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Preferential Treatment': GM Scores 'Sweetheart' Tax Deal

"A lot of things were done differently here."

Image source: AP Photo/David Zalubowski

Thanks to a "sweetheart" tax deal worked out between General Motors and government, the Detroit auto manufacturer won't have to pay $45.4 billion in taxes on future profits, according to recent reports from the Wall Street Journal and CNN Money.

As it turns out, not only did the feds give the failing company billions of taxpayers dollars, all while firing executives and replacing them with government-backed officials, but they also gave what some call "preferential treatment" in the form of tax breaks, according to documents filed with federal regulators.

“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,” Randall Smith and Sharon Terlep write in the WSJ.

“In GM's case, the losses stem from years prior to when GM entered bankruptcy,” the report adds.

Normally, when a goes through major restructuring (especially at the executive level), restrictions are put on certain tax benefits, according to tax analysts.

“GM even warned it expected to lose those tax breaks shortly before filing for Chapter 11 protection,” CNN Money reports.

Therefore, because the feds bailed out GM and took a 61 stake in the company, those tax benefit restrictions should have applied to GM, right?

“Should” is the operative word here.

“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 WSJ reports.

Simply put, the automaker was allowed to keep most of its tax breaks, essentially receiving a multi-billion "gift" from the government, as CNN Money puts it.

"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, Robert Willens, a New York tax consultant, told the WSJ.

So where did that $45.4 billion figure come from?

"The $45.4 billion in future tax savings consist of $18.9 billion in carry-forwards based on past losses," the Journal reports, "The other tax savings are related to costs such as pensions and other post-retirement benefits, and property, plants and equipment."

How do the feds explain why bailed out companies are exempt from the restructuring/tax benefit rule?

“The government's rationale…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,” the Journal reports.

Some insist GM was given special treatment.

"A lot of things were done differently here," Heidi Sorvino, head of the bankruptcy practice at Lewis Brisbois Bisgaard & Smith, told CNN Money, adding that the tax break is further proof that the “rescue” of GM was unlike anything anyone has ever seen.

Treasury Department officials disagree with Miss Sorvino's analysis and insist GM being allowed to keep its various tax breaks was not special treatment.

GM's ability to hold on to its pre-bankruptcy tax breaks "depends on the application of long-standing tax rules to GM's particular facts. The Treasury Department did not publish any guidance during the economic downturn that changed these rules either in general or for corporations that received government assistance," Treasury spokesman Mark Paustenbach said.

But many believe GM was allowed to keep the tax breaks because it "made it easier to sell shares,” or so says Linus Wilson, finance professor at the University of Louisiana at Lafayette.

Not a bad break for a company that made a $1 billion profit in the last quarter, according to the Detroit Free Press.

One last thing…
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