We attended an introductory lunch with a client based in the Northeast. The client had significant net operating loss carryforwards, and while willing to meet with us, believed that we could offer little in the income tax arena given their huge losses. In fact, the losses were so great that the client had a large valuation allowance as utilization of the losses was doubtful.
We inquired as to the nature of the loss which turned out to stem from a significant law suit in which the client had been forced to repay over $350 million in revenue to former customers. The lawsuit concerned revenue the client received in the late 80’s, a time during which the income tax rate was 46%, then 40% – as compared to today’s rate of 35%. This interesting fact pattern suggested an exciting possibility: that the repayment of this revenue might qualify for Internal Revenue Code §1341 treatment. This bizarre and little known law provides for a taxpayer to treat revenue that it must repay as never having been received. The net result was a claim for $35 million! Even more astonishing, a Big 4 firm handled the settlement accounting of the claim but never brought the refund opportunity to this client. Fortunately we were able to identify the claim before the statute of limitations tolled.
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