Conseco/CNO Financial and Banking & Finance and Taxes and Health Care & Life Sciences and Health Care & Insurance

Struggling firms stash away losses to cut future taxes

April 17, 2010

Conseco Inc. is taking steps to preserve one of its most precious assets: $4.7 billion in net operating losses.

The Carmel-based insurer has known since its 2002 bankruptcy what many companies are discovering in the deep recession: Huge losses can have a silver lining in the form of sizable federal tax savings. Conseco expects its write-offs will be worth more than $800 million over the next 20 years.

tax factbox“Long story short, it’s got tremendous value to the shareholders,” said Conseco Chief Financial Officer Edward Bonach. “And it’s an asset we should take prudent steps to protect.”

Conseco’s 2010 proxy includes a shareholder proposal giving the company’s board discretion over which investors can obtain more than 5 percent of its stock.

The company already has poison-pill provisions in place. But the potential tax write-off is so large that Conseco is taking extra steps to prevent any ownership change that could significantly reduce or invalidate the value of its losses according to IRS rules.

After a tough 2009, an increasing number of companies are exploring territory Conseco already knows well. David Holets, manager of South Bend-based public accounting firm Crowe Horwath LLP’s National Tax Office in Indianapolis, said companies large and small that suffered losses last year are looking to leverage them for tax purposes.

The rules are simple in principle. Companies traditionally had a two-year “carry back” period as well as a 20-year “carry forward” period during which they could use losses to offset federal income taxes. The write-off can’t exceed their annual income booked. President Obama’s stimulus extended the carry-back period to five years.

In practice, net operating loss claims get more complicated depending on a company’s legal structure. The law invalidates losses when company ownership changes, Holets said, to prevent acquisitions intended solely to obtain a tax benefit.

Many of Crowe’s clients have applied for tax refunds in the mid five- to six-figure range, he said, depending on how much red ink they had on their books last year. Corporate tax returns were due March 15, although some companies have sought an extension until Sept. 15.

“Definitely anybody who’s been impacted by the recession has been taking advantage of this, if they can,” Holets said.

Some companies that suffered losses have a long way to go rebuilding profitability before they’ll be in a position to claim the bulk of their tax benefits.

Locally based Emmis Communications Corp., for example, reported $309 million in net losses in its last fiscal year. But Emmis Chief Financial Officer Patrick Walsh said the company isn’t expecting a tax benefit until it either begins producing significant profit, or it decides to sell an asset like a radio station or magazine—something the company isn’t currently contemplating.

Walsh noted that, because CEO Jeff Smulyan owns a controlling position in the company, Emmis isn’t worried about an ownership change invalidating the tax value of its losses anytime soon.

“We’re probably in a unique position,” Walsh said.

Emmis does expect to benefit from a different stimulus provision that allowed the company to repurchase some of its debt at 57 percent of its former value, Walsh said, then defer the gain for tax purposes over seven years.

Allowing companies to take such write-offs ultimately benefits the government and taxpayers because it allows firms to recover more quickly, Holets said.

“You’re putting cash in the pockets of businesses that can then go back and reinvigorate the economy. They need cash to pay employees and suppliers. It creates a chain of cause and effect,” he said.

It’s really a fair thing to do.”•

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