Paul L. Caron

Saturday, August 1, 2009

GM's Tax Shelter Not Available to Other Car Makers (or Other Taxpayers)

Wall Street Journal editorial:  GM’s Tax Shelter:  Another $16 billion Not Available to Other Car Makers:

As everyone else’s taxes rise, one favored outfit may not have to pay federal taxes for years: General Motors. In another sweet deal from its benefactors on Pennsylvania Avenue, the government-owned car company is set to profit from billions of dollars in tax breaks not available to other businesses in the same predicament.

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. ...  According to Duke law professor Jeffrey Coyne, nothing in the tax code permits the preservation of tax attributes like NOLs in the context of an outright sale like GM’s. ...

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.

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