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BIG NEWS NEWS OUT
By Scott Thurm and ?Dan Fitzpatrick
Of THE WALL STREET JOURNAL
J.P.Morgan Chase & Co. (JPM) is nearing a deal that would allow it to benefit
from a tax refund of as much as $1.4 billion, becoming the latest company to
tap a little-noticed plank in an economic stimulus bill.
That law let companies apply losses from 2008 or 2009 against taxes paid in
the previous five years, instead of the previous two years. Failed Seattle
thrift Washington Mutual is eligible for about $2.6 billion in tax refunds,
thanks to big losses in 2008. Now J.P. Morgan, which took over WaMu's banking
operations in September 2008, is in discussions with the Federal Deposit
Insurance Corp. and bondholders about the refund.
According to people familiar with the talks, an agreement under discussion
would let J.P. Morgan claim more than half of the total, to be held in an FDIC
receivership as part of a larger settlement with bondholders. J.P. Morgan could
dip into that pot to satisfy certain claims related to WaMu's collapse.
Many other companies have benefited from the 2009 tax-refund law already.
According to an analysis of securities filings by The Wall Street Journal, more
than 250 companies have so far said they expect to get about $12 billion in
federal tax refunds under the law.
That remains a partial list. The Joint Committee on Taxation, a congressional
committee, estimated the provision would cost $33 billion in its first year.
Some critics have found the corporate-tax-refund technique wanting as a
stimulus or job-creation move. Prior to Congress's passage of the $787 billion
stimulus law in early 2009, the Congressional Budget Office looked at six
possible stimulus approaches and ranked this one least effective, saying each
corporate tax dollar refunded would generate at most 40 cents of boost to gross
domestic product. The corporate-tax-refund approach wasn't included in the big
stimulus bill early in the year, but was part of legislation in November that
extended jobless benefits.
Douglas Shackelford, a tax professor at the University of North Carolina at
Chapel Hill, said using federal tax receipts to shore up corporate balance
sheets amounts to "public borrowing to pay off private debt...It's not clear to
me that's a good use of money at all."
Home builders, hit with big losses in the housing slump, are getting the
biggest lift from the law. Sixteen builders estimate they are due refunds
totaling over $2.6 billion. The tax break propelled builders Lennar Corp.,
Hovnanian Enterprises Inc. and KB Home to profits in recent quarters.
Others that have said they are receiving tax refunds include U.S. Airways
Group Inc. and Alaska Air Group Inc.; retailers Liz Claiborne Inc., Borders
Group Inc. and Zale Corp.; and financial-services firms HSBC Holdings PLC and
Legg Mason Inc.
The law doesn't say how recipients must use the refunds. Some plan to pay
down debt or stockpile cash. Most aren't saying how they'll use the money.
Liz Claiborne said a $167 million refund it received will help it open 25
stores this year, instead of closing 10 to 20 as planned. "For us it was
transformative. It puts our company back in an expansion mode," said the
retailer's chief executive, William McComb, who had personally lobbied for the
tax break.
Oil-and-gas company Apache Corp. will pump its expected $138 million tax
refund into its multibillion-dollar exploration budget, a spokesman said.
Some companies intentionally took steeper losses last year to qualify for
bigger tax refunds. KB Home sold land at a loss in 2009, the Los Angeles home
builder told investors in January.
"We were able to dispose of lots, generate cash, take advantage of [the tax
break], improve our balance sheet," KB Chief Executive Jeffrey Mezgersaid. "It
was a very nice move for us." Booking the $192 million tax benefit propelled KB
Home to a $100 million profit in its fiscal fourth quarter ended Nov. 30.
Circuit City Stores Inc., which sought bankruptcy protection in 2008,
recently said it expects an $86 million refund. The retailer closed all of its
stores last year.
J.P. Morgan's access to the stimulus law would come even though the statute
excluded recipients of aid under the Troubled Asset Relief Program. J.P. Morgan
got $25 billion in TARP aid, which it has since repaid.
Another TARP recipient, Seacoast Banking Corp. of Florida, said Tuesday in a
federal filing is "not allowed" to tap refunds because it took bailout money.
In September 2008, J.P. Morgan bought the banking operations of Washington
Mutual Inc., which had been taken over my regulators after running up big
losses.
When Congress passed the tax break last fall, J.P. Morgan said it should be
allowed to claim the $2.6 billion in tax refunds WaMu would have qualified for
if it hadn't failed and been seized by the FDIC.
Holders of WaMu bonds have argued they should get the refunds and have
objected to J.P. Morgan's claims, citing the lifeline J.P. Morgan got under
TARP. Giving the break to J.P. Morgan would essentially grant the big New York
bank "a refund of its purchase price" for WaMu, said Renee Dailey a Bracewell &
Giuliani LLP partner who represents some bondholders.
J.P. Morgan officials have told other parties in the case the ban on TARP
recipients using the tax break is irrelevant, because it was WaMu that paid the
taxes on which the refund is based. J.P. Morgan has noted the refund wouldn't
go to it directly; it would sit in a receivership at the FDIC that also houses
the $1.9 billion JPM paid for WaMu's banking assets and deposits.
Under the deal being discussed, $1.55 billion of the refund would go into the
pot that would be used by the FDIC to cover J.P. Morgan's potential losses on
legal claims related to the takeover. J.P. Morgan can then make a claim for as
much as $1.4 billion of those funds.
J.P. Morgan wants to protect itself against exposure to mortgages that WaMu
serviced, people familiar with the matter said. The refund could help J.P.
Morgan avoid paying any damages out of its own pocket.
The potential settlement with bondholders covers an additional $11 billion in
disputed deposits and other assets. Bondholders, a federal judge and the boards
of the FDIC and J.P. Morgan must approve the proposal, along with a bankruptcy
judge.
If that happens, Washington Mutual's parent company, which filed for
bankruptcy reorganization in 2008 and is still in bankruptcy court, would apply
for a refund from the Internal Revenue Service. The agency would then decide
the final amount of the tax break.
-By Scott Thurm and ?Dan Fitzpatrick, The Wall Street Journal;
scott.thurm@wsj.com
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Journal, “the regulation involved letting companies apply losses from 2008 or ‘09 against taxes paid in the previous five years, instead of the previous two years.” WaMu had huge losses in 2008. The paper reports that JPM is in talks with the FDIC about the refund.
