IB Net Payout Yields Model

More on the Tax Loss CarryBack Legislation

The Wall St Journal is reporting that the proposal to allow Tax Loss Carry Backs for 5 years is poised to be approved next week. It's been difficult to find information on this subject as we originally wrote about it on Wednesday[Tax Loss Proposal Gains Support] and hadn't seen any news about it until finding this article.

The proposal is significant because it will provide immediate capital to a lot of struggling small cap stocks such as Liz Claiborne (LIZ) mentioned in the article. Basically any company losing money now would immediately be able to receive a portion of the taxes back that they've paid the last 5 years. The more they've lost the better. The article doesn't mention financials so we're still wondering what the impact will be on companies such as Regions Financial (RF) or Synovus Financial (SNV) that both received TARP money. If those companies were to get a refund, Congress might come under fire. If excluded, LIZ or Terex (TEX) would be our favorite plays off this legislation.

Maybe that's why this proposal has gotten so little discussion from the media. Nobody wants to highlight a handout for financials and corporations in general. The media is fixated with the housing credit and the extension of the unemployment benefits, but ultimately providing a tax refund of $33B to companies that badly need funds might prove more meaningful.

Considering this legislation, the big selloff today is more confusing. Alot of questionable balance sheets would see immediate improvements leading to higher stock prices. Some of the limited details:

Large and mid-sized companies battered by the recession are on the verge of securing as much as $33 billion in refunds from the federal government for taxes paid as far back as 2003.

The firms won support for the plan from Senate Majority Leader Harry Reid (D., Nev.), who added the tax refunds to legislation extending unemployment benefits and headed for Senate approval as early as next week. The tax provision would allow businesses to carry back losses incurred in either 2008 or 2009 to offset taxes paid up to five years before.

There is also broad bipartisan support in the House for the tax loss carryback provision. If the Senate passes the jobless-benefits bill in its current form, House leaders are expected to bring it directly to the floor and vote on it without modification.


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