A little-noticed but highly significant change of the rules on use of tax losses made possible Wells Fargo's takeover of Wachovia Corporation last week, and will probably enable much more restructuring of the US banking industry.
On October 1, the IRS issued Notice 2008-83 allowing banks to take advantage of losses deriving from bad debts or loan write-downs in a change of ownership situation on a much more generous basis than previously. Before the change, treatment of pre-takeover losses followed IRS Notice 2003-65, under which fairly stringent limits applied to the availability of pre-takeover operating losses.
In the case of Wachovia, Wells Fargo is thought likely to be able to utilize USD23bn of losses over the next three years under the new approach as against a mere USD3bn under the old rules.
A Treasury Department spokesperson said that the new rules had been under consideration for some weeks and had not been issued in the light of any particular transaction.
Analysts say that the new rules allowed Wells Fargo to pay a considerably higher price for Wachovia, and that they will encourage other future banking mergers.
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