The WSJ's editorial on Obama's GM bailout includes a shout out to my friend and coauthor Mark Ramseyer and another friend Eric Rasmussen:
In a 2011 working paper, J. Mark Ramseyer of Harvard and Eric Rasmusen of Indiana University argue that by manipulating corporate tax rules by fiat, "Treasury gave the firm (and its owners, including the UAW) $18 billion more in assets." Thus a Democratic Administration gave "a massive tax benefit to one of the party's biggest supporters." The other problem is that the move put Ford and GM's other competitors at a disadvantage, as bailouts always do.
The paper to which the Journal refers is Can the Treasury Exempt its Own Companies from Tax? The $45 Billion GM NOL Carryforward (July 1, 2011).
Abstract: To discourage firms from trying to buy and sell tax deductions, Sec. 382 of the tax code limits the ability of a firm that acquires another company to use the target's "net operating losses" (NOLs). Under the Troubled Asset Relief Program (TARP), the Treasury lent a large amount of money to GM. In bankruptcy, it then agreed to trade that debt for stock.
GM did not make many cars anyone wanted to buy, but it did have $45 billion in NOLs. Unfortunately for the firm, if the Treasury now sold the stock it acquired in bankruptcy it would trigger those Sec. 382 NOL limitations. Suppose the newly reorganized GM did start making cars that consumers wanted. It would be able to use only a modest portion of its old NOL’s -- if any.
Treasury "solved" this problem by issuing a series of "Notices" in which it announced that the law did not apply. On its terms, Sec. 382 states that the NOL limits apply whenever a firm's ownership changes. That rule, the Treasury declared, did not apply to itself. Notwithstanding the straightforward and all-inclusive statutory language, GM would be able to continue to use its NOLs in full after the Treasury sold its stock.
The Treasury had no legal or economic justification for these Notices, which applied to Citigroup and AIG as well as to GM. Nonetheless, the Notices largely escaped public attention -- even though they potentially transferred substantial wealth to the most loyal of the administration's supporters (the UAW). That it could do so illustrates the risk involved in this kind of manipulation. We suggest that Congress give its members standing to challenge such manipulation in court.