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Saturday, March 3, 2012

Treasury Department Defends Waiver of NOL Rules for AIG, GM

Following up on my prior posts (links below): Emily McMahon (Acting Assistant Secretary for Tax Policy), Just the Facts: Government Investments in Private Companies, the Tax Code and Taxpayers’ Interests:

Recent press reports have glossed over a number of central facts when describing how federal tax laws were applied to companies that received government assistance during the financial crisis. These stories present an incomplete picture. Here is why:...

The ability to carry forward NOLs ... could encourage profitable businesses to acquire failing companies with significant tax losses in order to lower their own tax bills. This type of trafficking in tax losses is not good for the economy or fair to other taxpayers. Accordingly, in 1986, Congress enacted § 382. Section 382 prevents companies from evading taxes by buying companies with significant tax losses. More specifically, it limits the ability of an acquiring company to use the NOLs of a target company to offset its own revenues when calculating tax liability. Over the past 30 years, § 382 has been an effective tool in preventing corporate raiders from evading taxes. 
In the fall of 2008, the financial crisis threatened to put the global economy into a second Great Depression.  When the Bush Administration and the Federal Reserve began making investments in private companies to prevent their disorderly failures and to protect the broader economy, Treasury officials recognized that these investments raised a novel tax question—did the government’s purchase or sale of private stock trigger § 382 and limit the NOLs of those companies? In this unique context, Treasury concluded that applying § 382 made no sense. Again, the provision originally was intended to prevent trafficking in tax losses. The government, of course, is not a taxpayer and has no interest in sheltering taxable income. It certainly did not invest in private firms to acquire NOLs. The government reluctantly made temporary investments to help stabilize the economy and to prevent a global financial collapse.       
For these reasons, Treasury determined that guidance was necessary to clarify the scope and applicability of § 382. Beginning under the Bush Administration in late 2008, Treasury issued a series of IRS Notices regarding § 382. In general terms, the Notices provide that § 382 does not apply to the government’s investments—both its purchase and, within strict limitations, its subsequent sale of shares in private companies.  
This conclusion is fully consistent not only with the purpose of § 382, but also with the government actions to respond to the financial crisis. The government had made large investments of taxpayer dollars to prevent corporate failures from causing a collapse of the financial system and resulting in even more severe harm to Americans. Allowing those companies to keep their NOLs made them stronger businesses, helped attract private capital, and further stabilized the overall financial system. It would have been counter-productive—and perhaps irresponsible—to undermine the stability of those same institutions, at the height of the financial crisis, by imposing a tax code provision that was never intended to apply in this context. Instead, the IRS Notices interpreted the law in the best interest of taxpayers.

Prior TaxProf Blog posts:

(Hat Tip: Ed Kleinbard.)

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We've got 'em worried!

Posted by: Eric Rasmusen | Mar 5, 2012 7:56:33 AM

That is rubbish. Like most regulations, Section 382 prohibits far more than its target activity ("trafficking in tax losses"). Private citizens don't get waivers from regulations when a "unique context" means the prohibition "makes no sense".

Posted by: Yo Gabba Gabba | Mar 5, 2012 11:41:31 AM