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Wall Street Journal Editorial: The Solyndra Memorial Tax Break


The Solyndra Memorial Tax Break
How Energy passed out tax-loss credits that mean taxpayers will pay twice for failure.
The Wall Street Journal
October 16, 2012

Perhaps you thought the Solyndra scandal amounted to a $535 million government loan that will never be repaid. No such luck. In the latest twist, Solyndra’s investors could be rewarded for their failure, thanks to a tax benefit the Administration handed out in a bid to evade political accountability.

The Internal Revenue Service exposed this double Solyndra debacle last week in the U.S. bankruptcy court for the district of Delaware, which is unwinding the defunct solar-panel maker. The IRS formally objected to Solyndra’s Chapter 11 reorganization plan, claiming its “principal purpose is tax avoidance.”

Having sold off its manufacturing plant, fired nearly 1,000 workers and proven the non-viability of its business model, Solyndra’s only real assets are what the IRS calls “tax attributes.” These are between $875 million and $975 million in net operating losses that can reduce future taxable income, which the IRS values as high as $350 million. Before it went toes up, Solyndra also accumulated $12 million in solar tax credits that can reduce tax liabilities dollar for dollar.

Tax-loss carry-forwards are routine but worthless if a company can’t turn profits to pay taxes on. So Solyndra’s owners are asking the court to liquidate the rest of the business and contribute a net $6.7 million to pay off creditors for pennies on the dollar. A holding corporation will then emerge from Chapter 11 that won’t make products or employ workers, but it will get the Solyndra tax offsets.

The dummy company is owned by Argonaut Ventures I LLC, Solyndra’s largest shareholder and the primary investment arm of the George Kaiser Family Foundation. …

Solyndra’s Energy Department loan closed in September 2009, and a year later it was back asking for more as it bled cash. To stave off bankruptcy, the company asked Energy to release the loan’s remaining $95 million immediately, instead of in monthly drawdowns, and to restructure the terms (it had already technically defaulted). The emails that follow are from the negotiations that began in December 2010 and are either exhibits in the IRS objection or come from the 300,000 pages of documents the House Energy and Commerce Committee uncovered in its investigation. …

In February 2011, Energy signed off on a deal that would subordinate its repayment interests to a new $75 million loan to Solyndra from Argonaut and Madrone. The two owners would open this tranche of senior debt to other investors for equity warrants. But under the Energy term sheet, those warrants would then bounce back to the Argonaut-Madrone holding company if Solyndra became defunct. That gave Argonaut-Madrone 99.9% control of the net operating losses.

Solyndra went bust in September 2011, but Mr. Kaiser referred in August emails to “the consolation prize NOL” and wrote that “we could get the same benefit out of a new entity in there without absorbing the costs of resuscitating this one.” In other words, the holding company will merge with another profitable Argonaut business that can use the tax breaks.

The irony is that the law that created the loan program specifically bars the Energy Department from taking a junior debt position. So Energy simply produced a novel legal analysis claiming that this prohibition applies only when a loan originates, not when it is modified.

One staffer at the White House budget office wrote at the time that “I think they have stretched this definition beyond its limits” and noted in particular that the government “is better off liquidating the assets today than restructuring under DOE’s proposal.” Fly-speckers at the Treasury agreed.

Under the bankruptcy plan, taxpayers will recoup $27 million at most on Mr. Obama’s $535 million “investment.” The IRS and Energy Department are now asking the courts to reject the deal, because bankruptcy is designed to give a business a second chance, not goose a tax return.

But this is little more than an ex post facto double-cross. Energy created the tax avoidance problem in the first place by gifting Argonaut and Madrone the net operating losses to delay the Solyndra crack-up that was fast becoming inevitable. That left taxpayers worse off than if they simply let Solyndra fail. …

The larger problem is Mr. Obama’s economic model that seeks to picks winners and losers and misallocates capital. That’s bad enough. But does he have to stick it to taxpayers twice for the same failed investment?

To read the entire article online, click here.


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