New GM Is Old GM . . . for Tax Purposes
The new GM will be allowed to claim a tax benefit from some $16 billion of net operating losses carried over from the old company, allowing it to avoid paying taxes on future profits, perhaps for years. The issue is a common accounting practice called ?tax-loss carry forward,? under which businesses can write off losses against future profits for up to
20 years.The losses are considered important assets on any company?s balance sheet, but they typically don?t survive bankruptcy. Under a longstanding section of the tax code passed to prevent companies from buying other companies for the purpose of assuming their tax losses, a business that undergoes a change in ownership usually has to forfeit the old company?s net operating losses.
That would normally be the case for GM, except that the government is its new majority shareholder. While transfers of net operating losses during bankruptcy can sometimes be handled through reorganization plans, that was not what the Obama Administration did. When GM filed for bankruptcy, it chose a so-called ?363 sale,? which allows the company to take a fast track to the sale without the due process protections usually provided to creditors.
According to Duke law professor Jeffrey Coyne, nothing in the tax code permits the preservation of tax attributes like net operating losses in the context of an outright sale like GM?s. ?The result seems to retain the cake while eating it,? he says. ?They get to sell quickly and without the many procedural protections because this is not a plan. They get to keep the [net operating losses] using a provision that requires the transfer to happen as part of a plan.?
Some insist this doesn?t matter because the government owns 60.8% of GM, and so any tax collection would merely move funds from one federal pocket to another. But the other 39.2% belongs to others who will also benefit from the special exception. And who might that be? Well, after the feds, the biggest stakeholder in the new GM is the United Auto Workers retiree health-care trust, which holds 17.5%. GM says the tax-loss exception will help its ?cash position to the benefit of all parties,? and no doubt the tax shelter makes the company more valuable to investors. But it also ensures the company has more cash on hand to pay union retirees, who will vote in 2012.
Congress limited tax-loss carry forwards because it concluded they were being abused to unfairly erase tax liability. If the Administration thinks that?s bad tax policy, it ought to propose changing the rule for all companies, not merely for those it owns. Instead, it has handed a $16 billion tax gift to GM that isn?t available to Ford or other auto makers that didn?t take bailout cash. It?s one more example of the way the political class has stacked the deck in favor of Government Motors.