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Your stimulus in action

The government's generosity toward big business in this recession has known few boundaries. Take, for example, a little-known tax provision that was slipped into the jobless benefits extension bill last November. JP Morgan is trying to use the tax break to get back most of the money it spent buying Washington Mutual.

As the Wall Street Journal explains, the provision allows companies to apply losses from 2008 or 2009 against taxes paid in the previous five years. You try getting that deal from the IRS.

Under the benefit, WAMU is apparently eligible for $2.6 billion in refunds. JP Morgan, which took over WAMU in fall 2008, is talking with the FDIC and its bondholders about claiming more than half that as a refund this year. It paid $1.9 billion for WAMU, so it would be close to getting a refund on its purchase price.

That's only the beginning. After analyzing SEC filings, the Journal says more than 250 companies are expecting a total of $12 billion in refunds because of this deal. It was passed in the name of "stimulus":

Some critics have found the corporate-tax-refund technique wanting as a stimulus or job-creation move. Prior to Congress's passage of the $787 billion stimulus law in early 2009, the Congressional Budget Office looked at six possible stimulus approaches and ranked this one least effective, saying each corporate tax dollar refunded would generate at most 40 cents of boost to gross domestic product. The corporate-tax-refund approach wasn't included in the big stimulus bill early in the year but was part of legislation in November that extended jobless benefits.

Douglas Shackelford, a tax professor at the University of North Carolina at Chapel Hill, said using federal tax receipts to shore up corporate balance sheets amounts to "public borrowing to pay off private debt...It's not clear to me that's a good use of money at all."

Now, there is some anecdotal evidence that the tax breaks may have saved a few jobs. Liz Claiborne says the refund will help it expand this year instead of closing stores, for instance. But it's particularly disconcerting, considering the glut of homes on the market, to see that home builders are getting the biggest boost from the tax provision:

Some companies intentionally took steeper losses last year to qualify for bigger tax refunds. KB Home sold land at a loss in 2009, the Los Angeles home builder told investors in January.

"We were able to dispose of lots, generate cash, take advantage of [the tax break], improve our balance sheet," KB Chief Executive Jeffrey Mezgersaid. "It was a very nice move for us."

Undoubtedly. One more thing: TARP recipients aren't supposed to qualify for this tax break. JP Morgan received $25 billion from the government under TARP. WAMU bondholders say it's ludicrous that JP Morgan should get a refund:

J.P. Morgan officials have told other parties in the case that the ban on TARP recipients using the tax break is irrelevant, because it was WaMu that paid the taxes on which the refund is based. J.P. Morgan has noted the refund wouldn't go to it directly; it would sit in a receivership at the FDIC that also houses the $1.9 billion J.P. Morgan paid for WaMu's banking assets and deposits.

You gotta hand it to 'em. Getting $1.9 billion worth of assets for about $500 million -- why, that's a steal.

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