Motorola deal could offer Google huge tax, patent benefits

Reuters

Google Inc's (Mountain View, Calif., U.S.A.) acquisition of Motorola Mobility Holdings Inc (Schaumburg, Ill., U.S.A.) will bring an unusual stable of tax and accounting benefits to the search-engine giant. The deal also underscores a trend by technology companies to snap up patents in a bid to stave off competitive threats and patent-infringement lawsuits. Google's patent portfolio is seen as one of the weakest in the industry.

By agreeing on August 15 to pay $12.5 billion in cash for struggling Motorola Mobility's vast portfolio of 17,000 patents and 7,500 pending patent applications on top of its handset business and television set-top boxes, Google is building a defensive bulwark for its Android phone software, already available on Motorola phones among others.

The acquisition, Google's largest ever, has legal tax and
accounting benefits, many associated with the money Motorola Mobility has lost over the years, according to experts who have studied its details.

"The tax benefits of the deal make what was a good deal into a great deal," said Robert Willens, a New York accounting and tax expert. He estimated that through the acquisition, Google can expect to reap $700 million a year in tax deductions from future profits each year through 2019. Google also will be able to immediately reduce its taxes by $1 billion due to Motorola Mobility's U.S. net operating loss, and by a further $700 million due to its foreign operating loss, he said.

These are deductions which Motorola Mobility has been unable to use because of a faltering business that has failed to generate the revenue against which to offset them. The deductions include those for research and development, tax losses in the United States and abroad, and credits carried over.

While Motorola Mobility has lost $3.9 billion on its U.S. business pre-tax over the past three years and generated a $630 million pre-tax profit on its operations abroad, Google made $11 billion in global pre-tax profit last year.

In 2009, the Internal Revenue Service changed rules that previously said the tax benefits associated with a loss-making company could only be used by that company to offset its own income. The change, according to Willens, "makes Motorola Mobility that much more valuable to Google, which will clearly utilize the losses."

The IRS kept a separate rule saying that a company could not acquire another company primarily for its tax benefits -- something Willens said Google was not doing, even as it benefited from the tax component of the acquisition.

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