Monday, February 14, 2011
A corporation that buys property does not thereby acquire the right to reduce its corporate income tax by deducting the seller’s past years’ losses against its own future income. The tax code contains express provisions to rule out various complex ways of doing that, so as to prevent assets from being purchased for the sake of the net operating loss carryovers. After the government joined private parties in purchasing most of General Motors’s property, the Secretary of the Treasury issued “the EESA Notices” which said that the usual tax rules would not apply and the purchasers could deduct $45 billion from their future corporate income, a tax asset worth an estimated $16 billion. The notice gave no justification for the exception, except that the TARP act gives the Secretary authority to do what is “necessary or appropriate to carry out the purposes of EESA.”
This paper argues that there is no legal or economic justification for the EESA Notices, even aside from the issue of whether the government should have bought the GM property. The scant attention paid to the large wealth transfer of the EESA Notices shows the danger of allowing this kind of tax ruling, especially in comparison to the widespread criticism of the government purchase itself, an action which may well have a much smaller cost given that the government’s previous loans to GM were already sunk.