Congress once again waited until the last minute to pass a bill resolving the "fiscal cliff" and in doing so passed a bill that, while temporarily averting the fiscal cliff, also contained favors to varying special interest groups. Of special note to investors is the $76 billion in special interest tax credits included in the bill. As columnist Tim Carney points out in the Washington Examiner, among the provisions included in the fiscal cliff legislation were those from the Family and Business Tax Cut Certainty Act of 2012. Larded up by lobbyists from both sides of the political aisle, the Act's provisions will directly profit the shareholders of the following 5 companies.
Citigroup (C) - Citigroup joined forces with General Electric (GE) to lobby for a two year extension of the active financing exception tax provision. The active financing exception allows corporations like GE and Citigroup to defer their US tax bill by moving profits offshore to financial subsidiaries. Many corporations with the ability to use this provision will then wait until a more opportune time to bring the money back onshore when rates are either lower or there is a tax holiday on offshore earnings. Investors obviously liked both the resolution of the fiscal cliff impasse and its implications for Citigroup as the stock has risen from $39.50 to $42.43 and hit a 52-week high of $42.54 on Friday - a rise exceeding that of the general upward movement in the Dow.
General Electric - GE is no stranger to using the political system to ensure its shareholders profit from favorable tax provisions, the creation of artificial demand through government regulations and the use of the weight of the US government in overseas deals. Because of the enormous scope of GE's operations, GE benefits from not just one of the Act's special interest tax credits, but two. First, GE benefits from the active financing exception described above and as a result pays next to nothing in income taxes. Second, the wind energy production tax credit received a one year extension and now applies to any project begun in 2013. Previously, the credit had only applied to projects brought online by 2012. As a result, GE's wind turbine subsidiary will receive a significant boost in 2013 orders with backlog likely extending into 2014 as well.
Diageo (DEO) - Diageo produces and distributes dozens of beer and liquor brands including Johnnie Walker, Crown Royal, Smirnoff, Ketel One, Guinness, Jose Cuervo and Captain Morgan. In February 2012, Captain Morgan shipped its first case of rum distilled in its new US Virgin Islands distillery. The distillery was built using funds raised in a bond issuance covered by the US Virgin Islands government. The bonds were issued in 2010 and backed by future rum tax revenues from the $13.50/gallon excise tax on rum imposed by the US government ($13.25 of the tax is returned to the territorial governments). The fiscal cliff legislation contained an extension of this excise tax which helps Diageo and other distillers in future bond issuances. More importantly, as much as 35% of the tax revenue is distributed to distillers by the territorial governments to help market rum in the US. Captain Morgan's portion of the excise tax nets the US Virgin Islands around $135 million annually, of which up to $47 million goes to marketing efforts for Captain Morgan - not a bad return on investment for a few lobbying dollars.
Sony Entertainment (SNE) and Lionsgate Films (LGF) - Another provision of the fiscal cliff deal is the continuation of Section 181 of the federal tax code, which allows film producers to write down up to $15 million of expenses from their tax bill if they meet certain qualifications. In order to qualify, filming must occur in the United States. The Joint Committee on Taxation estimates it will cost an estimated $430 million in deductions in 2013 and 2014. Film production companies such as Sony (16.6% market share) and Lionsgate (7.3% market share) will benefit from the tax deductions to varying degrees. For Sony, the tax breaks will be lucrative, but will not have an immensely large impact on the firm's bottom line due to its extensive diversification. For a smaller film company like Lionsgate, though, the tax breaks could significantly improve the firm's net income.