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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.”


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.

Rating: 2.5/5 (8 votes)


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