Just before Halloween, I discussed the several Treasury notices overriding enacted law governing the ability of acquiring corporations to use "net unrealized built-in losses" of acquired corporations. See More on the Bailout: Schumer Probes Treasury Handling. Notice 2008-83 suspends the rule in section 382 that disallows use of a net unrealized built-in loss, without citing to authority. Although some in Congress seem disturbed by this action (Grassley called it astonishing), it is not clear that this hitherto rather weak Congress will stand up and take action to block Treasury's rewriting of the law.
These points are clear in Amit Paley's report about the Treasury override of Congress, by which conservatives got something they couldn't get through legitimate action in Congress, in the Washington Post today.
When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal. But they have worried that saying so publicly could unravel several recent bank mergers made possible by the change and send the economy into an even deeper tailspin. ... Lawmakers are now looking at whether the new notice was introduced to benefit specific banks, as well as whether it inappropriately accelerated bank takeovers.
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Andrew C. DeSouza, a Treasury spokesman, said the administration had the legal authority to issue the notice as part of its power to interpret the tax code and provide legal guidance to companies. He described the Sept. 30 notice, which allows some banks to keep more money by lowering their taxes, as a way to help financial institutions during a time of economic crisis. Amit Paley, A Quiet Windfall for U.S. Banks, Washington Post, Nov. 10, 2008.
Furthermore, the Notice is striking for more than just an usurpation of authority. It is extraordinarily costly (perhaps as much as $140 billion of foregone revenue) and selectively favorable to "healthy" banks that acquire banks with losses, a measure that Paulson had said he wants to encourage through the use of bailout funds but which has not been vetted by Congress and was not intended to be a result of the bailout funds. As Citizens for Tax Justice noted in their November 7 release on this issue, "the new rules give an artificial competitive advantage to banks that can afford to expand now by effectively offering a tax break for acquiring other banks." Furthermore, as CTJ points out, the new rules will also be costly for state governments. Since most states follow the federal tax law (with adjustments), federal tax cuts result in state tax cuts. At a time when state budgets are suffering, from New York to California, this blow by the Treasury may be the straw that broke the camel's back. States that tax financial institutions' profits may become unwitting and unwilling funders of aggressive consolidation of banking companies.
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