The gaming industry had low expectations of President Barack Obama’s massive stimulus bill last month. After all, the bill contained a provision that prohibited any funding to companies involved in gambling. And Obama’s distaste for companies that had received federal bailout money holding meetings in Las Vegas actually resulted in several canceled gatherings in Sin City.
But provisions that reduce the tax burden on companies that seek to relieve some of their debt actually work out in favor of many gaming companies laboring under huge debt loads.
Several versions of language modifying the discharge of indebtedness rules were considered at various times during the drafting of the bill. The measure centers on companies buying back debt at a lower rate than initially subscribed. For example, bonds that originally sold at $100 are now selling for $70. By buying back that debt, a company would realize a theoretical gain of $30. Prior to passage of the stimulus bill, the tax on that income was due in the first tax year following the transaction. According to proposals discussed as part of the stimulus bill, however, companies would not have to pay the tax for a number of years and would then have the tax spread out over another term of years.
The House-passed version contained no such measure, and the Senate-passed bill would only have permitted debt repurchased with cash to qualify for the deferment. This would not greatly have benefited the casino industry since most gaming companies have little free cash.
House and Senate conferees, at the urging of the Nevada delegation, improved the Senate language dramatically during conference. The compromise language included in the final bill allows for debt-for-debt exchanges, not just cash buybacks.
It was all the industry had hoped. Companies that refinance their debt are granted a five-year exemption from paying taxes on the income gained, and then can spread the tax burden over an additional five years.
“This is a real win for our industry,” said Frank J. Fahrenkopf, president and CEO of the Ameican Gaming Association. “These tax incentives add up to billions in savings for our companies, allowing us to better deliver on our promises to our customers, shareholders and the communities where we operate. We still have a long way to go to pull out of this recession, but this is a good step forward.”
There is some question about how much of an impact the bill will have because of the type of debt most casino companies hold. The bill says that debt will only qualify “in connection with the conduct of a trade or business by such person.” That provision prevents debt that is issued by a private-equity partnership from qualifying for the tax break.
But the impact may be substantial because the debt that private equity firms use to acquire companies is typically “bootstrapped”-borrowing is done by the company being acquired, and equity from the private-equity partnership helps complete the deal, therefore qualifying for the tax savings.
Also included in the bill is a bonus depreciation provision, which permits companies to deduct 50 percent of the value of new equipment purchases or upgrades in the first year. This provision is expected to benefit slot manufacturers as well as operators, who will now have another incentive to upgrade existing equipment.
Tribes also got a boost. Current law allows tribes to issue tax-exempt bonds for essential government functions (i.e. roads, bridges, schools). A provision in the stimulus bill will permit them to also issue these bonds for economic activity. These “tribal economic development bonds” could be used on resorts, but not on gaming facilities, whether they are Class II or Class III.
A carve-out was included in the appropriations part of the stimulus bill, prohibiting the use of appropriated funds for a “casino or other gambling establishment, aquarium, zoo, golf course, swimming pool, stadium, community park, theater, art center, and highway beautification project.” This provision does not impact the ability of the gaming industry to take advantage of the tax benefits included in the bill.