In the terrific conference on the Constitution in the Financial Crisis that Co-Conspirator Todd and I were privileged to attend last week at Stanford Law School, one of the panelists (this was a panel looking at the peculiar incentives and disincentives created for corporate governance by having government as a controlling shareholder, as in GM) pointed out something I had completely missed and apparently a number of other people in that highly expert audience, too. A WSJ article of November 3, 2010, by Randall Smith and Sharon Terlep, points to a little-noticed IRS ruling on GM’s tax-loss carryforwards from years prior to the bailout. The amount at issue is potentially $45 billion. (Thanks to commenters for links to ruling.)
Although ordinarily a company in the midst of major restructuring would have limits on its ability to use the carryforwards – and ordinarily the Treasury’s 61% stake would trigger such limitations – the IRS has ruled that companies receiving TARP bailout funds will not be subject to the restructuring limits. (Someone can correct me, since is from memory (one of my first assignments in practice back when I started as a tax lawyer was on this very question, but I have long since dropped out of corporate tax), but I believe this is a classic section 382 problem (corrected per comment).) The WSJ story puts the argument and counter-argument over the ruling this way:
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.
The government’s rationale, said people familiar with the situation, is that the profit-shielding tax credit makes the bailed-out companies more attractive to investors, and that the value of the benefit is greater than the lost tax payments, especially since the tax payments would not exist if the companies fail.
In terms of the “internal” question as between GM and taxpayers, one takes the point that this can be seen as saving money for the taxpayer, or at least simply moving the losses from one pocket to another. But even granting that, in another way it’s part of the problem. The tax losses were generated under circumstances in which the losses and associated tax attributes, good and bad and with the tax code limitations as understood then, were about a company in which it was on one side and the Treasury as a revenue collection machine on the other. All of a sudden, the US government has a very different interest in the company, no longer at arms length, and so now we simply see it as a shift from the taxpayer’s right to left pockets, net position unchanged. That is true at this moment; it is not true of the situation seen over time.
But probably the biggest question the ruling raises is not about the “internal” question for GM and its USG owner, it is about its relative position to its competitors. Even if this is just shifting from one pocket to another now that the owner is the USG, it is not merely that for GM’s competitors, who have to cope with a company that, relative to them, now has in effect “found” money. Which, as the panelists at Stanford pointed out last week, is a real issue for the government as privileged competitor in the marketplace. Just saying that it doesn’t matter as between government and company is not the whole story; it is also how a change in otherwise long-standing rules changes the relative positions of competitors in the marketplace.