Old GM Shares: More Than Meets the Eye

GM's interest in the shares reflects the complexity of the tax consequences in the case, says Jeffrey Coyne, senior lecturing fellow at the Duke University School of Law, a management consultant who specializes in reorganizing troubled companies.

Two problems exist, Coyne says. First, under Section 368 G of the tax code, tax losses can be transferred only in connection with a bankruptcy reorganization plan. But under Section 363 of the bankruptcy code, which GM is pursuing, there is no reorganization plan; rather, there is a sale of assets to another entity. And because it involves a sale of assets, the 363 sale bankruptcy process does not normally allow for tax loss transfers.

Secondly, under tax law, tax losses can pass only to companies whose owners controlled at least 50% of the predecessor company -- not the case in the GM bankruptcy. Normally, in a Chapter 11 bankruptcy, "some or all of the (tax-loss carry forwards) can disappear if the shareholders with 5% or more ownership in either the holding company or any subsidiary make major changes in their holdings," Coyne says.

"The purpose of the law is to keep the benefit of the tax-loss carry forward for the people who had actual ownership of the company and lost the money."

In the GM case, "everybody had to agree that it's a sale, not a plan, because under a plan, protections for the creditors would kick in," Coyne said. "So, to conform to 363 law and get past the creditors' objections, the judge made a ruling that the transfer of assets to new GM is not a plan (but a sale)."