By on May 30, 2009

Previously, on Who Wants to Own an Automaker, I estimated the Motown meltdown has sucked more than $100 billion from the taxpayers’ purse. I forgot to mention the tax breaks that the Treasury Department will bestow upon “new” Chrysler and “new” GM. The Desert Sun reports that GM will benefit from Uncle Sam’s new rules for bailout recipients—’cause we don’t want a government-owned/controlled/supported enterprise to pay taxes to the government, now do we? “The notices have the full effect of a law, even though they aren’t reviewed or approved by Congress. They also apply to banks and other financial firms receiving money from the Troubled Asset Relief Program, or TARP.” Remember “these are not ordinary times. The Treasury Department has, in effect, suspended long-standing tax rules for companies that receive bailout money, providing benefits not available to firms that don’t receive government help.” The Sun says GM could avoid some $12 billion in taxes. Wait; did you spot the loophole?

But the new rules don’t apply to corporations taken over by other private companies. That means Chrysler could lose the value of its tax write-offs in its merger with Italy’s Fiat Group SpA, depending on the structure of the company after it emerges from bankruptcy protection, tax experts said.

So our prediction that Renault – Nissan may ride to the rescue of GM could fall afoul of a tax law. Unless, of course, the Treasury modifies the rule. What’s to stop them?

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29 Comments on “Bailout Watch 542: Doh! We Forgot the Tax Breaks!...”

  • avatar

    doesn’t this put Ford at an extreme competitive disadvantage? in fact doesn’t it put the entire industry at huge disadvantage?

  • avatar

    Ford will be just fine.

    You could hand GM a check for $250B with no strings and they would have the same market size, product and quality problems, they just wouldn’t need to fix them since they could make payroll for the foreseeable future.

    It’s all just various forms of welfare…

    Next time you see a GM / Chrysler executive, ask him/her:

    “So has your family ever been on welfare before? Maybe back in the early eighties? Do your kids get made fun of because they have government cheese in their lunch box?”

  • avatar

    The Sun says GM could avoid some $12b in taxes. Wait; did you spot the loophole?

    There might never be a profit shown again?

    Bring on the high profit small cars!

  • avatar
    John Horner

    “… doesn’t this put Ford at an extreme competitive disadvantage?”

    If you read the details, no. When a company looses money for a period of time and then later makes a profit, it generally gets to earn back all of the prior losses before the new profits become taxable. However, when a company or a portion of it is sold as GM is about to be then the future tax benefit of past losses normally disappears into thin air.

    The acquiring company generally doesn’t get to offset future profits with the past losses of the prior owner. My recollection is that these rules changed sometime in the 1970s or 80s, but I’m not certain about that.

    The recent treasury rule change makes it so that the acquiring company still gets to keep the old losses on its tax books. The new company will only be liable for income taxes once it earns profits in excess of the prior company’s accumulated losses.

    Ford hasn’t had a change of control, so it already has the ability to offset future profits against current and past losses for tax purposes. In other words, in this regard New GM and New Chrysler have been put on equal footing with Ford.

    The deities are in the details.

  • avatar

    When will my free Malibu be delivered?

  • avatar

    Taxpaying auto companies should sue the government on this one. This is so sickening it is beyond belief. I’m fairly certain that if I make the same money as my neighbor after deductions and whatnot that we are paying the same taxes. if not then I could make a severe case in court and win.

    I was already avoiding doing business with TARP companies based on principle. Now that will translate to a hyper-active effort including discussions with friends about how screwed it is.

  • avatar

    I’d be spitting mad if I was a competitor, but as a taxpayer I am more tolerant of corporate tax breaks than outright bailouts. At least the tax breaks are not “money sucked out of my pocket”, because the money was never in my pocket in the first place.

    One consolation is that, between now and the time both companies cease to exist, they probably wouldn’t have paid any taxes anyway due to their ongoing losses.

  • avatar
    John Horner

    “Smegley : Taxpaying auto companies should sue the government on this one.”

    On what basis? As I explained above, this leaves Ford and GM on a level playing field visa-vis income taxes going forward.

  • avatar

    As pointed out, the NEW GM will have to make a profit to take advantage of this tax break. Making a profit seems unlikely to say the least!

  • avatar
    Geo. Levecque

    The Wall Street Journal made a good comment on the New GM, says its a loser, due to having the UAW involved, expect it would have been better for GM to ditch the Unions, otherwise they will always be in the same boat, without there “Paddle”
    Union rules still apply and there looks to be a state of “War” between them like as now!

  • avatar
    Robert Schwartz

    This would be an issue if there were any chance that GM or FIATsler would make a profit in the years to come. Fortunately both companies will have been liquidated long before that happens.

    Boycott Government Motors!

  • avatar
    John Horner

    “The Wall Street Journal made a good comment on the New GM, says its a loser, due to having the UAW involved, … ”

    I suppose that means Ford is doomed as well, eh?

    VW is holding its own pretty well in the global markets these days, and it is even more heavily union influenced than GM is. VW’s unions sit on the board and have a big say in strategic decisions. VW’s unionized workers are very well paid and enjoy more vacation and better health care than GM’s US workers do.

    The UAW was a far more influential player in the 1950s than it is today, yet GM was on top of the world in the 1950s and is bankrupt today.

    Management has been the primary cause of GM’s troubles. Yes the UAW has been a contributing factor, but it is not the primary problem. Screwed up management is the primary problem with GM and has been for decades.

  • avatar

    bluecon is right.

    The price of gold does not change much; the values of currencies change against gold.

    Yesterday, it took $980 to buy once little ounce of gold, whereas the day before it too $960.

    Likewise, oil is creeping up against the dollar but the price of gasoline in the US is skyrocketing. Up 25 cents early last week, up 20 cents more about a week later, up about 5 more cents now.

    Put another way, for me on a personal basis, gas for my Prius was at $2.36 two weeks ago and it is now at $2.99 (partly because the only non-ethanol infused gasoline I can get now is Premium grade).

    Some (largely ignored) gold bugs are stating that we’ll have mixed inflation (for “stuff we need”) and deflation (for “stuff we don’t need but might want if we can afford it.”)

    Other experts are stating that it won’t be long – as in within a year – and we’ll have hyperinflation.

    With hyperinflation comes shortages, black markets, societal collapse, economic collapse…

    Little wonder (along with no longer being a nation where there is an actual rule of law to live by) foreign investors are throwing in the towel and pulling money out of the United States as quickly as they can.

    Are we having fun yet? Wait ’til about October.

  • avatar

    The price of gold does not change much

    Er, no. Had gold kept up with inflation, it would about $2,400/ oz. It’s obviously nothing close to that.

    The goldbugs lose money, and don’t understand what it is in the first place. As an investment, it’s generally a loser. It has a place as a hedge, but if you want to get absolutely creamed, as has anyone who listened to the likes of Irwin Schiff, do be sure to buy a lot of it.

  • avatar

    Well, as a conservative, I never consider tax breaks to be an expense. Tax breaks are a reduction in revenue, and provide the tax sender an opportunity to spend the money elsewhere, and then those people pay taxes. This is why tax reduction often results in more revenue for the government.

    Still, we shouldn’t be bailing out the carmakers. The tax thing is just window dressing at this point.

  • avatar

    With a stroke of pen FDR outlawed the ownership of gold. Took 40 years to reverse that. Buy a few tons of it, just keep it in a convenient location so the government can pick it up when they call.

    With TARP and rescue plans comes government favoritism. Stir in a little political pressure and you have the recipe for a disaster economically. When protected groups clamor for assistance you will see civil rights get trampled in the process.

  • avatar
    1600 MKII

    Wait! Does that mean if I buy a GM car, I get to write off the whole purchase? Now – if only I could make enough money to owe taxes…

  • avatar

    The socialist policies and the smackdown on investors and the collusion between the UAW comrades and the government is a great big not welcome sign to investors.

    Little wonder (along with no longer being a nation where there is an actual rule of law to live by) foreign investors are throwing in the towel and pulling money out of the United States as quickly as they can.

    These must be the same dumbass investors who bought all the MBS’s. Too bad they screwed the rest of us with their collective retard strength.

  • avatar

    agenthex, are you in the market right now?
    asking cause it seems that you have so much of blind faith in Obama and his socialist recovery plan.

  • avatar

    agenthex, are you in the market right now?
    asking cause it seems that you have so much of blind faith in Obama and his socialist recovery plan.

    I remember the conservative talking heads were predicting market doom and gloom right when Obama was inaugurated, and things didn’t turn out too badly.

    For followers of my investment newsletter, keep all your money on the mattress, so you can indulge your capitalist fantasies by swimming through it at night. Use paper denominations, since Scrooge McDuck’s coinage method is impossible to replicate with typical human muscle strength.

  • avatar

    Gold has gone from less than $300 to near a thousand since ’99.

    So did oil in an even shorter amount of time…

  • avatar

    It means oil was a better investment given the correct timing. was even better.

    Gold is hardly much of an “investment” at all given its limited commercial application. Ammunition is a far wiser investment if you think the end is coming. Textured vegetable protein works if you want more of a commodity.

  • avatar

    Some loser investment.

    Had you bought gold during the panic of 1981 and held it until now, you would have made a whopping return of 0.5%. (Yes, that is one-half of one percent.) Had you bought the Dow on the same day and held it through the ups and downs, you would have made 8.1%.

    Had you bought gold in April 1933 on the day that goldbugs believe lives in infamy (when FDR stopped gold hoarding) and held it, you would have made 5.2%. Had you bought the Dow on the same day and held it, you would have made 6.5%. So stocks would have outperformed gold by 25%.

    Had you bought gold in March 1976, when Bretton Woods finally crashed, and held it, you would have made 6.2%. Had you bought stocks and held them, you would have made 6.7%. Not as much of a gap there, but once again, stocks prevail.

    There is nothing magical about gold. Sometimes it’s a good trade; a lot of times, it isn’t. As an investment, it can make sense, but listening to the gold bugs is a sure ticket to mediocrity or something worse, especially if you buy it at the top.

    Sorry for the reality check, but unlike Irwin Schiff, the numbers don’t lie.

  • avatar
    Phil Ressler

    Then add into the mix that the government is running the printing presses at full speed ahead and then you will realize that the US dollar is not the place to be.

    So far, the late-Bush/early Obama initiatives to underpin the economy have not relied on printing money in amounts that can spur hyperinflation. The programs to put a floor under the economy have been primarily debt-driven while the money supply was only increased by about 10% as of a few months ago. The fluctuations in dollar value, have been mostly driven by gyrations in perception and concerns about the number of dollars in foreign hands relative to earnings here. And Treasury has already telegraphed its plans to mop up the money supply when recovery is well underway. Historically, this has been easier said than done, but prospects for following through are much better than, for example, following the money-printing spree to finance the Vietnam War and expanded social programs in the 1960s and early ’70s.

    Oil fluctuates with the dollar’s value because oil is traded in dollars. As we saw a year or so ago, even dramatic increases in oil have disproporationately mild influences on inflation compared to 35 years ago, in part because we use oil much more efficiently than then, both for materials and fuel. Plus, contrary to gloomy perception, there’s still lots of it left.

    Against a softened economy still in the neighborhood of $14T, we may have precedent-setting absolute numbers in the value of government intervention, but not relatively. It really doesn’t matter whether this automotive rescue totals $100B or $200B. If it doesn’t work, the relative amount wasted is not threatening and if it works, the value to the economy and to social stability will be far in excess of that value. So relax.

    The US will grow its way out of its current problems and the debts it is taking on. The automotive bailout is small beans. Let’s worry about how we get value out of over $1T invested in Iraq and Afghanistan. Let’s spend more on rebuilding public infrastructure neglected over the past 40 years. Folks, we’ve had bigger setbacks. As before, it is the US that will pull the world out of the extant mire, with large parallel contributions from China and India.

    The key to restructuring the US’ automotive manufacturing industry is to use crisis and cash to drive wholesale change, including the managerial talent pool and the caliber of corporate governance. It will take a strong, visionary, broker-leader to reconcile the interests and perceptions of government owners, unions, dealers, suppliers and the market’s customers, but like any other scaled, complex problem, if the will is present solutions can be found.

    And the American consumer has to get in the game, recognizing the extended self interest buying competitive vehicles when they exist in the catalogs of domestically-owned brands. We are seeing the true cost of consumer vanity that cost the D3 appropriate sales of their best products and rewarded Toyota and others for theirs which were mediocre or worse.

    It’s true, people can’t abide a temperamental car anymore. It’s too difficult, even dangerous. Yet even when the D3 fielded fully reliable vehicles, stubborn consumer perception undermined their market performance. Many will say the D3 earned continuing enmity. But markets can also function on buyers’ recognition of expanded self interest. If anyone is lamenting the government’s float of distressed auto companies, some 30% among them, at least, must look in the mirror to identify a prime component contributor to the problem.

    American consumers can mend the auto market and Detroit’s participation in it, if they want to. But individuals have to recognize the aggregate value of their buying power, even in a truncated market. My fellow Americans: If you want this to work, step up and make it happen! If you don’t, keep up old habits. I’m already eyeing my next GM or Ford purchases.


  • avatar

    PC101, I made a small fortune on gold since 2001 (still holding), and oil since 1999 (sold at $130/barrel). I’m presently buying more of both. Menno, you are dead on and well informed.

  • avatar

    Oh, and ammunition was good to me as well, up 400% in the last four years. =P

  • avatar

    I made a small fortune on gold since 2001 (still holding)

    In the long run, as I have noted above, the annual compounded returns on gold are not particularly good. This is just a fact, and one that contradicts what all of the gold bugs have been claiming.

    Buying and holding large amounts of gold and holding it into perpetuity is not particularly terrific. As a store of value, it’s not particularly reliable, as any chart will indicate. Like everything else, there is a time to buy it, and a time to sell it.

    Not to knock a good trade, but you could have made the same percentage return on Ford in the last 2.5 months than you did with gold in eight years, even before adjusting for the compounding effect.

    Gold is due to top out soon enough. Make sure that you get out at the right time.

  • avatar

    Or, I could just have easily lost it all with Ford if they went belly-up (see also GM and Chrysler). Gold would and will always still be worth something.
    I made 866% on oil (86% return per annum avg), 400% on ammo (100% return per annum avg) and 359% on gold (45% per annum avg). No stock or bond performance during those timeframes even comes close to those for more than a few months at a time (and then largely retraced or worse), and all had greater inherent risk. None of my other long-term investments (S&P stock funds, bonds, or T-bills) even came close, either.

    As for gold, just yesterday Northwestern Mutual bought hundreds of millions in gold (their first purchase in 152 years), citing it as a good hedge against asset price depreciation. I stick with Eric Janzen/ (and my own) forecast target of $2500/oz. It has been and remains a solid investment for the foreseeable future, especially given the decline in other “asset” classes (especially vs. inflation) and rampant monetary inflation on the horizon.

  • avatar

    I made 866% on oil (86% return per annum avg), 400% on ammo (100% return per annum avg) and 359% on gold (45% per annum avg).

    Yeah, ok, whatever buddy.

    I’d suggest a financial adviser who at least has a tentative grasp on math.

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