GM theft has no limits
GM bailout has future tax break worth billions
U.S. taxpayers are about to become majority shareholders in GM, acquiring more than 70 percent of the company in exchange for billions of dollars in aid.
Under ordinary circumstances, an ownership change like that would trigger a big tax hit for a money-losing corporation like GM, severely limiting its ability to use current losses to lower future tax bills.
But these are not ordinary times. The Treasury Department has, in effect, suspended long-standing tax rules for companies that receive bailout money, providing benefits not available to firms that don't receive government help. New Treasury rules could provide GM billions in tax breaks once it becomes profitable and starts paying taxes again, which could be years away.
Treasury officials say they are reluctant GM owners and hope to sell the government's share in the company as soon as possible. When they do, the tax breaks could become a lure for potential buyers.
For tax purposes, it's like the government's ownership never happened, said Robert Willens, a corporate tax accountant in New York.
The new tax rules, issued over the past few months, are part of the government's massive effort to prop up struggling financial firms and the automobile industry. The goal is to help companies like GM eventually become profitable, so the government can sell its stake, get back its investment and get out of the carmaking business.
There is, however, no time frame for such a turnaround and no guarantee it will even happen.
?All of this is unprecedented,? Willens said. ?No one even dreamt that this could happen before.?
Tax law allows money-losing corporations like GM to use current net operating losses to offset future taxable income, reducing their tax bills for up to 20 years after the losses occur. Corporations can also use current losses to offset profits from the previous two years, getting a tax refund. But that's not an issue for GM, which last posted an annual profit in 2004.
GM reported that in 2008 it could claim about $12.3 billion in future U.S. tax savings, based on losses and tax credits accumulated in the past few years, according to a regulatory filing. This year, the company has already posted a $6 billion loss for the first three months, which would add to its future tax savings.
The value of those savings, however, would be dramatically reduced if another company takes over GM. Decades ago, Congress severely restricted the ability of money-losing companies to cash in on the tax breaks if they are taken over by other companies.
The goal was to discourage corporate takeovers for the principle purpose of avoiding taxes, Willens said.
The government, however, doesn't want to penalize firms for participating in the taxpayer-financed bailout, so the Treasury Department has issued several notices in recent months creating exceptions for firms that get bailout money. Under the new rules, corporations can keep their tax breaks if the government becomes a majority owner.
?Why would we want a corporation paying taxes to the government when we own it?? said Nick Gruidl, managing director at the accounting firm RSM McGladrey.
The notices have the full effect of a law, even though they aren't reviewed or approved by Congress. They also apply to banks and other financial firms receiving money from the Troubled Asset Relief Program, or TARP.
But the new rules don't apply to corporations taken over by other private companies. That means Chrysler could lose the value of its tax write-offs in its merger with Italy's Fiat Group SpA, depending on the structure of the company after it emerges from bankruptcy protection, tax experts said.
GM is expected to file for bankruptcy protection as early as Monday, under a government proposal aimed at reorganizing the company so it can eventually return to profitability.