House Passes Stimulus Bill Repealing IRS Ruling 2008-83 Favoring Bank Acquisitions; Excludes TARP Recipients from 5-Year Loss Carryback

The House has passed an economic stimulus bill, HR 1, prospectively repealing IRS Notice 2008-83 that interprets 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. The bill would also exclude companies receiving TARP benefits, and Fannie Mae, Freddie Mac, from a 5-year carryback of net operating losses for companies. A companion bill reported out of the Senate Finance Committee would also repeal 2008-83 and exclude TARP recipients, now estimated to be about 300 companies, from the 5-year carryback provisions. Notice 2008-83 came under intense criticism by many in Congress and is now almost certain to be repealed in any version of economic stimulus legislation presented for President Obama’s signature.

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.

The provision states that Congress finds that the delegation of authority to the Treasury under section 382(m) does not authorize the Secretary to provide exemptions or special rules that are restricted to particular industries or classes of taxpayers. Also, the statute says that IRS Notice 2008-83 is inconsistent with the congressional intent in enacting such 382(m); and that the legal authority to prescribe 2008-83 is doubtful.

With two exceptions, the provision states that Notice 2008-83 will not have any effect for any ownership changes after January 16, 2009. One exception is for ownership changes pursuant to a binding contract entered in to on or before such date, The second exception is for changes pursuant to an agreement entered into on or before such date and such agreement was described in a public announcement or in a filing with the SEC.

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.