Cancellation of Indebtedness
Ensign on the Issues
January 6, 2009
TO THE MEMBERS OF THE UNITED STATES CONGRESS:
The undersigned organizations collectively represent hundreds of thousands of companies with tens of millions of employees throughout the country. Our member companies operate across all sectors of the economy, providing us with a comprehensive perspective of the economic challenges facing all Americans. As you know, this is an extremely difficult time for any business, and most economists predict that next year will be worse.
As Congress considers a stimulus package to jumpstart the economy, we encourage you to adopt provisions that will immediately provide businesses with the resources to grow and hire more employees, at a minimum to avoid unnecessary layoffs. In particular, we urge you to support a proposal for temporary tax relief for companies that purchase their own or related party debt at a discount. Under current law, if a company or related party purchases its own debt at a discount, the company is required to pay income tax on the difference between the purchase price and the original issuance price of the debt. Temporary suspension of this tax will create and preserve jobs, facilitate the “deleveraging” of the U.S. economy and strengthen financial institutions’ balance sheets.
Given the economic slowdown, companies are under great pressure to cut costs to remain viable. Companies are slashing capital expenditures, R&D and either slowing hiring or laying off employees in order to avoid defaulting on their debt obligations. Increasing incentives to purchase discounted debt would reduce a company’s debt payment obligations, which would enable it to put more cash towards saving and creating jobs. This temporary tax relief would allow many companies to restructure their balance sheets, reposition for positive growth and save tens of thousands of jobs across the country.
The tax relief would also facilitate the deleveraging of the U.S. economy and strengthen financial institution’s balance sheets. Economists agree that a massive deleveraging process needs to take place before the economy can begin to grow. Creating temporary incentives to reduce debt levels in the U.S. economy would facilitate the deleveraging process and help create the conditions for resumption of economic growth. Further, this tax relief would allow financial institutions to strengthen their balance sheets by selling distressed/and or discounted debt. Reducing debt levels and thereby improving capital adequacy ratios would enable banks to use more of their capital to start lending money again to consumers and businesses. Indeed, temporary relief from income related to cancellation of debt would fulfill the exact purpose originally envisioned for the TARP – reducing the amount of distressed or discounted debt held by financial institutions – but would do so by using private sector money.
Congress, the Treasury Department, and the Federal Reserve have each taken extraordinary steps to limit the negative impact of the financial and economic crisis. However, banks will not begin to lend again in earnest, and therefore the economy will not grow again, until companies and financial institutions can reduce the levels of debt on their balance sheets. Creating incentives for businesses to reduce their debt would help businesses effectively manage through the recession and save jobs. A temporary waiver of the income tax related to the cancellation of indebtedness would help get the U.S. economy back on track.
Thank you for your attention to this matter.
Sincerely,
- American Hotel and Lodging Association
- American Insurance Association
- American Farm Bureau Federation
- American Forest & Paper Association
- American Gaming Association
- American Gas Association
- American Trucking Associations
- Arizona-New Mexico Cable Communications Association
- Associated Equipment Distributors
- Association of Equipment Manufacturers
- Business Roundtable - Larry Burton
- Federation of American Hospitals
- Financial Services Roundtable
- International Council of Shopping Centers
- International Franchise Association - David French
- Mortgage Bankers Association - Josh Denney
- Motor & Equipment Manufacturers Association
- National Apartment Association
- National Association of Manufacturers
- National Association of Home Builders
- National Association of Real Estate Investment Trusts
- National Association of Wholesaler-Distributors
- National Electrical Contractors Association
- National Federation of Independent Business
- National Multi Housing Council
- National Electrical Manufacturers Association
- National Paint and Coatings Association
- National Roofing Contractors Association
- National Sand, Stone and Gravel Association
- Outdoor Power Equipment Institute
- Real Estate Roundtable - David Pearce
- The Associated General Contractors of America
- Travel Industry Association
- U.S. Chamber of Commerce
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