Inability To Use NOLs Means Biofuel Energy Loses $63M Of After Tax Value

Summary

• - Biofuel Energy (BIOF) has $181M in net operating losses (NOLS) which can be worth up to $63M in tax writeoffs.
• - BIOF is merging with a real estate investment company, JBGL Capital, and investors have bid up the stock, believing that BIOF will be able to unlock the NOLs after the merger.
• - Tax experts say the company likely won't be able to use its NOLs for JBGL Capital's profits. Without the writeoff, BIOF is worth only $4.27 per share.
• - BIOF’s proxy never mentions IRC Section 269 - Acquisitions Made To Evade Or Avoid Income Tax, or the Continuity of Business Enterprise part of IRC Section 382.
• - The rights offering offers the stock between $1.50 to $5.00, much lower than the value of the NOLs, which indicates the company doubts that they will be utilized.

White Diamond Research confirms that BIOF's NOLs will not be permitted to be used as a tax deduction for JGBL's profits.

If BIOF can't use its NOLs, then it could compromise the merger. On page 13 of the merger proxy statement, it says:

The consummation of the Transactions is subject to a number of conditions, including:

the availability of the Company's NOLs without impairment (subject to certain exceptions)

Barbara Blacklidge has been a tax preparer for 16 years, and has over 25 years as a real estate/corporate paralegal. Regarding BIOF’s situation she said:

A complete disallowance of NOLs under 382: continuity of business enterprise ("COBE"). COBE requires that the company (or its successor) either continue the old corporation's historical business or use a significant portion of the company's assets in the new business. The information you have provided indicates there are no assets; therefore, use of the NOLs would not be permitted.

Real estate is a different business than biofuel, therefore, the NOLs can't be used. In BIOF’s proxy statement, it goes over the issue of business ownership, but not the issue of business continuity.

IRC Section 269 - Acquisitions Made To Evade Or Avoid Income Tax

US code 269 states:If the principal purpose for which an acquisition was made is evasion of Federal income tax then the Secretary may disallow such deduction.

BIOF longs and shorts alike agree that the principal purpose of the merger is to utilize BIOF’s NOLs. A CFO/CPA we spoke with said:

I would never do something like this without first securing a "Letter Of Determination" from the IRS to confirm that the NOLs can be of use.

On page 144 of BIOFs proxy statement:

The merger rights offering is offering BIOF shares for a price between $1.50 and $5. Pre-merger there are currently 5.46M shares outstanding, so a share price of $5 would make BIOF's market cap $27.3M, much less than the potential value of the NOLs of $63M. 

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