GM Could Be Free of Taxes for Years ($45 billion tax break)

Wall Street Journal ^ | November 3, 2010 | RANDALL SMITH and SHARON TERLEP

[reaganaut1]

General Motors Co. will drive away from its U.S.-government-financed restructuring with a final gift in its trunk: a tax break that could be worth as much as $45 billion.

GM, which plans to begin promoting its relisting on the stock exchange to investors this week, wiped out billions of dollars in debt, laid off thousands of employees and jettisoned money-losing brands during its U.S.-funded reorganization last year.

Now it turns out, according to documents filed with federal regulators, the revamping left the car maker with another boost as it prepares to return to the stock market. It won't have to pay $45.4 billion in taxes on future profits.

The tax benefit stems from so-called tax-loss carry-forwards and other provisions, which allow companies to use losses in prior years and costs related to pensions and other expenses to shield profits from U.S. taxes for up to 20 years. In GM's case, the losses stem from years prior to when GM entered bankruptcy.

Usually, companies that undergo a significant change in ownership risk having major restrictions put on their tax benefits. 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.

"The Internal Revenue Service has decided that the government's involvement with these companies, both its acquisitions plus its disposals of their stock, means they should be exempt" from the rule, said Robert Willens, a New York tax consultant who advises investment banks and hedge funds.

[zeugma]

However this seems to be a unique case. The stockholders got completely screwed. Their old stock became worthless. I can see the point where you could say that these tax credits belonged to them, and since they no longer have any interest in GM, those tax credits no longer belong to this new GM. But I don't see any efforts by the government to transfer those tax credits over to the stockholders they screwed over, and I see absolutely no reason the government should just make those tax credits disappear. It's just a multibillion dollar money grab by the government.

I think we're both mostly on the same page with this. Like you, I don't like to see the government get a windfall profit off the dissolution of the company. However, I think I don't want the union to profit from their immoral deal with the devil even more.

That makes sense, because I don't see how they could so thoroughly screw over the stock holders and secured debt holders and still have it be the same company. I really don't understand how this was remotely legal anyway.

It wasn't legal. The problem though, is that the government has guns and is willing to use them at the drop of a hat. (This is the main difference between us and them. We have guns, but aren't willing to kill indiscriminately.) Thos involved understand the level the game was being played at, and largely swallowed their losses because the understood the consequences of not doing so.