Trade groups seek tax break on forgiven debt

WASHINGTON - Commercial real estate companies, the US Chamber of Commerce, and companies partly owned by private-equity firms are pushing Congress for a temporary tax break on forgiven debt similar to relief given in 2007 to homeowners facing foreclosure.

The provision would let solvent businesses negotiate new terms with lenders, lowering the amounts they owe, without being required to pay taxes on the forgiven portions of the loans. The proposal may emerge as a priority among Republicans for inclusion in a stimulus package that President-elect Barack Obama seeks to pass.

The tax break for canceled debt is being promoted on Capitol Hill by lobbyists from Oriental Trading Co., an Omaha, Neb., party-supply and novelty marketer partly owned by the Carlyle Group, and Las Vegas-based Harrah's Entertainment Inc., which is partly owned by Apollo Management LP, congressional aides and lawmakers say.

"In these tough economic times, it makes sense," said Nevada Republican Senator John Ensign, who introduced the legislation Tuesday. He said it would keep companies from entering bankruptcy, where they could avoid tax penalties for debt forgiveness under current law.

The Chamber of Commerce, American Farm Bureau Federation, American Gaming Association, National Association of Manufacturers, and Real Estate Roundtable, all Washington trade groups, also have identified the idea as a top priority.

"Creating temporary incentives to reduce debt levels would facilitate the deleveraging of the US economy and economic growth," Bruce Josten, the chamber's executive vice president for government affairs, said in a memo to lawmakers this week.

Ensign, who said he's met with Harrah's representatives who favor his proposal, said he pitched it last month to Rahm Emanuel, the chief of staff to Obama. Harrah's spokeswoman didn't immediately return a phone call seeking comment.

New York University tax-law professor Daniel Shaviro said the proposal is neither good policy nor an effective stimulus.

"I'm skeptical," Shaviro said. "It's probably a good thing to deleverage our economy a bit, but rewarding those who borrowed a lot in the past sends out mixed messages on this."

Under current law, companies must be insolvent or in bankruptcy to avoid paying tax on forgiven debt. In exchange, they lose the ability to claim certain tax advantages, such as loss carry-forwards, if they become profitable again.

The business groups' proposal would make debt forgiveness tax-free for companies that are still solvent, without making them surrender future tax benefits.

Companies would have to buy back their own debt at a discount compared to when it was issued to qualify; the debt could also be purchased by third parties under the proposal.

The provision would effectively do for businesses what Congress did for homeowners facing foreclosure in December 2007.