In September, 2008, the IRS changed tax laws to allow banks to utilize the tax l

Question

In September, 2008, the IRS changed tax laws to allow banks to utilize the tax loss carryforwards of banks they acquire to shield their future income from taxes (prior law had restricted the ability of acquirers to use these credits). Suppose Fargo Bank acquired Covia Bonk and with it acquires $74 billion in tax loss carryforwards. If Fargo Bank is expected to generate taxable income of $10 billion per year in the future, and it tax rate is 30%, what is the present value of these acquired tax loss carry forwards given a cost of capital of 8%?

Explanation / Answer

Assuming no limitation on NOL utilization After management change of Covia Bank Details Amt $ Tax Loss carryforward amt from Covia 90 billion Yearly projected taxable income of Fargo 15 billion Tax loss can be utilized in 6 years Tax Loss set off per year against taxable Income 15 billion Tax rate 30% Net saving of tax per year in billion $ 4.5 PV of Tax savings @8 % cot of capital year 1 year 2 year 3 year 4 year 5 year 6 Discountig factor @8%              0.926          0.857          0.794                 0.735              0.681              0.630 Net saving of tax per year in billion $                4.50            4.50            4.50                    4.50                4.50                4.50 PV of Tax savings 4.17 3.86 3.57 3.31 3.06 2.84 Total PV of Tax savings 20.80 So The PV of Tax Loss carry forward is $20.80 billion

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