Companies Paying the Least in Taxes

24/7 Wall St.

As Washington tries to find its way out of increasing debt, the debate continues over whether American companies should pay more or less in taxes. Meanwhile, some of the largest U.S. public corporations paid no taxes at all for 2012. As a matter of fact, several of America’s biggest companies received tax credits that rose into the hundreds of millions, or even billions, of dollars. Losing money or taking write-downs has become a sort of benefit for several well-known corporations.

There are several ways a company can avoid paying taxes. One is simple: The corporation loses large sums of money, and as a by-product it pays no taxes or even gets tax credits. Battered retailer J.C. Penney managed to do that last year.

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Another way to get federal tax benefits is through huge fines, mostly for illegal behavior, or behavior the government claims is illegal. Bank of America was able to do that as it paid billions of dollars in penalties for its misdeeds, particularly in its mortgage divisions.

Yet another set of circumstance that can get a company tax benefits and prevent the payment of taxes entirely might be called “acts of god.” Financial results of both Verizon and Caesars were badly hurt by Hurricane Sandy. As a result, accounting rules allowed them to take write-offs or losses.

The debate over whether American companies should be able to pay less than the 35% corporate tax has gone on for years, and may continue in the years ahead. High tax rates, some experts argue, help lower the national debt. Other experts believe that low tax rates free up capital, which allows companies to invest in plants and equipment and to add jobs.

The debate aside, several huge U.S. companies managed to dodge the tax man completely.

To identify the companies that pay the least in taxes, that is those with the lowest taxes and the largest tax provision from the government, 24/7 Wall St. reviewed corporate tax payments for the top 150 companies by revenue. Included in our analysis were company financials, including income, employee count and earnings before taxes. These were either provided by Capital IQ, or obtained by 24/7 Wall St. reviews of SEC filings or financial statements. All data, including taxes paid, are for 2012, or the most recent complete fiscal year.

These are the companies paying no taxes.

10. Alpha Natural Resources
> Income tax expense: -$550 million
> Earnings before taxes: -$2.99 billion
> Revenue: $6.98 billion
> 1-yr. share price change: -47.43%
> Industry: Coal and fuels

Alpha Natural Resources Inc. (NYSE: ANR), a metal and coal mining company, made the tremendous mistake of buying peer Massey Energy for $7.1 billion. One of Massey’s mines collapsed in 2010 and killed 29 miners, the worst such incident in 40 years. Alpha was left with the bill for a $210 million settlement. Prices for the kind of thermal coal that Alpha produces are also low. Natural gas is often used in the place of coal, adding to the price pressures. These factors caused Alpha to book an asset impairment charge of more than $1 billion and a goodwill write-down of $1.7 billion last year. The write-downs triggered a $2.8 billion operating loss for the year. At least Alpha got a large tax benefit of $550 million.

9. J.C. Penney

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REUTERS/Rick Wilking

> Income tax expense: -$551 million
> Earnings before taxes: -$1.54 billion
> Revenue: $12.99 billion
> 1-yr. share price change: -58.05%
> Industry: Department stores

J.C. Penney Co. Inc. (NYSE: JCP) took an odd path to its tax status. Management ruined the company by changing its merchandising approach. This caused same-store sales to drop more than 20% last year. Revenue from Internet sales fell even more. The fourth quarter was particularly brutal. Revenue dropped 25% to $3.4 billion, and the company posted a net loss of $552 million. J.C. Penney’s worst problems began when it hired former Apple Inc. (NASDAQ: AAPL) retail chief Ron Johnson to run the company. What worked at Apple was not appropriate for a mainstream retailer, which did not have products with near infinite demand. One of J.C. Penney’s largest shareholders, Vornado Realty, dumped a large number of shares recently as it pulled support for the imploding retailer. There are persistent rumors that Johnson will be dumped.

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8. AMR
> Income tax expense: -$569 million
> Earnings before taxes: -$2.45 billion
> Revenue: $24.86 billion
> 1-yr. share price change: N/A (Chapter 11)
> Industry: Airlines

AMR Corp., parent of American Airlines, earned much of its tax credit by filing for Chapter 11. The company should emerge from bankruptcy soon, as it merges with US Airways Group Inc. (NYSE: LCC). Most of AMR’s losses, which reached $1.1 billion in the fourth quarter, came from the write-down of the value of its planes and property and because of high jet fuel costs. AMR missed much of the consolidation that went on in the airline industry during the last round of high fuel prices, which coincided with much of the last recession. Because AMR was tardy as a consolidator, it missed out on benefits that often are supposed to to be part of airline marriage United merged with Continental, and Delta with Northwest in an attempt to lower the number of planes they operate, the number of employees they need and the number of routes they fly. A few years later, AMR is getting its merger. However, it has come too late for shareholders.

7. Lear

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Bill Pugliano/Getty Images

> Income tax expense: -$638 million
> Earnings before taxes: $679 million
> Revenue: $14.57 billion
> 1-yr. share price change: 22.88%
> Industry: Auto parts and equipment

Lear Corp. (NYSE: LEA), one of the largest suppliers of car parts, filed for Chapter 11 at the peak of the auto industry’s crisis, in 2009. Like General Motors (NYSE: GM) and Chrysler, it emerged from bankruptcy quickly. Lear’s restructuring worked, and it has even worked well enough to cause activist investors to seek board seats to force the company to distribute more cash. But the company’s success is relatively new. In 2010, Lear only made $461 million on $12 billion in revenue. Net income shot up last year to $1.3 billion, although some was due to a tax credits. Audit settlements helped drive the $638 million tax benefits as did valuation credits from operations in other countries



6. Verizon Communications
> Income tax expense: -$660 million
> Earnings before taxes: $9.90 billion
> Revenue: $115.85 billion
> 1-yr. share price change: 23.96%
> Industry: Telecommunication services

Verizon Communications Inc. (NYSE: VZ) is one of the most successful companies in America and the 15th largest in terms of total revenue. The company’s ancient landline business has continued to shrink as fewer and fewer people own home phones. But its cellular business, co-owned with Vodafone Group PLC (NASDAQ: VOD), has continued to grow, and it is now the largest provider in the U.S. based on subscriber counts. Verizon took a huge loss in the fourth quarter of last year. None of it had to do with day-to-day operations. The loss, rather, was the result of pension liabilities and the cost of Superstorm Sandy. Verizon is one of the few examples of how an extremely successful company can temporarily avoid paying taxes.

5. D.R. Horton

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REUTERS

> Income tax expense: -$673 million
> Earnings before taxes: $322 million
> Revenue: $4.72 billion
> 1-yr. share price change: 58.50%
> Industry: Home building

D.R. Horton Inc. (NYSE: DHI) operates in one of the sectors hardest hit by the recession — home building. The company lost $2.6 billion in 2008 and $545 million in 2009. Horton’s situation has improved substantially since then. Last completed fiscal year, the company had net income of $956 million on revenue of $4.4 billion. Donald R. Horton, chairman of the board, said when the company released results, “Our fiscal 2012 financial results reflect continued improvement in the housing market and in our company’s performance. Our fourth quarter pre-tax income of $99.2 million was our highest in 22 quarters and contributed to our fiscal 2012 pre-tax income of $242.9 million, the highest since fiscal 2006.” Horton’s tax situation was driven by “a reduction of the company’s valuation allowance for its deferred tax asset.” As such, the amount had no effect on the company’s operating performance.

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4. Ameren
> Income tax expense: -$680 million
> Earnings before taxes: -$1.65 billion
> Revenue: $6.64 billion
> 1-yr. share price change: 7.14%
> Industry: Utilities

Ameren Corp. (NYSE: AEE), the utility holding company, took huge write-downs last year on its merchant generation group, which marketed much of the power the company produced. Ameren said it would exit the business soon because the revenue it could get from power production was too low compared to the high cost of fuel. Ameren was fortunate recently to find a ready buyer in energy firm Dynergy Inc. (NYSE: DYN). Among other benefits to the company, the sale, according to Reuters, “removes $825 million in debt from Ameren’s balance sheet and will create an estimated $180 million in tax benefit.” Beyond these problems, Ameren is a relatively successful company. In 2011, the year before it took the write-offs, the company had revenue of $7.5 billion and net income of $526 million. Revenue in 2012 was $5.9 billion. Without the $2.6 billion impairment cost associated with its merchant business, the company would have been profitable again.

3. Caesars Entertainment

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AP Photo/Wayne Parry

> Income tax expense: -$871 million
> Earnings before taxes: -$2.25 billion
> Revenue: $8.59 billion
> 1-yr. share price change: 44.72%
> Industry: Casinos and gaming

Caesars Entertainment Corp. (NASDAQ: CZR), the casino operator, is another example of a relatively successful company that decided to write off some of its mistakes as well as the damage caused to its Atlantic City operations by Hurricane Sandy. Caesars also exited its attempts to enter the Biloxi, Miss., market. As a result, Caesars “loss from continuing operations net of income taxes” was nearly $1.4 billion. Because Caesars is so highly leveraged with debt, it would have lost money anyway. Last year’s interest expense was $2.1 billion, about the same as in 2011. Caesars is not growing, so it will have a challenge even with the write-downs it took in 2012. Last year’s revenue did not grow significantly from the year before. Caesars continues to be challenged by several other gaming companies, including Wynn Resorts Ltd. (NASDAQ: WYNN) and MGM Resorts International (NYSE: MGM). Also, Caesars operations in Missouri, Indiana and Illinois have already suffered drops in sales. The one hope of expansion that Caesars anticipates is the legalization of online gambling in some of the markets in which it operates.

2. Bank of America
> Income tax expense: -$1.12 billion
> Earnings before taxes: -$3.07 billion
> Revenue: $75.17 billion
> 1-yr. share price change: 50.68%
> Industry: Financial services

Bank of America Corp.’s (NYSE: BAC) tax credits are unique, compared to other companies with large tax benefits. The bank settled a number of lawsuits with the U.S. government, most of which had to do with litigation over past home loan practices. Its 2012 settlement with the federal government over home loan foreclosure practices cost it $2.5 billion. Its settlement with Fannie Mae over troubled loans the bank sold to customers cost it $2.7 billion. Bank of America claims that these settlements put most of its problems behind it. When the firm announced full year earnings, its Chief Financial Officer Bruce Thompson said, “We addressed significant legacy issues in 2012 and our strengths are coming through.” The bank has also continued its restructuring in the wake of the 2008 financial crisis, during which it made the questionable decisions to buy broker Merrill Lynch and subprime mortgage firm Countrywide Financial.

1. General Motors

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REUTERS/Jeff Kowalsky

> Income tax expense: -$34.83 billion
> Earnings before taxes: -$28.70 billion
> Revenue: $152.26 billion
> 1-yr. share price change: 9.91%
> Industry: Automobile manufacturers

Unlike J.C. Penney, GM did not receive its tax benefit because of operating success. The company received an “automotive interest expense” tax credit from the government, which was related to impairment of assets and amortization. This and related write-offs mean GM may not have to pay federal taxes for several years. Absent the write-offs GM has done relatively well recently. Revenue reached $152.3 billion last year, up from $135.3 billion in 2010. GM’s greatest challenge going forward is the losses in its European operations, which are made up mostly of its Opel and Vauxhall businesses. These losses have hurt global net income, offsetting some of GM’s success in the United States and China. GM has posted red ink in Europe for 13 straight years, and the car industry there is so troubled that there is no end in sight.

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