January 30, 2009 at 12:22 pm

GM lobbies Congress to avoid tax

Automaker wants to add provision to stimulus bill to eliminate expense that could cost as much as $7B.

Stabenow )

WASHINGTON -- General Motors Corp. is quietly lobbying Congress to help the automaker avoid a multibillion-dollar tax bill the company faces as part of its $13.4 billion loan agreement with the federal government.

The Detroit automaker has been urging members of Congress to add a provision to the $819 billion economic stimulus bill to eliminate the tax liability, which officials said could cost GM as much as $7 billion, and jeopardize the company's restructuring.

GM circulated a proposed fix to Congress, but the House passed the stimulus bill without the provision on Wednesday.

"In essence, a large portion of the federal loans may have to be used to pay income tax and would be immediately returned to the government, certainly a result not intended," GM said in a two-page memorandum distributed on Capitol Hill and obtained by The Detroit News.

Provisions of the loan agreements "could result in a significant multibillion-dollar tax liability at a time when auto companies need these funds to restructure their business operations," the memo said.

GM spokesman Greg Martin declined to comment Thursday.

As a condition of the $13.4 billion loan package, GM must file a viability plan with the U.S. Treasury Department by Feb. 17 and show significant restructuring progress by March 31. GM has already received $9.4 billion and is to get another $4 billion on Feb. 17. The terms of the loans require GM to seek concessions from key stakeholders, including debt holders and the United Auto Workers union.

The tax liability stems from GM's plan to reduce its $62 billion debt to $30 billion by offering bondholders equity in exchange for existing debt. GM also wants to use stock rather than cash to fund half of its contributions to a retiree health care fund to be managed by the UAW.

But the debt swapped for equity could be considered income for tax purposes and GM's ability to offset that income with prior-year losses, a common accounting practice, is sharply limited under a complex provision of the 1986 tax code that applies when a company changes ownership. The code was written to limit the ability of companies to buy other money-losing companies just to avoid paying taxes.

GM plans to issue new stock to bondholders and the UAW and has already issued the government warrants, which may trigger a "technical ownership change," GM said in its memo.

GM issued warrants to the Treasury equal to nearly 20 percent of GM shares in exchange for the loans.

JPMorgan said Thursday that bondholders could get 20 percent of GM's equity.

GM also noted that without action on the tax issue, the automaker would have to publicly disclose the potential liability.

"If Congress does not act quickly, the investor disclosures required to complete the debt to equity conversion will need to discuss the potential significant income tax consequences... which could further complicate and jeopardize the planned company restructuring," GM's memo said.

A legislative fix to GM's tax issue was included in a $25 billion bailout bill that passed the House in December, but died in the Senate. Since the Treasury used funds from the $700 billion Wall Street rescue to aid GM, no fix was included.

Hilarie Chambers, chief of staff to Rep. Sander Levin, D-Royal Oak, who is on the House tax writing committee, said members were talking with Treasury officials about a solution. "It needs a remedy," she said.

If an administrative solution doesn't work, they will consider a legislative solution. But Chambers said the stimulus bill may not be the right vehicle to make the fix.

The office of Sen. Debbie Stabenow, D-Lansing, a member of the Finance Committee, said "she is working with the administration to come up with the best way to address this issue that is of importance not only to Michigan, but the country's manufacturing economy as a whole."

Michelle Hanlon, an associate professor of accounting at the University of Michigan's Ross School of Business, said the provision was designed to keep companies from simply buying other companies to avoid paying taxes.

"It's smart for GM to ask for this," Hanlon said. "It would be silly for the government to loan them billions and them make GM give most of it back."

Chrysler LLC has received $4 billion in government loans. Because the Auburn Hills automaker is privately held, it does not face the same tax issue.

You can reach David Shepardson at (202) 662-8735.