Tag Archives: 2008-83

Treasury Notice 2008-83 also nixed in Senate

The Senate passed its version of the stimulus package today (HR 1.AS2). As is often the case, it seems there is something for everyone. For example, the Senate generously left intact Wells Fargo’s gift from Hank Paulson and crew, Treasury Notice 2008-83, although the notice has been restricted from further use. The gift is likely to make it into the final bill because the text came from the House version of the bill and was left untouched by the Senate.

SEC. 1281. CLARIFICATION OF REGULATIONS RELATED TO LIMITATIONS ON CERTAIN BUILT-IN LOSSES FOLLOWING AN OWNERSHIP CHANGE.

In other words, Congress is letting stand any bank mergers before Jan. 17 which might have relied on Treasury Notice 2008-83 which gave banks (and only banks) a pass on section 382(h) of the tax code. I provide a basic summary in an earlier post: Revenue Code Section 382: in the face of a financial crisis

Update: This made it through conference and was signed into law by President Obama.

Treasury Notice 2008-83 nixed in House economic recovery bill

The House passed an economic stimulus bill today. It includes the slap-down of Treasury Notice 2008-83 that the House Ways and Means Committee had previously included. I hope the conference with the Senate disallows all reliance on the notice.

H.R.1

American Recovery and Reinvestment Act of 2009 (Introduced in House)


PART 4–CLARIFICATION OF REGULATIONS RELATED TO LIMITATIONS ON CERTAIN BUILT-IN LOSSES FOLLOWING AN OWNERSHIP CHANGE

SEC. 1431. CLARIFICATION OF REGULATIONS RELATED TO LIMITATIONS ON CERTAIN BUILT-IN LOSSES FOLLOWING AN OWNERSHIP CHANGE.

    (a) Findings- Congress finds as follows:
    • (1) The delegation of authority to the Secretary of the Treasury under section 382(m) of the Internal Revenue Code of 1986 does not authorize the Secretary to provide exemptions or special rules that are restricted to particular industries or classes of taxpayers.
    • (2) Internal Revenue Service Notice 2008-83 is inconsistent with the congressional intent in enacting such section 382(m).
    • (3) The legal authority to prescribe Internal Revenue Service Notice 2008-83 is doubtful.
    • (4) However, as taxpayers should generally be able to rely on guidance issued by the Secretary of the Treasury legislation is necessary to clarify the force and effect of Internal Revenue Service Notice 2008-83 and restore the proper application under the Internal Revenue Code of 1986 of the limitation on built-in losses following an ownership change of a bank.
    (b) Determination of Force and Effect of Internal Revenue Service Notice 2008-83 Exempting Banks From Limitation on Certain Built-in Losses Following Ownership Change-
    • (1) IN GENERAL- Internal Revenue Service Notice 2008-83–
      • (A) shall be deemed to have the force and effect of law with respect to any ownership change (as defined in section 382(g) of the Internal Revenue Code of 1986) occurring on or before January 16, 2009, and
      • (B) shall have no force or effect with respect to any ownership change after such date.
    • (2) BINDING CONTRACTS- Notwithstanding paragraph (1), Internal Revenue Service Notice 2008-83 shall have the force and effect of law with respect to any ownership change (as so defined) which occurs after January 16, 2009 if such change–
      • (A) is pursuant to a written binding contract entered into on or before such date, or
      • (B) is pursuant to a written agreement entered into on or before such date and such agreement was described on or before such date in a public announcement or in a filing with the Securities and Exchange Commission required by reason of such ownership change.

Update: This made it through the Senate and conference session, and was signed into law by President Obama.

Federal stimulus plan would repeal big tax break for banks given by Notice 2008-83

It looks like Congress is about to squelch Treasury Notice 2008-83 but will provide a gift to banks that already relied on it. I think of it as much a parting gift to outgoing Treasury Secretary Paulson.

The draft economic recovery/stimulus package that is starting to wind its way through Congress essentially says that the Treasury Department went beyond its powers by issuing Notice 2008-83 but that banks that already relied on the tax guidance provided by the notice may still take advantage of the huge tax breaks it provides them.

Relevant text from the bill:

PART 4 â?? CLARIFICATION OF REGULATIONS RE-LATED TO LIMITATIONS ON CERTAIN BUILT-IN LOSSES FOLLOWING AN OWNERSHIP CHANGE

SEC. 1431. CLARIFICATION OF REGULATIONS RELATED TO LIMITATIONS ON CERTAIN BUILT-IN LOSSES FOLLOWING AN OWNERSHIP CHANGE.
(a) FINDINGS.â??Congress finds as follows:
(1) The delegation of authority to the Secretary of the Treasury under section 382(m) of the Internal Revenue Code of 1986 does not authorize the Secretary to provide exemptions or special rules that are restricted to particular industries or classes of taxpayers.
(2) Internal Revenue Service Notice 2008â??83 is inconsistent with the congressional intent in enacting such section 382(m).
(3) The legal authority to prescribe Internal Revenue Service Notice 2008â??83 is doubtful.
(4) However, as taxpayers should generally be able to rely on guidance issued by the Secretary of the Treasury legislation is necessary to clarify the force and effect of Internal Revenue Service Notice 2008â??83 and restore the proper application under the Internal Revenue Code of 1986 of the limitation on built-in losses following an ownership change of a bank.
(b) DETERMINATION FORCE EFFECT OF INTERNAL REVENUE SERVICE NOTICE 2008â??83 EXEMPTING BANKS FROM LIMITATION CERTAIN BUILTâ??IN
LOSSES FOLLOWING OWNERSHIP CHANGE.â??
(1) IN GENERAL.â??Internal Revenue Service Notice 2008â??83â??
(A) shall be deemed to have the force and effect of law with respect to any ownership change (as defined in section 382(g) of the Internal Revenue Code of 1986) occurring on or before January 16, 2009, and
(B) shall have no force or effect with respect to any ownership change after such date.
(2) BINDING CONTRACTS.â??Notwithstanding paragraph (1), Internal Revenue Service Notice 2008â??83 shall have the force and effect of law with respect to any ownership change (as so defined) which occurs after January 16, 2009 if such changeâ??
(A) is pursuant to a written binding contract entered into on or before such date, or
(B) was described on or before such date in a public announcement or in a filing with the Securities and Exchange Commision required by reason of such ownership change.

Full Text of The American Economic Recovery and Reinvestment Plan

The bill was posted today and will be officially introduced by Rep. Rangel to the House Ways and Means Committee over the coming days. Apparently, this is hot off the presses. A Committee press release about the bill is dated Saturday, Jan. 17, 2009 although it does mention the bill blocking Notice 2008-83.

The AP provides more commentary on the stimulus package and the repeal of Notice 2008-83.

via Stimulus plan repeals big tax break for banks – washingtonpost.com.

House leaders moved this week to repeal the tax break for banks even as the Senate voted to help many of those same institutions by releasing the second $350 billion of the widely unpopular Wall Street bailout. Many lawmakers are unhappy with the results after the Bush administration spent the first $350 billion, making them wary of helping banks in the stimulus package.

Repealing the tax break would negate those savings in future bank mergers. It would not, however, affect mergers already under way, according to a summary of the stimulus package released by the tax-writing House Ways and Means Committee.

I personally think Congress should prevent any party from taking advantage of the guidance from Notice 2008-83. The banks that did knew or should have known that it was likely not legal, outside the powers of the Treasury Department, and would be slapped down by Congress. I wrote more about that in my last post about Notice 2008-83.

Related posts:


Revenue Code Section 382: in the face of a financial crisis (pt. 2)

This follows up my earlier post regarding a presentation I gave to my tax policy class. I have since completed a final draft of my paper (PDF). I turned it in last night. There is much more that can be said about the subject but I realized part way through semester that it would be helpful to have had a background in economics. I checked out several books about economics and even sequestered myself in the libraries more than once but barely skim the top of the subject in the paper. I wish I’d studied economics in college, even if just a class or two. Fascinating stuff.

Since I gave the presentation, Senator Chuck Grassley sent a letter on November 14, 2008 to Inspector General Eric M. Thompson of the United States Treasury requesting a formal investigation into the origins of Notice 2008-83 and conflicts of interest in the Treasury leadership and their relations with bankers who will benefit from the guidance. The investigation is ongoing. http://finance.senate.gov/press/Gpress/2008/prg111408c.pdf

In addition, Senator Bernie Sanders introduced a bill to rescind Notice 2008-83. His web site has more information about the bill – Closing Corporate Loopholes news release, November 18 2008.

I agree with Sen. Sanders that it should be rescinded. It does not make sense, Treasury clearly lacks authority (in my view at least) to waive application of Section 382(h), and the banks should know better than to rely on it. This maxim comes to mind: “If it sounds too good to be true, it is.” If Treasury had wanted to really waive the rule, I think a better choice would have been to apply the waiver temporarily to all corporations that can show the purpose was not to traffic in NOLs and require the ownership change to involve an operating business and a substantial level of business continuity. Such a change in the program will accomplish a few things. It will limit macroeconomic distortions by encouraging investment and recapitalization of all business types. It will ensure that the original intent of Congress, to prevent or limit trafficking in NOLs, is met. And it will be more administrable than ad hoc regulation directed to correct market failures in one industry or group of corporations However, it might not be politically acceptable because it will limit Federal revenues and will increase an already large tab for the bailout of the financial system.

As for fixing the financial system (not my paper topic), the bailout is a failure. It is not targeted to the root causes of the chaos: trust. Or, I should say lack of trust. The Madoff ponzi scheme is just one more nail in the coffin of the bubble that the market is. The real issue is that nobody knows the true value of the assets held by banks, companies, or individuals. Those fancy securities with acronymns for names (CDO, MBS, etc.) are not transparent and escape any real valuation until everyone knows what they contain (not just dud grenades or sour grapes). In addition, the bailouts have come without two necessary components – revenge and accountability. Revenge is not just necessary from the tax payers vantage point but to lessen the moral hazard and prevent this from ever happening again.  If I were in Treasury, and I came very close to applying on change.gov, I would set up a separate unit/corporation of government that would take all of the bundled securities from banks and other entities that needed bailouts, enter bankruptcy protection, etc. and have that government entity sort out all the securities, insert transparency and then sell them off. The government would keep a share (say 50%) and give the rest back to the original holder. Such a plan would: 1) allow everyone to trust those securities again; 2) enact some modicum of revenge that lessens the moral hazard and makes it more acceptable to tax payers; and 3) through the first two create some accountability.

Revenue Code Section 382: in the face of a financial crisis

I gave a presentation in my tax policy seminar today, scratchy throat and all, based on the topic of a paper I am writing for the class. The U.S. Treasury Department intrigued and scared me with some of the moves it made in September and October so I ended up writing my paper on the actions it is taking. In particular, I focus on one notice of guidance issued by the I.R.S. that essentially waives application of a section of the code – 26 U.S.C. 382(h) – for banks only. This waiver is credited with Wells Fargo snatching up Wachovia, which had already agreed to a sale to Citibank. The drama of it all. I estimate Wells Fargo will save about $26 billion in taxes and enlarge itself to boot.

The slides below are followed by my notes, including for the missing slide. Keep in mind that this presentation greatly simplifies one of the most complex sections of the code. Comments are welcome. Enjoy!

[flickr]photo:3027029930[/flickr]

  • I am interested in how the tax code is being used to help combat the current financial crises.
  • one place Treasury started was 382, which limits the use of losses and gains by a new loss corporation

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We will quickly cover …

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The treasury department has been active in identifying trouble spots and issing guidance to corporations to help deflect some of the market turmoil.

  • it started with the rescue of Fannie Mae and Freddi Mac, which remain publicly traded corporations
  • then it was confronted with AIG
  • then it decided to help recapitalize corporations so it gave a safe harbor from the law
  • The last one is the topic of my paper
    • treasury excuses banks from 382(h) which restricts trafficking in built-in losses
    • we’ll come back to this, but first …382

[flickr]photo:3026208963[/flickr]

NOL:

  • Occurs when tax-deductible expenses exceed taxable revenues
  • carry back: to offset income during the previous two tax years;
    • OR
  • carry over for a 20 years before they expire.
  • considered a tax asset under GAAP accounting standard and shows as an asset on balance sheets
    • Good example: GM took a $39 billion write-down in September 2007 to realize losses on tax assets that were expiring or it did not expect to redeem.  GM lists â??Other current assets and deferred income taxesâ? in its 10Q. In the August 2008 10Q, it is  $3.58 Billion.Key terminology:

Loss Corporation is entitled to use the loss

  • Old loss corporation is the one that generated the loss before the change date
  • New loss corporation is the one that can use the NOL after the change date

[flickr]photo:3027044162[/flickr]

382(b) â?? places annual limits on NOLs after ownership change

Change in ownership is complex

  • Just know it can be triggered by a number of things:
  • sale of the corporation, reorganizations, recapitalization, capital injection, stock transfer, IPO.The old and new loss corp can be the same
  • Assumption here: corporation acquired all at once

Annual limit

  • equal to, or less than, the value of the old loss corporation times the long-term federal tax-exempt bond rate – set by the IRS monthly 4.65%
  • Carryforward allowed, carry back prohibited.
  • Wachovia example: 24.5 Billion * 4.65% = 1.14 Bill.
  • GM example: 3.64 Billion * 4.65% = 169 million

NOLs expire after 20 years.

  • If the annual limit is $5 million dollars due to 382, the maximum deductible amount is $100 million dollars.
  • Wachovia ex: 1.14 Billion * 20 years = $22.79 Bill.
  • GM example: 169 million * 20 years = $3.4 billion – based on market cap on Y! Finance
  • These are the  NOLs that can be utilized by the new loss corporation over the 20 year carry forward term.

[flickr]photo:3026209289[/flickr]

  • 382(h): Limits new loss corporations from using net unrealized built-in gains or losse (I’ll cover losses only)
  • Without 382(h), a loss corporation could speed up or slow down recognition of gains or losses.

NUBIL: net unrealized built-in losses

  • includes depreciation, amortization, and depletion.
  • When built-in loss is recognized, that loss is then added to the pre-change NOL carryovers and limited as such.
  • limits are only placed on losses recognized during the five years after the change date.
  • Elements
    • must be accrued at the time of the ownership changes
    • the amount must be substantial (>=15% fmv of the assets or $10mill) â?? de minimis rule
    • recognized within a limited period (five years).
    • After year 5, the built-in losses are carried over without limitation.

Burden on the new loss corp. to establish that a loss recognized during the recognition period is not a RBIL.

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IRS Notice 2008-83

  • Waives application 382(h) for banks
  • Applies only to banks
  • Has no termination date

[flickr]photo:3027044556[/flickr]

Immediately after the merger is complete

  • Wells can recognize NUBILs it owns through its acquisition of Wachovia
  • apply those losses through carry back mechanism to offset income during the past two tax years.
  • gets a refund check from the I.R.S.

Wells expects to eventually write down $74 Billion in value from Wachovia’s loan portfolio – NUBIL.

  • once recognized, those $74 billion in losses would be attributed to Wells Fargo, rather than Wachovia.
  • immediately be used to offset income
  • Any remaining amount can then be carried over as NOL to subsequent tax years, to offset future gains, either as NOLs that are carried forward or that offset income during a given tax year.

Possible scenario for carryback:

  • Taxable income â?? 2007: $11.6 Billion
    • annual report: 3.57Bill. tax paid / 30.7% effective tax rate
  • Taxable income â?? 2006: $12.7 Billion
    • annual report: $4.23 Billion tax paid / 33.4% effective tax rate

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  • Unequal treatment creates macroeconomic distortions.
  • Generally, similarly situated taxpayers should be treated similarly.
  • Others w/ large NUBIL: insurance companies, investment banks, manufacutures, real estate developers or holding companies, and

Similarly situated taxpayers can include both small and large corporations and span across different industries because the corporations follow the same tax laws and regulations. It can also be used more narrowly to only apply to companies large or small or only companies within a particular industry. I think it should apply broadly and inclusively.

argument for providing the banks (under 581) a bypass around 382(h).

  • perhaps saving the financial system could trump economic efficiency arguments.
  • Counter: Citibank bid for Wachovia without this provision.
    • Citi had the gov’t assume certain risks. Here Wells assumed the risk and paid a premium for Wachovia, versus Citi.
  • Counter what about all the other companies part of the finanical system not covered? And other important industries?

[flickr]photo:3026209761[/flickr]

distortions are pushing non-bank financial servicers to become banks or bank holding companies

  • take advantage of tax breaks and other government assistance that is being provided to banks.
  • take advantage of 2008-83.
  • GMAC announced on Nov. 5
  • Amex on Monday
  • Investment banks Goldman Sachs and Morgan Stanley have already received permission to become bank holding companies.
  • Will insurance companies be next?

[flickr]photo:3027044946[/flickr]

Moral Hazard â?? taxpayer behavior distorted by removing some risk of failure

Missing slide:

Start by asking what is this regulation intended to correct? Does it actually accomplish that goal or are there other intended or unintended consequences

  • Seems this guidance is intended to help recapitalize banks.
  • If so, compare to other methods to recapitalize banks. Are there better ways? Direct capitalization? Bankruptcy?

Direct capitalization

  • Wells: $74 billion write off – Assume 35% tax rate â?? expect $25.9 billion in taxes lost
  • Is $25.9 billion in lost tax revenue better used recapitalizing Wachovia?

Bankruptcy or receivership?

  • 382 includes a bankruptcy exception that provides what amounts to a waiver of 382.

Creates super bank

  • Is Wells taking risks it would not otherwise take (moral hazard)?
  • What if Wells Fargo is mistaken about the risks inherent in the bank it acquires or their own portfolios?
  • Is it worth the risks to have two banks fail rather than one if there are bigger losses than anticipated in the new loss corporation as a result of the acquisition?

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[no notes]

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  • Notice 2008-83 has received public attention of Senators from both parties
    Charles Schumer (democrat)
    Charles Grassley (republican)
    Both are upset because Congress was not consulted, yet this will cost hundreds of billions of dollars.

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Poor tax policy to give only one industry a waiver to 382(h) requirements.

Better choice?

  • Apply waiver temporarily to all corps that can show the purpose was not to traffic in NOLs
    • require sale of an operating business & business continuity
  • Limits macroeconomic distortions by encouraging investment and recapitalization of all business types
  • Ensures the original intent of Congress, to prevent or limit trafficking in NOLs
  • More administrable than ad hoc regulation directed to correct market failures in one industry or group of corporations
  • Might not be politically acceptable because it will limit Federal revenues and it will

I think it would have also been better for Treasury to insert this into the discussions of the big bailout package since Notice 2008-83 came out while Congress was debating the bailout.

… now for me to finish writing the paper.

Update (12/18/08): I finished the paper. Sources for the information given above is identified in the paper. 🙂