Monday, June 25, 2007

There's a little brouhaha over the NYT's report that Rupert Murdoch's NewsCorp paid no taxes in two of the past four years despite making domestic (and presumably GAAP) profits of $9.4 billion during that time frame.

If I have it right, the provision is one that allows companies that expect a future tax loss to net current period taxable income against those future losses. The company pays interest on the taxes it 'owes' to the IRS until such time as the future taxable losses offset the current tax liability.

To illustrate, assume a company has a 2006 profit of $1mm. Taxes on this would be in the ballpark of $350,000 and would normally be paid during the course of the year. In 2008, the company has a taxable loss of $1mm, which the company can pretty much 'carryback' to 2007 to offset 2007's taxable income and file for a refund of the $350,000 that was paid in taxes.

The IRS provision allows the company that anticipates a future tax loss to skip paying the taxes it expects to recover via a future year refund. It, in effect, allows a company to say "Hey IRS, I made money this year and owe taxes, but I figure I'm going to lose money next year so I'll just be filing a refund, so how about we skip the paying part and the refund part and, instead, I'll pay you the going interest on what amounts to be a $350,000 one year loan?"

Now, I don't know why this provision exists. I do know that it predates Murdoch's use of it over the past few years; it in no way is a loophole that Murdoch's lobbyists slipped into law in order to keep Murdoch from having to cough up some money for a year to the government.

I also don't know what caused Murdoch to report that NewsCorp was going to lose money in the future, so much so that it would greatly offset what amounts to be a fair amount of current period of taxable income. But I do know that there has to be some justification for using this provision; the taxpayer doesn't get to simply make a claim, the IRS has to find some legitimacy behind the request.

Of course, none of this matters to the NYT, who simply wants to nail Murdoch and make it look likes he's doing something improper. The liberal NYT hates the conservative Murdoch and they hate the idea of outsiders coming in and taking over family-owned (through supervoting shares and not outright ownership of the equity) media companies. What better reasons can one have for making much ado over what is really nothing?