GM may be avoiding death with Uncle Sugar’s $13.4b (and counting) bridge loans to nowhere. But it’s not doing so well on the tax front. The Detroit News reports that GM’s been “quietly” lobbying Uncle Sam to drop a $7b tax bill. Without success. OK, folks, hang onto your green shades. “The tax liability stems from GM’s plan to reduce its $62 billion debt to $30 billion by offering bondholders equity in exchange for existing debt. GM also wants to use stock rather than cash to fund half of its contributions to a retiree health care fund to be managed by the UAW. But the debt swapped for equity could be considered income for tax purposes and GM’s ability to offset that income with prior-year losses, a common accounting practice, is sharply limited under a complex provision of the 1986 tax code that applies when a company changes ownership. The code was written to limit the ability of companies to buy other money-losing companies just to avoid paying taxes. GM plans to issue new stock to bondholders and the UAW and has already issued the government warrants, which may trigger a ‘technical ownership change,’ GM said in its memo.” And thus, a $7b tax bill. Now, let’s define chutzpah.
Chutzpah is when you kill your parents and then plead for mercy from the sentencing judge because you’re an orphan. Alternatively, “If Congress does not act quickly, the investor disclosures required to complete the debt to equity conversion will need to discuss the potential significant income tax consequences… which could further complicate and jeopardize the planned company restructuring,” GM’s memo said.
God forbid we should jeopardize GM’s restructuring by making them pay tax for it! Even worse, the DetN has completely removed itself from the spade-calling business.
“A legislative fix to GM’s tax issue was included in a $25 billion bailout bill that passed the House in December, but died in the Senate. Since the Treasury used funds from the $700 billion Wall Street rescue to aid GM, no fix was included.”
Fix? How about tax waiver? Or tax dodge? Or a non-loan addition to Uncle Sugar’s contribution to GM’s survival? Anyway, this whole bailout buffet thing has moved well past farce, deep into the realm of tragi-comedy.
“It’s smart for GM to ask for this,” [associate professor of accounting at the University of Michigan’s Ross School of Business Michelle] Hanlon said. “It would be silly for the government to loan them billions and then make GM give most of it back.”
Silly?
If we are going to bail them out, let’s just do it and get it over with. What’s another $7b?
Yet another example of how these bailouts will cause the govt. to completely rewrite half of the corporate accounting/corporate governance book. All of those laws on the books designed to protect the US from all sorts of accounting tricks will now be overturned to allow new, government sponsored accounting tricks!
With Ch. 11, none of this happens. The judge decides who gets what debt and how much ;new’ equity everyone receives.
This isn’t the last of these little snafus that go along with a call-it-anything-you-want-just-don’t ever-call-it-a-bankruptcy.
Corporations paying tax is one of the dumbest shell games going on in the Internal Revenue code. It hides the true cost of goverment while penalizing the consumer in the end. Repeat after me! Corporations DO NOT PAY TAXES. They may write a check, yes. But they don’t actually pay taxes. They pass that cost onto the ignorant voters who allowed the tax laws to be written.
Owners and customers ultimately pay all taxes.
We’re such a jealous lot, wanting to tax corporations so that we feel better; even when it is proven to hurt us far far more than any benefits provided…we really are getting what we so richly (poorly?) deserve.
No bailout should even be discussed without first creating a bill to absolve the tax liability of the bailee. Or better yet, eliminate all income taxes on corporations.
After all, if we’ve decided that they’re “too big to fail,” then why make them pay any taxes? It’s just a stupid way of routing more money into and out of government bureaucrats’ hands. What leaves is always less than what they started with.
I blame it on government schools, but whatever the reason, it’s obvious that we have become very foolish in the last two generations or so.
Sometimes I think it’s amazing we don’t pee on ourselves, or get eaten by our own housecats. It’s even more wonderous that we are able to produce offspring.
I must admit that it is remarkable the scrutiny GM comes under. Truly no stone is left unturned. Every conceivable angle is analyzed. I guess it is warranted though.
The tax laws have many strange side effects.
Say you bought a house two years ago for $200,000, put 10% down and borrowed $180,000. Say that same house has dropped in market value to $120,000; and that you lost your $60,000/year job and could only replace it with a $40,000/year job. That scenario is not far fetched.
Now, assume you have a reasonable bank which would rather have half a pie instead of nothing. So, they negotiate with you to write down your loan to $120,000 and set up new payments based on this new amount.
Ding, you own income taxes on the $60,000 write down! Said $60k doesn’t exist. You never had it and don’t have it now. Where are you going to come up with the cash to pay taxes on money you never actually got?
John Horner:
Oh, that $60k exists, all right.
– It existed as home equity when the home owner first bought the house. That’s asset the owner could have borrowed against.
– It will show up on the bank’s bottom line as a write-down.
– You owed $180k, and now you owe $120k. In effect, the bank gave a gift of $60k to the owner. How is this different from income tax on gifts from any individual (over $10k)?
@ RF
At what point does Ford cross-over from “supporter” to Bailout critic? It seems to me this additional example of (possible) favourable treatment of GM/Chrysler will ultimately make it impossible for Ford to be viable. With or without the claimed supply chain implications.
I guess if you’re not GM/Chrysler you can just be happy to keep a low profile, while Hurricane Bailout passes.
ZoomZoom: “I blame it on government schools, but whatever the reason, it’s obvious that we have become very foolish in the last two generations or so.”
BS. The local high school spends about $6500/student.
There are two nearby private high schools that are better in many ways – but by no means all – and they charge a mere $12K/student (plus whatever they’re getting in alumni gifts). Of course, it helps that, in addition to twice the financial support per student, they get to pick their students. No special needs kids need apply.
http://www.washingtonpost.com/wp-dyn/content/article/2008/11/09/AR2008110902155_pf.html
“Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would then use the acquired company’s losses to offset their gains and avoid paying taxes.”
It seems the Treasury gutted it (illegally?) rendering it null and void with a terse 5-sentence memo while we were being blindsided with the bailout bill.
So GM’s debt swap tax bill will probably automagically disappear!
I blame it on government schools, but whatever the reason, it’s obvious that we have become very foolish in the last two generations or so.
Yes, that is something that an old person would say.
Poke, poke.
John Horner:
Oh, that $60k exists, all right.
– It existed as home equity when the home owner first bought the house. That’s asset the owner could have borrowed against.
When the owner first bought the house, it was worth 200K. His equity in the house was 20K. That is, it is what he himself owned in the house. Two years later, his equity was the amount of principal he paid off, along with any increasing value of the house. Since the value declined he never had 60K in equity. At least that is how I understand it. Please explain?
@KixStart
http://www.reuters.com/article/domesticNews/idUSN2438214220070524
Don’t know where you are, but some of the worst schools in the country (D.C.) spend $12,979/student/year.
To ZoomZoom: The ability to procreate is not a higher-function, this will only cease well after the self-peeing phase ends.