Monday, February 2, 2009


So the word is out that GM is worried about the tax it will incur because of the US government mandated reduction in GM's debt. Check out this small piece from Bloomberg.

Here is how it works. Let's say GM exchanges $10 billion of stock for $27 billion of unsecured bonds. That results in a gain of $17 billion. This gain is taxable and in this example would result in taxes of around $7 billion.

So, by complying with the US government's requirement that GM reduce its debt and union obligations, GM will incur significant tax obligations that it can't pay. I don't know why this is a surprise. This is the way it works.

Years ago, there was a stock for debt exception in the IRS code that would have not taxed the gain on the stock for debt swap. However, that was changed and such a gain is currently taxable. I would have thought that this would have been dealt with at the time of the auto bailout loans.

It does not make sense for this tax treatment to be changed without proper consideration. It would seem that the answer here is for GM to pay the taxes on the gain and for Congress then to provide for the tax payment to be rebated back to GM. Obviously this is an issue for Chrysler also.

Stay tuned for more.

Cheers, Mike

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