TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, October 16, 2012

WSJ: Taxpayers Will Lose Twice if Bankruptcy Court Allows Solyndra Insiders to Harvest $975m of NOLs

SolyndraFollowing up on Friday's post, IRS Says ‘Tax Avoidance’ at Heart of Solyndra Bankruptcy Plan:  Wall Street Journal editorial, The Solyndra Memorial Tax Break: How Energy Passed Out Tax-Loss Credits That Mean Taxpayers Will Pay Twice for Failure:

Perhaps you thought the Solyndra scandal amounted to a $535 million government loan that will never be repaid. No such luck. In the latest twist, Solyndra's investors could be rewarded for their failure, thanks to a tax benefit the Administration handed out in a bid to evade political accountability.

The IRS exposed this double Solyndra debacle last week in the U.S. bankruptcy court for the district of Delaware, which is unwinding the defunct solar-panel maker. The IRS formally objected to Solyndra's Chapter 11 reorganization plan, claiming its "principal purpose is tax avoidance."

Having sold off its manufacturing plant, fired nearly 1,000 workers and proven the non-viability of its business model, Solyndra's only real assets are what the IRS calls "tax attributes." These are between $875 million and $975 million in net operating losses that can reduce future taxable income, which the IRS values as high as $350 million. Before it went toes up, Solyndra also accumulated $12 million in solar tax credits that can reduce tax liabilities dollar for dollar.

Tax-loss carry-forwards are routine but worthless if a company can't turn profits to pay taxes on. So Solyndra's owners are asking the court to liquidate the rest of the business and contribute a net $6.7 million to pay off creditors for pennies on the dollar. A holding corporation will then emerge from Chapter 11 that won't make products or employ workers, but it will get the Solyndra tax offsets.

The dummy company is owned by Argonaut Ventures I LLC, Solyndra's largest shareholder and the primary investment arm of the George Kaiser Family Foundation. Mr. Kaiser is a Tulsa oil billionaire who bundled campaign checks for Mr. Obama in 2008. ...

The larger problem is Mr. Obama's economic model that seeks to picks winners and losers and misallocates capital. That's bad enough. But does he have to stick it to taxpayers twice for the same failed investment?

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Section 382 anyone?

Posted by: Anonymous | Oct 16, 2012 11:18:56 AM

Oh, there's no problem in preserving NOLs for Solyndra executives, who are Obama campaign bundlers, and for maintaining high wages and pension funds for GM union activists, who support long as Obama is President, who doesn't mind helping "the rich" if they're "his rich."

TaxProf Blog -- WSJ: GM's Special $45 Billion NOL Provides Lucrative Tax Shelter

The U.S. bailout of GM, in which the Treasury took a 61% stake in the company, ordinarily would have resulted in GM having such limits put on its tax benefits, according to tax experts. But the federal government, in a little-noticed ruling last year, decided that companies that received U.S. bailout money under the Troubled Asset Relief Program won't fall under that rule.

TaxProf Blog -- Rasmusen Presents The Lawlessness of the GM NOL Ruling

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.

Posted by: Woody | Oct 17, 2012 9:27:36 AM