Back to the Present

How some companies are taking advantage of extensions to net operating loss (NOL) carrybacks.
Ilan MochariNovember 4, 2004

On the way to its first profitable year since the 1990s, Lucent Technologies may soon reap a windfall from a loss.

In September, the telecom-equipment maker said the Internal Revenue Service had tentatively agreed to a net operating loss (NOL) carryback yielding a whopping $816 million tax refund. “It’s one of the biggest I’m aware of,” observes Mark Silverman, head of Steptoe & Johnson’s tax practice.

Lucent obtained the refund by carrying its 2001 NOL back to 1996. Carrybacks have traditionally covered two years, but Lucent capitalized on a provision in the Job Creation and Worker Assistance Act of 2002, which allowed companies with NOLs in 2001 or 2002 to go back five years. The provision was targeted at telecom and other industries hurt by the recent economic downturn, says Jennifer Blouin, an assistant accounting professor at Wharton.

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In an NOL carryback, the amount of the refund is equal to the difference between the loss and the cumulative tax liability of the carryback year and all ensuing years with taxable income. For Lucent to have received such a refund means that its 2001 NOL had to be massive — and indeed, Lucent lost $16.2 billion in 2001.

Other kinds of companies have benefited from the act. Westaff, a $500 million staffing company based in Walnut Creek, Calif., received a $4.7 million refund from its 2002 NOL, thanks to the five-year carryback stipulation. “We were in a fairly tight liquidity situation, so it made sense for us to claim the refund,” says CFO Dirk Sodestrom.

Profiting from Loss
Some recent NOL carrybacks.
Company Loss,
Amount of Refund
Lucent $16.2 billion, 2001 $816 million*
Westaff $3.5 million, 2002 $4.7 million
R.R. Donnelley $18.9 million, 2003 $40 million
Schering-Plough $92 million, 2003 $404 million
* Pending approval by the Congressional Joint Committee on Taxation and an IRS audit of 2001 returns.
Source: Various reports

Lucent’s refund is subject to an audit of its 2001 tax return and a review by the congressional Joint Committee on Taxation (which examines all refunds over $2 million). “While we are pleased to have reached this tentative agreement, we recognize that it is not finalized and there are some key hurdles to clear,” says Frank Briamonte, a spokesperson for Lucent. In its 8-K, Lucent said it could receive the money during fiscal 2005, pending the tax committee’s approval.

But some guess Lucent might get paid sooner. At $816 million, the committee probably won’t “sit on it too long,” says Fred Adam, a tax shareholder at Greenberg Traurig.

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