My proudest accomplishment — threatened by the corona virus

The 2017 Tax Act stopped carrybacks of losses generally, primarily as a revenue raising ploy.  Now in a mad dash to Do Something about the corona virus, Congress is going to allow carrybacks so corporations can get cash.

That brings to mind filling out a form last year, in connection with my 50thcollege reunion, that describes my proudest accomplishment.  That was dreaming up Sec. 172(b)(1)(D), the so-called corporate equity reduction transaction rule, preventing the “carryback of excess interest losses attributable to corporate equity reduction transactions.”

Here’s the story.  At the height of the Leveraged Buy Out (LBO) craze in the late 1980s, Senator Bentsen asked staff (me) to Do Something about LBOs, which were making headlines and out of favor.  But I had to be sure not to Spook the Markets.  I was reading Forbes or Fortune in my office one day when a transaction caught my eye.  An LBO artist bought a profitable company in a merger transaction that incurred huge debt.  The debt created huge interest expenses.  Those deductible interest expenses were sot big that the new operation had losses.  Those losses were carried back to the profitable years of the profitable company, creating a TAX REFUND.  That looked like the Code was subsidizing LBOs.  That didn’t sound right, so we drafted up something that Senator Bentsen introduced; Mr. Rostenkowski put it in the House bill and it sailed into the law without any opposition rearing its head. The rule was estimated as picking up $2.2 billion in revenue over five years.

A side note:  To make sure we didn’t Spook the Markets, Senator Bentsen had me hold a Staff Briefing to float the notion.  Famous journalist Jeff Birnbaum, with the WSJ then, left the briefing in the middle once he understood the plan.  The Markets were Not Spooked, and the provision stayed in the Code until it got subsumed into a broader rule in the 2017 Tax Act.  I hope it comes back.






One thought on “My proudest accomplishment — threatened by the corona virus”

  1. A great story, Pat. I wish you had shared it sooner. The 2017 Act was basically written by lobbyists. It contains many, many ill conceived provisions. Undoing it will be a life’s work, even for the young.

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