A corporation with $400M of pre-2018 NOLs (subject to a 20-year carryforward) undergoes an ownership change. At that time, its fair market value is $150M and the long-term tax-exempt rate is 4%. The company expects to generate $25M of pre-tax income annually. Tax rate is 25%. Compute the annual Section 382 limitation, the maximum cumulative NOL usable over the remaining 15 years, and the approximate PV of the NOL using a 10% discount rate.

The annual Section 382 limitation = equity value × long-term exempt rate = $150M × 4% = $6.0M. Since pre-tax income of $25M exceeds $6.0M, the full $6.0M can be used each year. Over 15 years, maximum cumulative NOL usage = 15 × $6.0M = $90M. The remaining $310M of NOL expires worthless. The annual tax saving = $6.0M × 25% = $1.5M. The PV of a 15-year annuity of $1.5M at 10% = $1.5M × [(1 − 1/1.10^15)/0.10] = $1.5M × 7.606 = $11.4M approximately. The gross face value of the NOL is $100M in tax savings ($400M × 25%); the massive haircut illustrates why Section 382 is a deal-killer for NOL-rich but low-value companies.

Follow-up pressure:

• If the company had only $5M of pre-tax income annually, how much NOL would actually be usable each year? Show the interaction.
• Explain the policy rationale for Section 382 and why the annual limit is based on equity value rather than, say, a fixed dollar cap.
• If the company emerged from bankruptcy, name the specific subsection of Section 382 that could relax the limit and describe how the calculation would change.