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JPMorgan Chase & Co. (NYSE: JMP) is close to a deal that gives the financial giant a $1.4 billion tax refund, even though it received a $25 billion bailout in 2008. JPMorgan is the latest company to take advantage of the tax refund, which is giving billions to everyone from retailers and airlines to energy companies and homebuilders.
A little-known provision in a November addition to the 2009 stimulus bill allows companies to apply losses from 2008 and 2009 to taxes paid up to five years ago, expanding the usual two-year limit. The "net operating loss carryback" extends the timeframe into years when companies were profiting and had to pay in each tax season.
Although companies that received Troubled Asset Relief Program (TARP) aid are not eligible for the tax break – and JPMorgan nabbed a hefty $25 million of those funds – JPMorgan is gunning for part of Washington Mutual Bank's $2.6 billion refund. JPMorgan bought the financial institution's banking operations for $1.9 billion in September 2008, after WaMu became the biggest bank failure in U.S. history and was seized by the Federal Deposit Insurance Corporation (FDIC).
JPMorgan has been discussing the fund distribution with the FDIC and the bank's bondholders. In the proposed agreement, $1.55 billion of the total refund would be placed in a FDIC receivership and held for legal claims; JPMorgan could tap into $1.4 billion of those funds, hoping to offset costs incurred from lawsuit settlements associated with WaMu's mortgage business.
JPMorgan argues the TARP aid it received is irrelevant because the refund is based on taxes paid by WaMu, and the $1.4 billion would be held in a receivership, not given to JPMorgan directly.
The spending habits of TARP-aid recipients have been closely watched, and many have been criticized for spending too much on executive bonuses. The White House "pay czar" Kenneth Feinberg announced Tuesday he would further examine executive compensation at TARP-recipient firms, including JPMorgan, which is known for paying generous bonuses.
Turning Losses Into Profit
More than 250 companies have applied for tax refunds thanks to the loss carryback provision, which the Joint Committee on Taxation estimated would give back $33 billion to companies in its first year. The tax break encouraged some companies to take intentional hits in 2009, according to The Wall Street Journal.
"We were able to dispose of lots, generate cash, take advantage of [the tax break], improve our balance sheet. It was a very nice move for us," KB Home (NYSE: KBH) Chief Executive Officer Jeffrey Mezger told The Journal.
KB Home sold land at a loss last year but pocketed a $192 million refund.
Homebuilders got the biggest lift from the deal as they suffered some of the biggest 2008-2009 losses. The tax break allowed some to post profits in last year's third and fourth quarters.
There is no stipulation restricting how companies spend their refunds, but the cash has kept some companies afloat. Retailer Liz Claiborne plans to use its $167 million refund to open 25 stores instead of closing 10-20.
A Congressional Budget Office study released in 2009, prior to the stimulus package, claimed the tax break would generate no more than 40 cents per each refunded dollar to boosting gross domestic product (GDP). The provision was labeled less effective than others because it would be costly for the government and contribute more to companies' revenue than overall economic recovery.
Although tax refunds can bring payments to creditors, their effect as a stimulus measure is questioned when given to fallen companies like Circuit City Stores, Inc. Circuit City qualifies for an $86 million refund; it filed for bankruptcy in 2008 and closed all its stores in 2009 according to The Journal.
News and Related Story Links:
- The Wall Street Journal:
Tax-Break Battle Flares
Pay czar takes aim at all TARP takers
- Money Morning:
U.S. Banks Refuse to Detail How They're Spending Federal Bailout Money
- Money Morning:
As Stimulus-Package Debate Continues in Congress, New-Look Bank Bailout Plan is Set to Debut This Week
- Money Morning:
Obama Administration Wants New "Pay Czar" and Shareholder Vote to Reign in Executive Compensation