In what circumstances may net operating loss carryforwards be applied by an acquiring company?

The correct choice indicates that net operating loss (NOL) carryforwards can be utilized by an acquiring company under specific conditions, often subject to limitations. This option reflects the reality of tax regulations that govern the application of NOLs in the context of M&A activities.

When a company is acquired, the ability to utilize the target company's NOLs may depend on various factors, including continuity of business operations and ownership changes. The U.S. Internal Revenue Service has established rules that can restrict how much of the NOL can be carried forward after a change in ownership, which usually occurs during a merger or acquisition. Thus, the right circumstances may include maintaining a substantial portion of the acquired entity's business and complying with the specified guidelines regarding limitations and eligibility.

The other options suggest misunderstandings of how NOL carryforwards function in M&A situations. Some options imply either an unconditional transfer or criteria that don’t align with tax laws, such as requiring the NOLs to exceed the purchase price or ceasing the operations of the acquired company, which do not accurately capture the complexity of tax benefits arising from NOLs in mergers and acquisitions.