Nov 11, 2008 |
US banks in for a windfall WASHINGTON - SOME of America's biggest banks are in for a windfall - on top of the US$700 billion (S$1.05 trillion) government bailout - thanks to a new tax policy quietly issued by the Treasury Department.
The notice gives big tax breaks to companies that acquire struggling banks hit hard by the mortgage crisis. In some cases, the tax breaks could exceed the cost of acquiring the banks, according to analyses by private tax experts.
The change could cost the Treasury as much as US$140 billion by enabling firms that acquire struggling banks to use more losses incurred by those banks to offset their own taxable profits.
Wells Fargo, which made a bid to acquire Wachovia, just days after the notice was issued, stands to reap about US$20 billion in additional tax savings because of the change, according to the analyses. Wells Fargo paid US$14.8 billion in a stock deal to buy Wachovia.
The notice was issued Sept 30 as Congress debated the US$700 billion bailout plan. Some members of Congress are upset that such a sweeping tax change was issued with no public hearings or congressional input.
'I am 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,' Senator Charles Schumer said in a letter last week to Treasury Secretary Henry Paulson.
Treasury Department spokesman Andrew DeSouza said the notice was issued to provide tax guidance to firms involved in bank takeovers at a time when numerous financial institutions are struggling and their value can be difficult to determine. He said it wasn't aimed at any one specific taxpayer or transaction.
'Treasury has worked very hard at expediting tax guidance to provide clarity regarding uncertain tax issues relating to the financial markets', Mr DeSouza said.
'This guidance was developed over many weeks by Treasury and the IRS and was not requested by any outside institution. This was broad guidance'.
Some tax lawyers on Monday questioned the legality of the notice, but Mr DeSouza said it is authorised under the department's regulatory authority.
When one bank acquires another, it is allowed under tax law to use some of the unrecognised losses of the bank it acquires to offset its own revenues for tax purposes. That lowers the tax liability of the merged bank.
Before the notice was issued, the merged bank could write off only a limited amount of the losses. The notice removed those restrictions, enabling the acquiring banks to make huge reductions in their tax liabilities.
In some cases, banks can qualify for refunds of taxes paid in previous years through writing off losses of the banks they acquire, said Mr Robert Willens, a corporate tax lawyer in New York.
Mr DeSouza said the Treasury Department did not issue a formal estimate on the cost to taxpayers.
However, a widely circulated commentary by the law firm of Jones Day estimates that banks could reap tax savings of up to US$140 billion by acquiring banks with large losses related to the housing market downturn.
Willens estimates the change will cost taxpayers US$105 billion to US$110 billion. He calculated that it will reduce Pittsburgh-based PNC Financial Services Group's taxes by about US$5.1 billion through its takeover of National City.
Spain-based Banco Santander could cut its tax liability by an additional US$2 billion with its takeover of Philadelphia-based Sovereign Bancorp, he said.
Mr Willens is one of the tax lawyers who doubts the legality of the notice. But, he said, repealing it could be disastrous for the banking industry and for financial markets.
'I suppose that some of these banks would have to be seized by the government', Mr Willens said in a telephone interview. 'That would just send shock waves through the market'. -- AP
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