This is the fourth in a series of six articles about the volatile financial misfortunes and turnaround of trucking company YRC Worldwide.
Terry Gerrond is like all employees of YRC Worldwide: each time the company completed another refinancing, staving off bankruptcy or worse, he got to keep his job.
But Gerrond has a special perspective. As vice president of taxation, he frowns at one side effect of the refinancings: a limitation on using YRC’s net operating losses (NOLs) to mitigate future tax liabilities.
Each of the company’s debt restructurings in 2009, 2011, and 2014 was subject to IRS rules that limit the amount of NOLs that can be carried forward at any point in time when there’s been greater than a 50% change in company ownership compared with three years prior. Each restructuring was marked by enough new equity investment, lenders’ conversion of convertible notes from debt to equity, or both to reach that threshold. (Interestingly, YRC also reached the threshold in 2013, simply because of significant investors buying or selling the stock, and convertible debt holders exercising their conversion rights.)
The rules — which have been part of the tax code for many decades, as most recently amended in the Tax Reform Act of 1986 — have a meritorious purpose: to prevent profitable companies from buying money-losing companies at bargain prices and using the latter’s NOLs to mitigate their own tax liabilities. But the rules are written broadly enough that they apply to other scenarios as well.
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