Small Favors: GM Bankruptcy Could Mean Tax Boon

The company would have no limits on the amount of losses it could use to shave its taxable income, according to a report issued today.
David KatzMay 28, 2009

Amid the gloom of General Motors’ looming bankruptcy and U.S. taxpayers’ possible acquisition of 70% of its shares, there might be a tiny glow. It’s likely that the portion of the company’s huge losses that it can apply to offset taxable income will be limitless, a prominent corporate tax expert thinks.

That’s because “the seismic shift in the ownership of GM’s stock should not produce an ownership change,” according to a report issued by Robert Willens, head of Robert Willens LLC, a tax consultancy. And it’s an ownership change that would trigger limits on the company’s ability “to freely use its losses to offset otherwise taxable income,” he writes.

For the purposes of tax law, that’s an ownership change that happens if at least one shareholder that owns 5% or more of the company’s stock increases its ownership by more than 50 percentage points. Called “loss companies,” the companies at issue are ones that use at least part of their net operating losses (NOLs) to offset current taxable income, thus lowering their corporate tax bills.

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Indeed, the IRS substantially curbs the amount of NOLs that can be used when there’s a change of ownership. In that way, the government prevents corporations from buying loss companies just to latch on to NOLs for their accompanying tax benefits. The NOL limitation rule is found in Section 382 of the tax code, which provides a definition of change of ownership for this purpose, as well as how the NOL limits work.

Besides the U.S. Treasury Department’s acquisition of 70% of  GM’s post-reorganization stock,  the company’s voluntary employee benefit association, or VEBA, and other company creditors would reportedly get 17.5% and 12.5%, respectively, according to Willens, who writes a weekly tax column for

In this case, of course, Treasury would be boosting its prior percentage of ownership – which was zero – by much more than the 50-percentage-point limit, he noted. “Would this dispersion of stock give rise to an ownership change?” Willens asks. “The answer would appear to be no. Accordingly, no limitations should be placed on the amount of GM’s taxable income that can be offset by the losses it sustained prior to the foregoing issuance of its stock.” 

That’s so because on April 13, the IRS provided guidance to corporate issuers about Treasury’s acquisition of shares under its Automotive Industry Financing Program clarifying that bailout plans can’t limit the taxable income of companies benefiting from them, according the to consultant.

Willens cited the portion of the guidance that says, for purposes of Sec. 382, the ownership of any shares by Treasuryshall not be considered to have caused the Treasury Department’s ownership in the issuing corporation to have increased over its lowest percentage owned on any earlier date.