Paul L. Caron

Wednesday, March 27, 2013

Ramseyer & Rasmussen: The IRS Had No Authority to Waive NOL Rules for GM (and AIG, Citigroup)

GMJ. Mark Ramseyer (Harvard Law School) & Eric B. Rasmusen (Indiana University, Kelley School of Business), Can the Treasury Exempt Its Own Companies from Tax? The $45 Billion GM NOL Carryforward:

To discourage firms from buying and selling tax deductions, § 382 limits the ability of one firm to use the ‘‘net operating losses’’ (NOLs) of another firm that it acquires. Under the Troubled Asset Relief Program, the U.S. Treasury lent a large amount of money to General Motors. 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 Treasury, if it now sold the stock it acquired in bankruptcy, it would trigger § 382. Foreseeing this, the market would pay much less for its stock in GM. Treasury solved this problem by issuing a series of notices in which it announced that the law did not apply to itself. Section 382 says that the NOL limits apply when a firm’s ownership changes. That rule would not apply to any firm bought with TARP funds, declared Treasury. Notwithstanding the straightforward and all-inclusive statutory language, GM could use its NOLs in full after Treasury sold out. The Treasury issued similar notices about Citigroup and AIG.

Treasury had no legal or economic justification for any of these notices, but the press did not notice. Precisely because they involved such arcane provisions of the corporate tax code, they largely escaped public attention. The losses to the public fisc were not minor — they cost the country billions of dollars in tax revenue. That the effect could be so large and yet so hidden illustrates the risk involved in this kind of tax manipulation. The more difficult the tax rule, the more easily the government can use it to hide the cost of its policies and subsidize favored groups. We suggest that Congress give its members standing to challenge unlegislated tax law changes in court.

Scholarship, Tax | Permalink

TrackBack URL for this entry:

Listed below are links to weblogs that reference Ramseyer & Rasmussen: The IRS Had No Authority to Waive NOL Rules for GM (and AIG, Citigroup):


Actually, I had a friend at GM during the pre- and bailout period and this is old news. They were paying lobbyists from day one to get section 382 straightened out. They wanted a legislative fix but took what they could get.

This is right up there with wiping out the secured bondholders while protecting the union. Our government in action. Per the previous post, oh yes, I will trust them to calculate my tax.

Posted by: air65cav | Mar 27, 2013 1:12:47 PM

I'll add notes on financial developments since we wrote that paper:

1. GM is off the hook. It waited long enough before the government sold all its shares so that the sale would not count as an ownership change, so GM does not have to invoke the special government tax notice.

2. Citigroup is very much on the hook. It has had profit and used the IRS Notice to carry forward old losses and reduce tax.

3. AIG is close to using the tax notice. When writing the paper we didn't talk much about them because we thought they'd never make a profit, but they did make one in 2012.

4. Even more surprising, and unmentioned, I think, in our article: Fannie and Freddie not only still exist, but they exist as for-profit corporations and profitable! The basic idea is the same as for the other companies, but they rely on a different and earlier notice from 2008 that was written especially to preserve their loss carryforwards after a change in control. That notice is no more legal than the EESA ones.

5. I forget if we mentioned Chrysler, but I'm pretty sure we didn't mention Ally Financial, the old GM lending company that was also government-acquired. As I recall, both Chrysler and Ally were partnerships prior to being acquired, and so did not start with any corporate NOL carryforwards.

Posted by: Eric Rasmusen | Mar 27, 2013 1:22:17 PM