CFAI Reading 13, Example 8, p369. Tax Loss carryforwards

CFA Level III Portfolio Management
#1

Hi guys,

I have a quick question regarding this example. The books says that Lee would would gain +1.25M through a sale and leaseback. For me this is incorrect.

Assuming, that he has tax loss carryforward and assuming tax base 0, he would get

5M - (5-1.5)*.25 = 4.125M

But the book says that "carryforward will more than offset the 25% capital gains tax of 1.25M, thus he will get

5M - 5*0.25 + 1.5= 5.25M or 5M net.

I assume that the book incorrectly interpritates carryforwards…

Thanks

#2

The 1.25 must be after tax.

#3

Thanks, but this is not the case.

#4

I agree with you that the answer on the book interprets ‘loss carryward’ as ‘tax credit’.

with 4.25m > 3.75m, the conclusion is still valid though.