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 restricted the ability of acquirers to use these? credits). Suppose Fargo Bank acquires Covia Bank and with it acquires$78 billion in tax loss carryforwards. If Fargo Bank is expected to generate taxable income of $14 billion per year in the? future, and its tax rate is 30%?, what is the present value of these acquired tax loss carryforwards given a cost of capital of 8%??

Explanation / Answer

In this case the bank can shield % 14 billion per year for next 5 yrs and $ 8 billion in year 6. Given a tax rate of 30% the tax savings would be 14*0.30, 4.2 billion for 5 yrs and 2.4 billion for 6th yr Present value of these transactions is Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Yr 6 Tax savings 4.2 4.2 4.2 4.2 4.2 2.4 Discounting factor 0.925926 0.857339 0.793832 0.73503 0.680583 0.63017 18.28178926 3.888889 3.600823 3.334095 3.087125 2.858449 1.512407 Present value is $18.28 billion

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