Tax Break for Solyndra

Story first appeared on the wsj.com.

Perhaps you thought the Solyndra scandal amounted to a $535 million government loan that will never be repaid. No such luck. In the latest twist, Solyndra's investors could be rewarded for their failure, thanks to a tax benefit the Administration handed out in a bid to evade political accountability.

The Internal Revenue Service exposed this double Solyndra debacle last week in the U.S. bankruptcy court for the district of Delaware, which is unwinding the defunct solar-panel maker. The IRS formally objected to Solyndra's Chapter 11 reorganization plan, claiming its principal purpose is tax avoidance. If you are a company in need of an expert Indianapolis Bankruptcy Lawyer, consider Ayres Carr & Sullivan.
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Having sold off its manufacturing plant, fired nearly 1,000 workers and proven the non-viability of its business model, Solyndra's only real assets are what the IRS calls "tax attributes." These are between $875 million and $975 million in net operating losses that can reduce future taxable income, which the IRS values as high as $350 million. Before it went toes up, Solyndra also accumulated $12 million in solar tax credits that can reduce tax liabilities dollar for dollar.

Tax-loss carry-forwards are routine but worthless if a company can't turn profits to pay taxes on. So Solyndra's owners are asking the court to liquidate the rest of the business and contribute a net $6.7 million to pay off creditors for pennies on the dollar. A holding corporation will then emerge from Chapter 11 that won't make products or employ workers, but it will get the Solyndra tax offsets.

The dummy company is owned by Argonaut Ventures I LLC, Solyndra's largest shareholder and the primary investment arm of the George Kaiser Family Foundation. Mr. Kaiser is a Tulsa oil billionaire who bundled campaign checks for Mr. Obama in 2008. The other owner is Madrone Partners LP, a California venture outfit.

Solyndra's Energy Department loan closed in September 2009, and a year later it was back asking for more as it bled cash. To stave off bankruptcy, the company asked Energy to release the loan's remaining $95 million immediately, instead of in monthly drawdowns, and to restructure the terms (it had already technically defaulted). The emails that follow are from the negotiations that began in December 2010 and are either exhibits in the IRS objection or come from the 300,000 pages of documents the House Energy and Commerce Committee uncovered in its investigation.

Argonaut and Madrone were prepared to commit a new $25 million but needed the government either to take a haircut or subordinate taxpayer repayment rights to new senior debt. Solyndra's private financing rounds were failing because new investors were coming in behind the government's $535 million.

Steve Mitchell, an Argonaut managing director, wrote to Mr. Kaiser on December 7, 2010 that The DOE really thinks politically before it thinks economically. The Department of Energy gnomes demanded $75 million and refused to invite the political blowback that signing away taxpayer claims to private financiers would invite, but Mr. Mitchell wouldn't go above $25 million. So he wrote that he politely moved the conversation toward how we should use the time to start discussing the bankruptcy process . . . To me it was clear that the Department of Energy folks were somewhat caught off guard that we weren't going to bail out the company, especially their Wind Energy divisions, including Wind Turbine Repair Services Nationwide.

Argonaut and Madrone could walk away in part because they had so little skin in the game. Solyndra had 73% debt to 27% equity, not the 65%-35% split that the Treasury Department wanted before Energy boxed it out of a 2009 due-diligence review in the push to get stimulus dollars out the door. Realizing that Argonaut-Madrone would rather liquidate than throw good money after bad, Energy eventually gave in.

Meanwhile, Mr. Kaiser's mind was on the net operating losses (NOLs). He mused to Mr. Mitchell that hewould go a long way to preserve the NOLs, and he suggested that the final decision to ante up to $75 million could be subject to their better understanding of whether the NOLs can conceivably be preserved in a semi-liquidation (that is, somehow maintaining the line of business and avoiding change of control).

In February 2011, Energy signed off on a deal that would subordinate its repayment interests to a new $75 million loan to Solyndra from Argonaut and Madrone. The two owners would open this tranche of senior debt to other investors for equity warrants. But under the Energy term sheet, those warrants would then bounce back to the Argonaut-Madrone holding company if Solyndra became defunct. That gave Argonaut-Madrone 99.9% control of the net operating losses.

Solyndra went bust in September 2011, but Mr. Kaiser referred in August emails to the consolation prize NOL and wrote that they could get the same benefit out of a new entity in there without absorbing the costs of resuscitating this one. In other words, the holding company will merge with another profitable Argonaut business that can use the tax breaks.

The irony is that the law that created the loan program specifically bars the Energy Department from taking a junior debt position. So Energy simply produced a novel legal analysis claiming that this prohibition applies only when a loan originates, not when it is modified.

One staffer at the White House budget office wrote at the time that they think they have stretched this definition beyond its limits and noted in particular that the government is better off liquidating the assets today than restructuring under DOE's proposal. Fly-speckers at the Treasury agreed.
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Under the bankruptcy plan, taxpayers will recoup $27 million at most on Mr. Obama's $535 million "investment." The IRS and Energy Department are now asking the courts to reject the deal, because bankruptcy is designed to give a business a second chance, not goose a tax return.
 Many North Carolina businesses are turning to Raleigh Bankruptcy Lawyer advocates at Smith Debnam Law
But this is little more than an ex post facto double-cross. Energy created the tax avoidance problem in the first place by gifting Argonaut and Madrone the net operating losses to delay the Solyndra crack-up that was fast becoming inevitable. That left taxpayers worse off than if they simply let Solyndra fail.

This raises a question or two for the President who once called Solyndra a testament to American ingenuity and dynamism and who keeps accusing Mitt Romney of supporting tax breaks for outsourcing and corporate jets, which he doesn't. Here one of Mr. Obama's own billionaire pals is trying to sidestep a federal tax bill amounting to hundreds of millions of dollars as a result of an epic crony capitalist fiasco.

The larger problem is Mr. Obama's economic model that seeks to picks winners and losers and misallocates capital. That's bad enough. But does he have to stick it to taxpayers twice for the same failed investment?

Obama Gets Sued By Chinese Firm For Blocking Bid To Build Wind Farms near Drone Training Site.

original article appeared in the Chicago Tribune

Barack Obama has been sued by a small Chinese firm for squashing their bid to build wind farms close to a naval training site. PSI-Repair specializes in Wind Turbine Repair services. Experts claim that the suit is a long shot for the firm that greatly underestimated U.S. suspicions about Chinese intentions.

Ralls Corp, which is owned by two Chinese nationals, was installing wind turbines close to the training site in Oregon, which, according to the facility's web site, is used to test unmanned drones - a highly sensitive and prized U.S. technology.

The U.S. Navy says the training site's airspace is also the only restricted area in western United States where fighter jets conduct training maneuvers at high speed and very low altitudes.

Obama put the brakes on the project last week and ordered Ralls to sell off the four planned wind farms due to national security risks, the first time since 1990 that a U.S. president has formally blocked a business transaction or required a sale on such grounds. Ralls Corp has until December 27 to comply.

In its suit, made public on Tuesday, Ralls Corp alleges Obama exceeded his power by dictating the terms of the sale, by allowing the government to inspect all aspects of its operations, and by not treating the firm equally as required by law.

The lawsuit comes in the final weeks of the U.S. presidential campaign, during which Obama's Republican rival, Mitt Romney, has accused the president of not pushing back against China's trade and investment practices.

Obama's order followed a recommendation from the Committee on Foreign Investment in the United States (CFIUS), an inter-agency group headed up by the Treasury secretary that evaluates the national security risks of foreign investments in U.S. companies or operations.

Ralls Corp initially sued CFIUS in September for ordering the company to halt operations temporarily while the committee completed its probe and made its recommendation to Obama.

Its chances of winning the suit are slim given the president's broad authority on national security matters and the fact that courts do not often second guess the executive branch on security issues, experts say.

A partner with Skadden, Arps, Slate, Meagher & Flom, who is in charge of the firm's CFIUS practice said that it is a very, very difficult case.

A Treasury spokeswoman said the administration believes the lawsuit has no merit and would defend its case vigorously.

In issuing the rare presidential order, Obama said there was credible evidence that led him to believe that Ralls Corp and the Chinese Sany Group executives who own the company might take actions that posed a risk to U.S. security.

The statement did not get into the specifics of the risk, but experts have said that the government was likely to have been wary of any potential for espionage.

Ralls Corp said the government had not provided any evidence or explanation.

MISSTEPS

CFIUS experts said the deal was likely doomed from the start. They said Ralls Corp miscalculated by not asking CFIUS to review its plans to acquire wind-farm projects before closing the deal and embarking on plans to install turbines made in China by the closely held Sany Group.

It is unclear whether Ralls Corp studied previous cases in which CFIUS forced other Chinese companies to kill development plans because of their location or for failing to get CFIUS approval before closing a deal.

Benjamin Powell, a former general counsel to the director of national intelligence and now a partner at the WilmerHale law firm, said companies could face a more difficult review process if they did not notify CFIUS of a transaction that might raise national security issues.

In 2009, CFIUS forced the Chinese-owned Nonferrous International Investment Company to backtrack on a proposal to buy Nevada-based Firstgold, whose properties were close to a naval air station.

And in 2011, Chinese telecom maker Huawei had to relinquish plans to buy some assets from U.S. server technology firm 3Leaf after CFIUS ordered Huawei to give up some parts of the deal.

Huawei did not file paperwork with CFIUS on the deal, even though a few years earlier the panel had rejected another of its proposed deals because of national security concerns.

Ralls Corp has also been slow to bring in U.S. firepower.

It hired two high-profile lawyers - the George W. Bush administration's top lawyer Paul Clement and former U.S. assistant attorney general Viet Dinh - only after CFIUS ordered the company to cease activity in August and months after the Navy expressed concerns that one of Ralls Corp's wind-farm projects was located within restricted airspace.

The company's three other wind-farm projects are located close to the training facility.

According to court documents, the Navy said the company should be obliged to move the wind farm located in the restricted airspace to another spot, even though it had no authority to require the move.

According to maps included in the court documents biled by Ralls Corp, hundreds of wind turbines are already in close proximity to the Oregon training site. A handful of these turbines are already operating within the restricted airspace, as shown on the maps.