Leucadia Management on Net Operating Loss (NOL) and Deferred Tax Assets

Leucadia National Corporation was a New York based holding company, founded by the acclaimed value investors Ian Cumming and Joseph Steinberg. After a merger with Jeffries Bank and the retirement of Cumming and Steinberg, the holding company was renamed into Jeffries Financial Group.

Turnaround Investors

To most Value Investors, Leucadia is a household name. As investors Steinberg and Cumming were held in such high regards that they were often compared to Warren Buffett, due to Leucadia’s impressive long term record of compounding its shareholders’ capital.

Although both founded on a Fundamental Finance methodology, Cumming and Steinberg’s approach at Leukadia did differ from that of Berkshire Hathaway and Warren Buffett in the way they allocated capital.

Compared to Berkshire Hathaway, Leucadia favored turnaround situations and therefore there would also be a higher turnover of holdings and investments within Leucadia as they would divest companies once they had been turned around.

Leucadia Letters to Shareholders

Similar to Warren Buffett, Cumming and Steinberg would write comprehensive letters to their shareholders, where they would explain in detail certain aspects of their methodology and other finance and investment related topics.

In the 2005 Leucadia Letter to Shareholders Cumming and Steinberg discuss the accounting concepts Net Operating Losses (NOLs) and Deferred Tax Assets (DTA) and how these can affect shareholder returns:


NOL, Deferred Tax Assets
From the Leucadia 2005 Letter to Shareholders


Net Operating Losses

Net Operating Losses or NOLs can play a crucial part in the IRR of a turnaround situation. Historical losses are carried forward as a asset on the balance sheet and can thus be offset once the company returns to profitability. In other words, the tax charge in used to calculate net profits on the income statement is not accounted for on the cash flow statement, the cash stays in the company.

Deferred Tax Assets

If an investment that a company holds appreciates in value without the company monetizing that investment, the gain has in implied capital gains tax. That gain is recorded on a balance sheet as a Deferred Tax Asset. If the company were to sell the investment, the company would pay the capital gains tax on the appreciation.

Therefore, you could say that by holding the investment, you also hold the capital that would otherwise be paid as tax on the gains. This amount is held on the balance sheet as a payable so you could essentially say that this is an interest free loan from the government as the DTA portion of the investment will be able to compound interest over time.

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