either directly or upon the exercise of a warrant) pursuant to specified EESA programs ( TARP Stock ) KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 84

85 Notice : The Rules TARP Stock (other than Section 1504(a)(4) Stock) issued to Treasury is not considered to cause Treasury s ownership in the issuing corporation to have increased over the lowest percentage that it owned on any earlier date. TARP Stock is considered to be outstanding for purposes of computing the percentage of stock owned by other 5-percent shareholders on any testing date. TARP Stock that is redeemed will be treated as if it had never been outstanding. If Treasury sells TARP Stock (other than Section 1504(a)(4) Stock) and the sale creates a segregated public group (a TARP Public Group ), the TARP Public Group s ownership in the issuing corporation will not be considered to have increased solely as a result of such a sale. The TARP Public Group s ownership is treated as having increased to the extent the TARP Public Group increases its ownership pursuant to any transaction other than a sale of stock by Treasury, including an increase attributable to the Small Issuance Exception or the Cash Issuance Exception KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 85

86 Impact of an Ownership Change

87 Impact of an Ownership Change Limitation on Pre-change Losses/credits Offsetting Post-change Income 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 87

88 Annual Limitation In general, Equity value immediately before ownership change Adjustments for: (1) Capital contributions within two years [ 382(l)(1)] (2) Redemptions or other corporation contractions [ 382(e)(2)] (3) Extent of nonbusiness assets [ 382(l)(4)] (4) Controlled group adjustment [Reg ] Adjusted equity value x AFR for ownership changes in given month Basic annual limitation Annual limitation may become zero if continuity of business enterprise is broken within two years of an ownership change Certain exceptions for ownership changes pursuant to court-approved plan of reorganization in bankruptcy case 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 88

89 Determining the Value of the Stock of the Loss Corporation For the purposes of 382, the value of a loss corporation is based on the fair market value of the stock of such corporation (including any stock described in 1504(a)(4)) immediately before the ownership change. Warrants, options, contracts to acquire stock, convertible debt interests, and other similar interests may be treated as stock if so treated under rules applicable to ownership shifts KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 89

90 Determining the Value of the Stock of the Loss Corporation Publicly Traded Corporation: generally treat average price at which the stock is trading on an established exchange on the ownership change date as the value of the corporation for the purposes of 382. BUT, in appropriate exceptional circumstances departure from the trading price may be permissible in determining fair market value. See,, Amerada Hess Corp., 517 F.2d 75 (3rd. Cir. 1975); Moore-McCormack Lines, Inc. v. Comm r, 44 T.C. 745 (1965); TAM ; TAM KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 90

91 Determining the Value of the Stock of the Loss Corporation (continued) When might value not be determined by trading price? May be a control premium on the stock. Restrictions or additional rights (e.g., on voting rights) on stock may cause variation in and from the trading price. The stock price on the ownership change date is aberrational compared to its price on the exchange throughout the rest of the year. Trading price only reflects sales of small lots, forced sales, or sales in a restricted market KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 91

92 Available Limitation in Given Tax Year Annual limitation [In year of ownership change, annual limitation proportionately scaled back for postchange period] + Carryforward of unused limitation + Built-in gains recognized in recognition period for loss companies in a net unrealized built-in gain position on change date Available limitation in given tax year 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 92

93 Built-in Gains and Losses Objective of built-in gain/loss rules is to promote neutrality Pre-change NOLs could have offset built-in gains recognized before an ownership change Built-in losses should not escape the section 382 limitation If a loss corporation has a net unrealized built-in gain ( NUBIG ): Built-in gains recognized during the 5 year recognition period ( RBIG ) increase the base section 382 limitation applicable to NOLs to the extent of the NUBIG If a loss corporation has a net unrealized built-in loss ( NUBIL ) Built-in losses recognized during the 5 year recognition period ( RBIL ) are treated as pre-change losses to the extent of the NUBIL, subject to the base section 382 limitation along with any pre-change NOLs 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 93

94 Notice Notice : Notice (September 12, 2003) provides guidance on the identification of built-in items under 382(h) Alternative approaches: Two alternative safe harbors for the identification of built-in items for purposes of 382(h): - (1) The 1374 approach - (2) The 338 approach 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 94

95 NUBIG/NUBIL Calculation NUBIG / NUBIL under Notice (both approaches): Calculation of NUBIG or NUBIL: Amount realized if, immediately before the ownership change, the loss corporation ( L ) had sold all of its assets, including goodwill, at fair market value to a third party that assumed all of its liabilities - Decreased by the deductible liabilities (including contingent liabilities) of L that would be included in the amount realized on the hypothetical sale and L s aggregate basis in all of its assets - Increased or decreased by the L s 481 adjustments that would be taken into account on the sale - Increased by any RBIL that would be disallowed as a deduction under 382/383 or 384 on the sale (as a result of prior transactions) If this amount is positive, L has a NUBIG; if the amount is negative, L has a NUBIL; both are subject to the threshold limitation (the lesser of $10 million or 15 percent of the fair market value of certain assets immediately before the ownership change) 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 95

96 Example NUBIG/NUBIL Calculation o Assets - $1000 FMV - $100 adjusted tax basis o Non-Deductible Liabilities - $200 (undiscounted pre-discharge) 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 96

97 Example NUBIG/NUBIL Calculation (continued) o Assets - $100 FMV - $100 adjusted tax basis o Non-Deductible Liabilities - $200 (undiscounted pre-discharge) See PLR KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 97

98 The 1374 Approach 1374 Approach Overview Identifies built-in items using 1374 rules (net realized built-in gains of subchapter S corporations) Generally treats items as attributable to pre-change period if they accrue prior to the ownership change - However, for purposes of determining whether an item is RBIL, 461(h)(2)(C) and Treas. Reg (g) (concerning certain liabilities for which payment is economic performance) do not apply. Generally best for taxpayers who want to avoid characterization of deductions as built-in losses 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 98

99 The 338 Approach 338 Approach Overview Identifies built-in items by comparing L s actual items with those that would have resulted from a 338 transaction Generally allows some items (e.g., income from foregone depreciation, deduction for contingent liabilities) not accrued prior to OC to be treated as built-in gain or loss Generally best for taxpayers who want to treat income from wasting (i.e., depreciable or amortizable) assets as recognized built-in gain 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 99

100 Wasting Assets 338 Approach Wasting asset RBIGs: If LossCo has a NUBIG, certain of LossCo s built-in gain assets are treated as generating RBIG even if such assets are not disposed of during the recognition period - The amount treated as RBIG (regardless of L s gross income in any year during the recognition period) equals the excess of the cost recovery deduction that would have been allowable with respect to a built-in gain asset had an election under 338 been made for the hypothetical purchase over L s actual allowable cost recovery deduction for the asset - The deduction allowable had a 338 election been made is determined based on the fair market value of the asset on the change date and a cost recovery period that begins on the change date 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 100

101 Wasting Assets (continued) Example 338 Wasting asset RBIGs: LossCo has a NUBIG of $300 attributable to goodwill with a value of $300, and a basis of $0. The annual cost recovery deduction that would have been allowable with respect to the goodwill had an election under 338 been made for the hypothetical purchase would be $20, because LossCo could amortize 1/15th of the $300 basis in the goodwill. The actual allowable cost recovery deduction would be $0. Therefore, LossCo is treated as having $20 of RBIG ($20 hypothetical cost recovery deduction - $0 actual cost recovery deduction) and may increase its 382 limitation by $ KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 101

102 Amy K. Chapman Amy K. Chapman Senior Manager, Corporate Washington National Tax Professional and Industry Experience Amy is a senior manager with KPMG s Washington National Tax practice, specializing in corporate taxation, with a particular emphasis on mergers & acquisitions, dispositions, reorganizations, debt restructurings, and bankruptcy and nonbankruptcy workouts. Amy s broad range of clients include global leaders in the banking and insurance industries. Prior to joining KPMG, Amy was an associate in the tax department of the international law firm Dewey & LeBoeuf LLP, based in New York. Publications and Speaking Engagements Amy has written numerous articles for tax publications, including the Journal of Corporate Taxation and The Tax Adviser. Amy lectures on corporate tax matters, and serves as a panelist for various groups. She also teaches internal and external continuing professional education courses. KPMG LLP 1801 K Street, NW Washington, DC Tel Fax akchapman@kpmg.com Function and Specialization Restructurings, Mergers, Acquisitions, Spin-offs and other Divisive Strategies Education, Licenses & Certifications J.D., Washington & Lee School of Law B.A., St. Mary s College of Maryland 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 102

103 Timothy M. Nichols Professional and Industry Experience Tim Nichols is a manager in KPMG s Washington National Tax Corporate Group. Tim consults on a variety of corporate tax transactions, including mergers, acquisitions, corporate restructurings, spin-offs, recapitalizations and redemptions. Prior to joining KPMG Tim practiced law with a private firm and represented closely held businesses and other clients on tax and other matters. Timothy M. Nichols Manager KPMG LLP Suite Washington, DC Tel Fax Cell tnichols@kpmg.com Function and Specialization Mergers, acquisitions, spin-offs, divestitures, liquidating and non-liquidating corporate distributions, and corporate reorganizations. Education, Licenses & Certifications LL.M., Georgetown University Law School J.D., Marquette University B.A., Marquette University 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 103