My recollection is that 3 or 4 years ago the accumulated NOL's of the company was around $300M total. We may have lost a little do to the lapse of time, but in any case we must still have much more than $7.6M piled up and available.
Uh... perhaps we should give this one of those "5% certain" qualifiers. Anyone interested might do their own googling or possibly register to view this entire article:
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Do NOL Tax Assets Really Hold Any Value?
This is the fundamental question. To answer it, one must understand just where value is believed to originate. An NOL occurs when a company's total tax-deductible expenses exceed its taxable gross revenues. The good news for a company incurring an NOL is that it will owe little or no current income tax liability. The bad news is that the excess deductions provide no current-period tax savings. Taxing authorities frequently attempt to mitigate this potential loss of tax benefits by using NOL carryback and carryforward provisions. For example, current U.S. federal income tax provisions allow a corporation to carry its NOL back two years and/or forward 20 years, to be deducted against taxable income reported in these carryback and/or carryforward years. The application of NOLs in this manner could create tax refunds in the carryback years when taxes were previously paid and potentially could reduce tax liabilities in carryforward periods as well. FAS-109 allows these potential tax savings to be recorded on the company's balance sheet as a deferred tax asset, given that positive future cash flows are expected from the tax savings generated by the NOL's use.
It should be noted that deferred tax assets can arise from transactions other than NOLs, and deferred tax liabilities are also possible. The existence of other deferred tax assets and deferred tax liabilities often can affect whether NOLs have any real future value. FAS-109 requires that a deferred tax asset be recorded whenever losses or expenses are recorded in a company's financial statements in the current year, but the same losses or expenses do not produce savings in the tax return until future periods. Conversely, deferred tax liabilities must be recorded when gains or income are recorded in the financial statements in the current year but will not be subject to taxation until future periods. Deferred tax assets in excess of deferred tax liabilities suggest net future tax savings as a result of activities in prior and current years. On the other hand, a net deferred tax liability indicates net future tax costs as a result of current and prior activities.
FAS-109 also requires that a company establish a valuation allowance (similar to the allowance for doubtful accounts) when management believes it is more likely than not that some or all of a deferred tax asset will not be realized. Thus, management is required to assess the probability that the company's NOLs will generate tax savings and reduce the reported deferred tax asset whenever there is a greater than 50 percent probability that some or all of the NOLs will expire unused. Consequently, a significant amount of management judgment is required in this area and potentially provides yet another earnings management opportunity, particularly given the weak internal controls that apparently plague so many companies in the tax-reporting area.
Evidence That NOLs Have Value
FAS-109 outlines what type of evidence management should consider when valuing its company's NOLs for financial reporting purposes. Exhibit 1 lists this evidence by type: Positive evidence indicates factors suggesting that NOLs may have value and that no valuation allowance is required. Clearly, if taxable income and a tax liability exist within the permitted carryback period (currently two years under US. federal income tax law), then at least some NOLs will be used and the related deferred tax asset has some value. The company need only file a refund claim for the prior taxes paid.
Exhibit 1 NOL Positive Evidence
NOLs have value and no allowance is necessary
* The company paid taxes in previous years that provide carryback
potential.
* The company has a strong earnings history exclusive of the loss that
created the NOL.
* Favorable recent developments provide evidence of sufficient future
taxable income (for example, new customers).
* There exist contracts or firm sales backlog.
* There exists evidence of sufficient taxable income arising from the
reversals of existing future taxable temporary differences (that is,
deferred tax liabilities).
* The fair market value of the company's assets exceeds its tax bases
(that is, the built-in gain scenario).
* Tax-planning strategies are available.
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Evidence That NOLs Have Little or No Value
Management also must consider evidence that suggests NOLs will not be used in the future and, therefore, may have no value: negative evidence. Exhibit 3 details factors that indicate that a valuation allowance may be needed for deferred tax assets. Not surprisingly, continuing or cumulative losses and going-concern issues suggest that NOLs will not be needed in future years to reduce taxable income. Unfavorable operating developments and industry trends also do little to increase the likelihood of NOL usage. Similarly, short carryback and carryforward periods and the need for special types of income (such as capital gains or foreign source income) to realize tax benefits also suggest that NOLs may expire unused.
Exhibit 3 NOL Negative Evidence
NOLs have little or no value and allowance is necessary
* The company has a history of cumulative losses in recent years.
* Going-concern issues trouble the company.
* The company expects losses in its early years of operations (for
example, start-up operation).
* Management has a history of being unable to accurately forecast
future earnings.
* There exist loss contingencies and other uncertainties that may
adversely affect future earnings.
* The company has experienced a recent unfavorable development
(for example, loss of a major customer).
* The company's industry is plagued by unfavorable trends, or the
company's position within the industry is deteriorating.
* Carryforwards have historically expired unused.
* The company has brief carryback and carryforward periods.
* Special types of income are required to realize tax benefits
(for example, capital gains, foreign source income, etc.).
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Exhibit 8 Rite Aid Corporation Deferred Tax Asset Note
Disclosure 2005 10-K
2005 2004
(in thousands)
Deferred tax assets:
Accounts receivable $68,572 $18,511
Accrued expenses 69,061 91,838
Liability for lease exit costs 91,037 101,492
Pension, retirement and other benefits 185,660 150,647
Investment impairment 28,782 34,296
Long-lived assets 39,514 121,919
Credits 81,922 75,332
Net operating losses 1,079,521 1,142,937
Total gross deferred tax assets 1,744,069 1,736,972
Valuation allowance (1,436,570) (1,650,967)
Net deferred tax assets 307,499 86,005
Deferred tax liabilities
Inventory 115,176 83,384
Other 3,052 2,621
Total gross deferred tax liabilities 118,228 86,005
Net deferred tax assets $189,271 $ --
At February 26, 2005, the Company had federal net operating loss (NOL) carryforwards of approximately $2,330,000, the majority of which expire between fiscal 2019 and 2022. The Company underwent an ownership change for statutory tax purposes during fiscal 2002, which resulted in a limitation on the future use of net operating loss carryforwards. This limitation was considered when the valuation allowance was stablished.
Valuation Allowances
The valuation allowances as of February 26, 2005, and February 28, 2004, apply to the net deferred tax assets of the Company. Until the fourth quarter of fiscal 2005, the Company provided a full valuation allowance against its net deferred tax assets. Based upon a review of a number of factors, including the Company's historical operating performance and its expectation that it can generate sustainable consolidated taxable income for the foreseeable future, the Company now believes it is more likely than not that a portion of these deferred tax assets will be used. Based upon the Company's expected future use, a portion of the valuation allowance at year end was reduced resulting in a noncash tax benefit of $179,538 during fiscal 2005. An additional reduction in the valuation allowance of $5,293 was recorded as additional paid-in capital in fiscal 2005 to reflect the tax benefit associated with previously recorded stock based compensation. The Company continues to maintain a valuation allowance of $1,436,570 against remaining net deferred tax assets at fiscal year end 2005.
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