Senator Schumer Questions IRS and Treasury on Notice 2008-83 Allowing Bank Write-Offs of Acquired Losses from Acquisitions of Troubled Banks

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 will 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.

Senator Schumer also questions whether the tax change creates an unnecessary incentive for acquisition-minded banks to pursue takeovers that provide no benefit to the stability of the larger financial system, but simply represent an opportunity for firms seeking future tax deductions to shelter their earnings. Since the Notice was issued, he continued, at least three banks stand to gain sizeable tax benefits from acquisitions. For example, the new ruling will allow Wells Fargo to save $19.4 billion in taxes from their acquisition of Wachovia, according to published reports.

The senator is referring to IRS Notice 2008-83, which interprets Section 382 of the Internal Revenue Code, which was enacted by Congress to prevent tax-motivated acquisitions of loss corporations. On September 30th, 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 is 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.

The senator is concerned that the Notice, which was never debated by Congress, could end up costing taxpayers tens of billions of more dollars on top of the hundreds of billions of dollars already approved by Congress in the financial rescue plan. He also fears that the Notice could have the unintended consequence of motivating more financial firms wanting future tax deductions to shelter their earnings to buy competitors, leading to more consolidation in the financial industry than would be necessary to restore stability in the financial sector. Given that the Notice does not have an expiration date, leaving its future uncertain, he is concerned that this change in federal tax law may lead to takeovers motivated solely by the opportunity to take advantage of tax savings.

In light of these concerns, the senator asks the IRS and Treasury to answer five questions as soon as possible. First, what was the rationale for making this change and why was there no consultation with Congress? Second, since the section 382 change was made prior to the Treasury’s rollout of its capital infusion program, does Treasury still think the change to section 382 is necessary as part of its financial rescue efforts? Third, he wants to know what analysis, if any, Treasury has done to ensure that this change will not create an incentive for consolidation beyond what is necessary for stability in the financial sector?

Fourth, what are the plans for reviewing the outcome of this change to the tax law and assessing its cost-effectiveness? Fifth, since one of the main goals in designing the financial rescue program is allowing taxpayers to share in the upside as the financial industry recovers, is it not against taxpayers’ interests to allow these tax deductions to be carried forward, since it reduces the taxable profits of the banks making the purchases and reduces taxpayers’ potential?