Geithner Promises Congress to Review IRS Ruling 2008-83 Favoring Bank Acquisitions

At his Senate confirmation hearings, Treasury Secretary Tim Geithner acknowledged that IRS Ruling 2008-83 favoring bank acquisitions raised complex issues about 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 2008-83.

Notice 2008-83 interpreted Section 382 of the Internal Revenue Code to allow banks and other financial institutions pursuing acquisitions to write-off acquired losses stemming from takeovers of other banks to offset future income. Section 382 was enacted by Congress to prevent tax-motivated acquisitions of loss corporations. On September 30, 2008, Notice 2008-83 effectively removed the limit on how much taxable income a purchasing bank, thrift, industrial loan company, and trust company could deduct post-acquisition. The Notice was designed to help the struggling banking sector recover by allowing acquiring banks the ability to deduct the built-in tax losses of any banks they acquire that possesses a portfolio of loans that have deteriorated in value

Senator Grassley noted that Section 382 was not enacted lightly by Congress, but rather after extensive scholarly reflection by the staffs of the Senate and House tax-writing committees and the Joint Committee on Taxation. It has been an established part of the law ever since 1986. In the senator’s view, this law was changed when Treasury issued Notice 2008-83. He observed that many tax law scholars have opined that Treasury simply did not have authority to make this change. One of the country’s largest law firms at one point estimated that this IRS waiver could cost the US Treasury $140 billion dollars in taxes that would have otherwise been paid.

Further, the senator was troubled that this Notice was issued on September 30, 2008, meaning that Treasury virtually waived section 382 the day after the House said no to the first bail-out bill and two days before Wells Fargo acquired Wachovia on October 2, 2008.

Noting the high level of congressional concern over this issue, the Secretary pledged to respect the constitutional limits on Treasury’s authority. He also mentioned the House stimulus bill provision repealing 2008-83, as well as the fact that Senator Grassley has called for an Inspector General’s report on this issue. The Secretary looks forward to reviewing that report when it is completed.

Notice 2008-83 came under intense criticism by many in Congress and is now very likely to be repealed in any version of economic stimulus legislation presented for President Obama’s signature. For example, in a letter to Treasury and the IRS, Senator Charles Schumer demanded to know why the IRS issued a notice allowing financial institutions pursuing acquisitions to write-off acquired losses stemming from takeovers of other banks to offset future income. He questioned the need for the tax change after the implementation of the Treasury’s capital injection program and expressed concern that the change would result in tens of billions of lost tax dollars for the federal government, which has already committed $700 billion in resources to many of these same financial institutions under the rescue plan approved by Congress.