Beazer Homes USA is scheduled to release its delayed year-end earnings report before the market opens Tuesday, Dec. 2, but of more interest than its numbers is an answer to the question of whether the company will be able to reap some tax refunds related to its losses last year.
The company's accountants, like the number crunchers at many home builders now, have been trying to figure out if Beazer will be able to recoup taxes paid in 2006 because of losses it had in 2008. The answer to the question lies in whether or not the company has had an ownership change according to the Internal Revenue Service's complicated and difficult-to-interpret-and-apply definition.
As defined under IRS Code section 382, a company's ownership has changed if 50% of the owners of 5% or more of its stock have changed over a period of time. If the ownership has changed, the company could lose some or all of its anticipated tax refunds related to claiming current losses against past years' gains.
But determining that is far from simple.
"It's actually fairly painful," said Steve Freidman, national director of home building services for Ernst & Young. In its extreme, it could require the company to go back as far as its inception as a C corporation, tallying the movements of 5% owners of stock every day. "Usually it's three years' worth of ownership change," Friedman said. But sometimes you have to go back further. "It's not always easy to figure out who your shareholders are," he said, because much is held in the names of brokerage accounts.
"Conceptually, all companies are supposed to track this on an annual basis, but nobody does," Friedman added. "As a practical matter, everybody doesn't. ... It's expensive. And this doesn't become an issue unless you have losses and you want to use those losses [for tax refunds.]" If the company claims net operating losses, it's the company's burden to prove that it has not had an ownership change.
Friedman said companies can use their own investor relations and accounting people to conduct the investigation or hire an outside firm for the work. But conducting the investigation is the burden of the taxpayer.
In addition to determining whether there's been an ownership change under the IRS definition, it's also necessary to figure out when it occured and what the company was valued at that time because that, too, has a bearing on refunds.
Friedman said he has no knowledge of a builder who has been audited in the matter.
"It's still a little bit early for that," he said. The builders first started experiencing losses in 2006. The losses for that year were filed in 2007. "It takes the IRS at least a year, sometimes two years, before they examine the company."
Friedman says it's important to get it right from the beginning. Having to hand money back to the government after the fact "would not be good."
Beazer Homes USA is only the latest builder with worries that stock transactions among its largest shareholders may have endangered its chances of snagging tax refunds for net operating losses. Those with great stock volatility among their largest shareholders would appear to be most vulnerable.
Standard Pacific expects to lose an anticipated tax refund due to a change of ownership. Its provision was triggered when MatlinPatterson provided the company with a much-needed cash infusion. That case, which is being reviewed by the IRS, was much more clear-cut since it only involved one transaction.
The worry of other home builders is that they could have a change of ownership under tax law and not even be aware of it or have any control over it. That's why Hovnanian Enterprises, in an attempt to protect its net operating loss benefits, put in place a shareholder rights plan in August that would dilute its stock if an individual or entity buys more than 4.9% of its stock.
At the time, Hovnanian's CFO Larry Sorsby called the change in ownership provision "Draconian" and said Hovnanian began to research the issue while it was considering issuing equity.
And it's an issue likely to come up for any builder considering issuing equity to recapitalize its balance sheet.
Beazer's preliminary earnings release for its Sept. 30 year-end had closings down 38.2% from the same quarter last year. New-home orders were up 10.3% year-over-year to 1,083, but Beazer's buyers continued to cancel at a higher rate than that experienced by other builders, spiking over to 45.7%. However, that's a big improvement from last year's 68.1% cancellation rate when false rumors of bankruptcy were circulating. Beazer's cash balance was improved to $584.3 million compared to $314.2 million at the end of its third quarter and $453.2 million at the end of September 2007.