Senators question Treasury’s liberalization of bank NOL rules
Senator Chuck Grassley (R-IA), ranking member of the Committee on Finance, and Senator Charles E. Schumer (D-NY), have questioned a controversial IRS Notice that changed the existing rules to allow banks to deduct the built-in losses of other banks that they acquired. Code Sec. 382 generally limits the amount of an acquired corporation’s losses that can be used by the acquiring corporation. After an ownership change, such as in a takeover, Code Sec. 382 limits the amount of a corporation’s taxable income in a post-change year that can be offset by pre-change losses. However, on September 30, IRS issued Notice 2008-83, 2008-42 IRB 905, which provided that a bank’s losses on loans or bad debts (including deductions for a reasonable addition to a reserve for bad debts) wouldn’t be treated as pre-change losses. IRS implemented this administrative action–which resulted in billions of dollars of tax savings for the banks (and lost tax revenue for the government)–on its own.
The Senators noted that the tax change paved the way for Wells Fargo’s acquisition of Wachovia earlier this month, and provided significant tax savings to other banks pursuing takeovers. Wells Fargo saved $19.4 billion; and PNC Financial, which acquired National City, saved $5.1 billion. Schumer questioned whether the tax change created an unnecessary incentive for acquisition-minded banks to pursue takeovers that further consolidated the financial industry and provided no benefit to the stability of the larger financial system, but only an opportunity for firms to shelter their earnings.
Grassley requested that Treasury Inspector General Thorson investigate the facts and circumstances surrounding Notice 2008-83 , noting possible conflicts of interest of Treasury officials, former Goldman Sachs executives, and board members in the sale of Wachovia Corporation to Wells Fargo.
Grassley stated that Notice 2008-83 , which was issued just days before Congress voted on the Emergency Economic Stabilization Act of 2008, appears to have benefited Wachovia executives and Wells Fargo. It allowed Wells Fargo to take over Wachovia despite a pending bid from Citibank by reportedly allowing it to shelter up to $74 billion in profits. It also potentially enabled Wachovia’s senior executives to qualify for parachute payments that may not have been available under the Citibank deal.
Grassley also questioned whether IRS, which was authorized by Code Sec. 382 to issue regs to implement that Code Section, had exceeded that implementing authority by attempting to change the law through Notice 2008-83.