New GM in line for billions in tax breaks

July 12, 2009

New GM in line for billions in tax breaks


In perhaps one of the first signs indicating the advantages of government ownership, it appears the new General Motors Co. will be able to benefit from billions in tax breaks that should significantly improve the company’s value for investors.

GM is being allowed to carry forward previous losses on paper by the "old" GM in order to defer future taxes on profit.

The size and scope being allowed is unusual, accounting experts said.

Records filed with the U.S. Bankruptcy Court say GM has around $16 billion in net operating losses that could "potentially allow … new GM to significantly reduce future U.S. federal income tax liability, depending upon future operating results."

"It’s going to shelter taxes once they become profitable," said Brad Coulter, an expert in corporate restructuring at O’Keefe & Associates. "You could go two, three, five years with untaxed profit. It would be a huge benefit."

With the U.S. government owning 60.8% of GM, "it probably doesn’t make a lot of sense for them to be collecting tax on something they own themselves," said Nick Gruidl, managing director in the corporate tax practice of RSM McGladrey.

A common business accounting and tax practice allows a business to defer taxes based on net operating losses — commonly called NOLs — for up to 20 years into the future.

In bankruptcy, those deferred tax assets become limited and generally are only transferable to a new company that is 50% owned by the predecessor company, said Jeffrey Coyne, a corporate restructuring expert who teaches at Duke University School of Law.

Furthermore, he added, wiping out debt typically reduces the value of the tax breaks.

"GM will benefit from its NOLs, assuming it has income on a going-forward basis, in a way that most bankrupt companies emerging wouldn’t have," Gruidl said. "The lack of a limitation on the ability to use the NOL is what’s different here. … The amount of the NOL that they can use on a go-forward basis, there is definitely a benefit."

Said Coyne: "We’re treading on entirely new ground."

On Friday, GM’s good parts emerged from bankruptcy as a new company owned largely by the U.S. government.

The government is spending about $30 billion to restructure the automaker after already spending about $20 billion to keep it afloat.

GM reported a $30.9-billion loss for 2008; excluding onetime charges, the loss would have been $16.8 billion.

GM said its losses could "significantly reduce future U.S. federal income tax liability" and could help old GM and new GM’s "cash position for the benefit of all parties."

The U.S. Treasury has issued rulings that "basically treat the U.S. government as never having been a shareholder," the Tax Justice Digest said last month. "So if things start looking up for the troubled automaker, and the government is able to share some of its stake in the company, the GM stock will be significantly more valuable to a potential investor because of the NOLs that will save GM taxes in the future."

In addition to the Treasury, the UAW retiree health care trust holds 17.5% of new GM, the governments of Canada and Ontario hold 11.7% and old GM bondholders have 10%.

Because of the tax breaks, GM sought and won approval by the court to place restrictions on GM’s stock sale to protect the assets, which could be impacted by swings in share ownership.

Chrysler was unable to capture its net operating losses in this fashion as part of its good asset sale to Fiat because tax law governing limited liability corporations is different.

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