Joanna ___________________________
Q. We've talked aobut some macro issues. How about some micro issues?
A. A lot of companies have sustained losses this year. When a company has a loss, it is allowed to carry back that loss to recover taxes that they paid in prior years. If the loss is not fully absorbed through the carry-back, the company may then carry forward the loss to reduce taxes it would otherwise have to pay in future years. The idea is to make sure companies in cyclical industries do not pay more taxes over a period of years than their counterparts in more stable industries. The idea was to strike an average taxable income over a period of time. Currently the carry-back period is limited to two years. But you can carry it forward for the next 20 years to redue future taxes. In March of this year, Congress decided that for losses sustained in 2001 and 2002 -- only those two years -- companies could carry back the losses five years to recover prior taxes. That's been great for a lot of companies.
Q. I can imagine. Any in particular?
A. Lucent Technologies has received a check for $500 million in windfalls from the IRS. And they still have billions of dollars in loss carry-forwards. Literally, $6 billion of losses. The airlines qualify and UAL and US Airways have received refunds already.
Q. So things aren't as dire for some of these companies as they seem.
A. No, they never are.
Q. Any others like this?
A. Earlier in the year, the IRS issued a ruling in the case of a company that was sued by its shareholders because the company had issued false and misleading financial statements. A class-action lawsuit was instituted and a settlement payment was made to shareholders. The company asked the IRS whether or not it could get a tax deduction for that payment. If it could, the government would be in essence picking up 40% of the payout.
Q. And?
A. The IRS said it was deductible.
Q. Why?
A. The way you determine whether a payment is deductible is through the origin-of-the-claim doctrine. If the origin of a payment is a company's regular business activity, the payment is deductible. In this case, the IRS determined the origin of the claim was related to dissemination of financial information and the dissemination of financial information, false or otherwise, is a regular business activity. Ergo, the origin of the claim is a regular business activity and the payment must be deducted.
Q. So, this has implications for Enron and WOrldCom and Adelphia?
A. Every single one of them will be able to deduct. That means that you and I and the guy around the corner are going to be, in essence, bearing 40% of this settlement. Really, it's amazing to a logical person who is not steeped in tax law because from a tax point of view, it is so clearly deductible. There was just no doubt about it.
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