(Indiana University, Kelley School of Business) have sent me an updated version of their paper,
. Here is the abstract:
To discourage firms from trying to buy and sell deductions, § 382 of the tax code limits the ability of a firm that acquires another company to use the target's "net operating losses" (NOLs). Under the Troubled Asset Relief Program (TARP), the Treasury lent a large amount of money to GM. In bankruptcy, it then transformed the debt into stock.
GM did not make many cars anyone wanted to buy, but it did have $45 billion in NOLs. Unfortunately for the firm, if the Treasury now sold the stock it acquired in bankruptcy it would trigger those § 382 NOL limitations. Suppose the newly reorganized GM did start making cars that consumers wanted. It would be able to use only a modest portion of its old NOL’s -- if any.
Treasury solved this problem by issuing a series of "Notices" in which it announced that the law did not apply. On its terms, § 382 states that the NOL limits apply when a firm's ownership changed. That rule, the Treasury declared, did not apply to itself. Notwithstanding the straightforward and all-inclusive statutory language, GM would be able to continue to use its NOLs in full after the Treasury sold its stock.
The Treasury had no legal or economic justification for these Notices, which applied to Citigroup and AIG as well as to GM. Nonetheless, the Notices largely escaped public attention, though they had the potential to transfer significant wealth to loyal supporters (the UAW). That it could do so illustrates the risk involved in this manipulation. We suggest that Congress give its members standing to challenge such manipulation in court.