Corporate Governance

Banks Reaped Windfalls from Tax Code Change in Bailout Debacle

By Carol Straw

In the midst of Congressional approval of the controversial $700 billion bailout package which passed last year, the Treasury Department quietly issued a ruling in which it repealed a 22-yr tax law limiting a kind of tax shelters arising in corporate mergers. This ruling (2008-83) would give American banks a $140 billion windfall at the tax payers? expense.

Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would than use the acquired company?s losses to offset their gains and avoid paying taxes. Lawmakers decried the tax shelters as a scam and created a formula to strictly limit the use of those purchased losses for tax purposes. Until the financial meltdown, banking lobbyists failed in their efforts to get the tax code changed for two decades.

Dubbed by analysts at the ?The Well Fargo Ruling?, the notice came 24 hours after the House of Representatives initially defeated the bailout bill, but one day after Wachovia agreed to be acquired by Citigroup in a government-brokered deal. Wells Fargo, which ultimately made a successful bid for Wachovia, reaped $25 billion as a result of the new tax guidance. PNC, which took over National City, and Banco Santender, which took over Sovereign Bancorp., netted an extra $5.1 billion and $2 billion, respectively also.

But lawmakers were furious. No one in the Treasury informed the tax-writing committees of Congress about this move. Many tax experts opined that the Treasury overstepped its? authority in repealing Section 382 as a backdoor way of providing aid to banks. Treasury Secretary Tim Geithner agreed. At his Senate Confirmation hearings, Geithner acknowledged that the IRS ruling favoring banks acquisitions raised complex issues about the Treasury?s authority and differential treatment of the financial services industry. Under strong questioning from Finance Committee Member Charles Grassley, the Secretary promised to more closely examine the issue and work with the Committee to resolve the issues raised by the ruling. In taking the lead, the House has passed an economic stimulus bill, HR 1, prospectively repealing IRS Notice 2008-83. The bill would exclude companies receiving TARP benefits, and Fannie Mae, Freddie Mac, from a 5-yr carryback of net operating losses for companies. A companion bill reported out of the Senate Finance Committee would also repeal 2008-83 and exclude TARP recipients, now estimated to about 300 companies, from the 5-yr carryback provisions.

See Amit R. Paley?s article dated 11/08/2008 in the Washington Post entitled ?A Quiet Windfall for U.S. Banks.?
See Jim Hamilton?s blogs posted 1/28/2009 06:31:00 PM and 1/27/2009 01:22:00 PM

Full post as published by PomTalk on February 03, 2009 (boomark / email).