US Banks Lose Out In House Stimulus Bill

by Leroy Baker, Tax-News.com, New York

20 January 2009

Banks operating in the United States are set to lose a generous tax break granted to them by the Treasury Department last year if proposals contained in the House of Representatives version of the economic stimulus legislation is approved.

The little-noticed provision inserted into the House bill outlined by Ways and Means Committee Chairman Charles Rangel last week would "prospectively repeal Treasury Section 382 ruling," meaning that banks would no longer be able to claim huge tax deductions when they buy out struggling debt-stricken rival institutions.

On October 1, 2008, the Internal Revenue Service 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.

It is thought that this rule change prompted Wells Fargo to go ahead with its acquisition of Wachovia Corporation in a USD14.8bn stock deal. The rule change allowed Wells Fargo to utilize USD23bn of Wachovia's losses over three years, whereas, under the old rules, it could have offset just USD3bn in losses. However, the House proposal to repeal the rule change will not be enforced retrospectively, meaning that any bank takeovers benefiting from last year's ruling would not be affected.

The Treasury ruling provoked strong criticism from some senior lawmakers, including Sen. Charles Schumer, the Chairman of the Senate Banking Committee, and Sen. Chuck Grassley, the ranking Republican on the Senate Finance Committee, who have accused the government of exceeding its authority by not consulting Congress over the rule change, especially given the fragile state of the banking industry and that so much tax revenue appears to be at stake.

In something of a double tax blow for the banks, the House stimulus bill also excludes those institutions taking part in the Treasury's Troubled Asset Relief Program (TARP) from using higher deduction limits for investments, and more generous loss carry back rules aimed at easing company cash flow problems.

The recovery legislation will be formally introduced in the coming days, and is expected to receive consideration in the Ways and Means Committee this week.

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