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Washington erased Caesars' tax bill
A company whose bonds are falling can buy them back cheaply, spending maybe 50 cents on the dollar to retire each dollar of debt. That cuts the debt burden, but the discount counts as income. It is literally called cancellation of debt income, and it produces a tax liability.
Caesars did not have the money to pay those taxes, because it did not have the money, period. So its owners lobbied Washington. In 2009, with a massive stimulus bill moving under Obama, a provision went in that removed the tax on cancelled debt.
All the wheeling and dealing to reduce the debt would not have kept the company afloat without that provision. It arrived in the same stretch that the banks were being bailed out, and the private equity firms and the casinos they owned got relief too.
Why does a debt discount count as income?
When a borrower settles a debt for less than it owes, the lender forgives the difference. The tax code treats that forgiven amount as a gain, since the borrower is better off by the same sum. It is reported as cancellation of debt income under Section 61(a)(11) of the Internal Revenue Code. Special rules exist for insolvent borrowers and for bankruptcy.
Why did Congress pass the 2009 stimulus?
The American Recovery and Reinvestment Act was signed in February 2009 as the economy contracted sharply. The Congressional Budget Office estimated its cost at about $787 billion at passage. It combined tax cuts, aid to states, and infrastructure and other spending. It also carried tax provisions aimed at businesses.
Why would a firm buy debt at 50 cents?
A bond trading at 50 cents means the market doubts it will be repaid in full. A company that retires it at that price extinguishes the full face value of the obligation for half the cash. The cash it saves is cash it keeps for operations. Bonds trading far below face value are commonly described as distressed.
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