Another clever GE deal highlights flaws of the corporate tax code
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Version 0 of 1. General Electric is breaking itself into pieces these days, but its famous tax department is still intact. You can see that from a pending transaction that would allow GE to finish extracting $23.5 billion of value by unloading one of its businesses — without paying a penny of income tax on the approximately $4.6 billion of profit that it would show shareholders if the deal were completed today. Yes, I know this sounds confusing. But please bear with me as I tell you about GE, its soon-to-be-former subsidiary named Synchrony Financial and a tax-efficient, corporate-mainstream transaction called a split-off. In what proved to be a timely transaction — please forgive the pun on Synchrony’s name — GE had Synchrony become a public company in summer 2014 via an initial public stock offering that raised about $2.9 billion and turned Synchrony into a company with 15 percent public ownership, leaving GE with 85 percent. Synchrony runs “private-label” credit cards for merchants, such as Amazon.com and Wal-Mart, and even has its own bank. It’s a nicely profitable business that used to be part of GE’s financial arm, which GE is in the process of divesting. The money Synchrony raised through its IPO helped it repay about $8 billion that it owed GE, which is why I include the $2.9 billion of IPO proceeds in the value GE is realizing by unloading Synchrony. Because the money Synchrony gave GE was repaying an intra-corporate loan, GE owed no income tax on it. Now, we come to the big bucks — a “split-off” under which GE will offer its shareholders a chance to swap some or all of their GE shares for the Synchrony shares that GE owns. GE would swap Synchrony stock worth $22.2 billion (at Synchrony’s closing price on Wednesday) for GE stock worth $20.6 billion. The $1.6 billion price differential is designed to give GE shareholders an incentive to absorb all the 705 million Synchrony shares that GE owns. The deal, scheduled to be completed in mid-November, would let GE retire about 7 percent of its outstanding shares if Synchrony and GE stock is the same then as it is now. The transaction is the functional equivalent of selling its Synchrony stake and using the cash to buy GE shares — except that there’s no taxable gain, the way there would be in a straight-up Synchrony stock sale. How much would this save GE? By my reading of GE’s documents, the deal would show a $4.6 billion profit for earnings purposes at today’s prices but no gain for tax purposes. So I will use $4.6 billion as the taxable gain GE will avoid having to show. That would save GE about $1.75 billion in income taxes. The actual profit will be determined when the deal closes. GE told me it could not comment on my math because the split-off deal is in registration with the Securities and Exchange Commission. GE’s tax office is famous — some would say infamous — for finding innovative ways to cut GE’s income tax bill. While I was at Fortune magazine, from which I retired this year, I tried to do a story in conjunction with ProPublica (where I’m a senior editor) that would have put GE’s now-retired tax chief on the cover and called him “GE’s Most Valuable Employee.” Alas, that story fell through. By GE standards, this split-off isn’t aggressive or groundbreaking. “Split-offs have been around for a long time,” tax expert Robert Willens told me. He said that a 1997 transaction in which DuPont split off its stake in Conoco, a big energy company, was the first time a prominent, blue-chip company used the technique. Numerous other split-offs have followed. Why am I writing about this deal even though it’s not scandalous, illegal or even hyper-aggressive? Because the fact that a deal such as this has become routine tells us a lot about how convoluted our corporate tax code has become. And how hard it will be to fix it. If we ever try. |