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Martin Whitman: Repealing Section 382 Could Have Saved Ambac Financial

December 02, 2010 | About:
Investment Guru Martin Whitman wrote a column article and argued the necessity of repealing Section 382 of the tax code. In his opnion: “The benefits of repealing Section 382 far outweigh the costs to the U.S. Treasury in lost revenue. Eliminating the rule would sharply reduce corporate failures--large and small--and would allow cash-rich companies and financial institutions to deploy capital to support economic growth and job creation, ultimately expanding the country's tax base.”

Excerpt:
On Nov. 8 Ambac Financial declared bankruptcy, needlessly. Had Congress acted to change the tax code to give troubled corporations a much needed break, Ambac probably could have raised enough equity to rebuild its core business.

Unfortunately the U.S. tax code left Ambac ( ABK - news -people ) with no way of raising equity without destroying one of its most valuable assets, $7 billion worth of net operating losses that could have been used to offset future tax burdens after the company returns to profitability. Section 382 of the Internal Revenue Code limits a company's ability to use these losses when new or existing investors purchase enough equity to trigger "change of ownership" rules.

Third Avenue Management has a history of investing in and rehabilitating distressed companies. Over the years we have helped to rebuild companies like Nabors Industries ( NBR -news - people ) and Covanta Energy ( CVA - news - people )--but we have walked away from opportunities where our investment would destroy the tax benefits of net operating losses, which we consider to be a vital asset.


Read the full text at forbes.com.

About the author:

Guruek
Jae Jun is the author of Old School Value, a value investing blog dedicated to the Old School methodologies and teachings of the investment greats such as Graham, Buffett and Fisher. The blog deals with finding intrinsic value, fundamental stock analysis and special situations including spinoffs and merger arbitrage.

Visit Guruek's Website


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