Closer look at bank bailout tax breaks

We Main Streeters must wait until next year for any potential relief from another stimulus package. Even then, as I blogged here, it's not going to be a stimulus rebate check along the lines of those issued in the first round of economy boosting efforts.

But some big banks already are getting their tax bonuses, thanks to a Treasury rule Don't Mess With Taxes blogged about on Sept. 9 in the wake of the Fannie Mac/Freddie Mac rescue.

Back then, we noted that Section 382 of the Internal Revenue Code says that net operating losses (NOLs) are limited when there is a change of control. The rule was designed to keep companies from buying other firms simply to use their losses as a tax break.

Now that edict (Notice 2008-76) from Treasury Secretary Hank Paulson that changed the NOL rule is getting a closer look.

20/20 tax hindsight: In today's Washington Post, Amit R. Paley reports on that ruling and the hindsight consternation it's causing, especially since it will give banks buying failed or failing banks a windfall of as much as $140 billion.

The problem, say many of those interviewed for the Post's story, is that no one wanted to be seen as holding up any effort to deal with the financial services calamity.

One tax specialist likened it to the days just after the Sept. 11 attack, when Congress essentially gave the Bush Administration everything it asked for to fight terrorism. In this case, the issue of fiscal terror won out over closer inspection of the bailout provisions.

Citizens for Tax Justice also slams the Treasury, detailing why it thinks the rule change is wrong. It cites three reasons:

1. It usurped the legislative role of Congress.

2. It provides an artificial competitive advantage to some banks.

3. It could be quite costly to taxpayers.

Almost every state, says CTJ, could see losses from this giveaway.

Buy now, say some lawyers: Some banking lawyers are advising their clients to hurry up and deal since there's no telling how long the rule might be in effect, according to an article last month in American Banker.

Some banking experts even suggest, reports the trade publication, that the rule could effectively mute the impact of new accounting rules that bankers had said would discourage them from doing deals.

Some say the tax break isn't enough to encourage a healthy bank to buy a troubled one; others, however, say we shouldn't be surprised if some banks will recognize the help that the tax benefit offers.

Not the first bailout break:  Sadly, the Treasury didn't stop there in greasing financial skids during the financial crisis.

As noted in this previous blog item, the government's controlling interest in Fannie, Freddie and insurance giant AIG also was calibrated so that the Fed or Treasury didn't end up owning more than 79.9 percent of the nationalized entities.

The reason was to ensure that the federally "rescued" institutions could continue to deduct the interest paid on Fed/Treasury loans.

And today we get word that the federal government is providing new assistance to AIG.

Hmmm. I wonder what tax surprises might show up in this latest deal.