In earlier post1 and post2 on Treasury's decision in favor of big banks not to enforce an anti-abuse provision regarding the use of acquired losses, I discussed Treasury's Notice 2008-83, in which it announced that section 382(h) would not be enforced against banks that acquire other banks with net unrealized built-in losses.
More and more tax professionals and Congresspersons have indicated their concern that Treasury had no authority to implement this selective failure to enforce the law in favor of the big banks that are already benefiting from an unprecedented bailout using hundreds of billions of taxpayer monies (while at the same time the Big Three in Detroit are being repulsed in their effort to receive bridge funding to permit them to (admittedly belatedly) roll out vehicles that respond to environmental and consumer demands and keep millions of ordinary Americans in the work force rather than subsisting on handouts and too limited unemployment compensation--see this Jay Newton-Small story on Time/CNN). Among those expressing concern have been Charles Schumer (D) (see post1), Max Baucus (D), and Grassley (R) (see Grassley press release asking for Inspector General review). Under the Notice, there is a significant potential for unseemly favoritism on the part of the Treasury and abuse of the tax system by banks.
"Treasury’s issuance of the Notice apparently enabled Wells Fargo to take over Wachovia despite a pending bid from Citibank. Without the issuance of the Notice, Wells Fargo would have only been able to shelter a limited amount of income. Under the Notice, however, Wells Fargo could reportedly shelter up to $74 billion in profits. It also potentially enabled Wachovia’s senior executives to qualify for parachute payments that may not have been available under the Citibank deal." Grassley press release
The Congressional concern has racheted up the pressure on Treasury to reconsider its ultra vires notices, and Treasury is finally responding to that criticism. See Lynn Brownley, "Treasury to Review New Tax Break Plan", NY Times, Nov. 19, 2008. As the report indicates, the Treasury inspector general will review the announced administrative decision not to enforce the law in respect of banks purchasing loss corporations, thus permitting those acquiring banks to use the purchased bank's tax losses against the acquiring banks future income to eliminate the acquiring bank's tax liability.
Note that the Times article calls this a review of a "change in policy," as though this were a policy decision within the Administration's purview. Such language belies the nature of Treasury's action.
Treasury, to be sure, has taken administrative action to "relax" the laws in other circumstances. In the main, those have been cases where the legislative language appears more rigid than its enacters likely intended, so that the specific enforcement would be overly punitive in some sense. Administrative relaxation of the rules is most likely when there is a long-existing custom of treating particular items in a particular way. While these types of administrative decisions may not be strictly appropriate under the particular statutory provision, they may well come within the general regulatory authority of the Treasury to do what is necessary and proper for the overall enforcement of the tax laws.
This action (Notice 2008-83 and similar recent pronouncements by Treasury) is not making administrative policy within the realm of the administrator appropriately carrying out Congress's directives. Instead, it has explicitly decided, and publicly announced, that it will not enforce, against a particular chosen subset of taxpayers, the laws enacted by Congress to cover exactly the situation in which it is applying its decision. That is most definitively not the Treasury's decision to make, but the Congress's. Congress enacts the laws and Treasury (as an arm of the executive) enforces them. And the Congress has spoken succinctly, explicitly and unambiguously on this matter, by enacting an anti-abuse rule to prevent this use of losses from acquisition of loss corporations.
Under this Administration, there has been a rather cavalier view of the executive responsibility to enforce the laws, as evidenced by the many signing statements in which Bush claims a right not to enforce particular portions of laws that he takes a personal dislike to. Similarly, various agencies' (e.g., the EPA) have conducted their work so as to favor the regulated rather than the public interest, even when Congress has mandated particular requirements. Treasury's actions in connection with the bailout are taking on more and more of this shade of the Bush Administration, a worrisome trend indeed. Hopefully, the Inspector General will make it clear that this particular action goes beyond the authority of the Treasury to benefit the banks. If Treasury thinks this is a necessary thing to do, it can go to the Congress and ask for immediate legislation to that effect. I hope the Congress turns them down, because it should look to the true heart of the problem instead--pass legislation that permits homeowners to modify their mortgage loans in bankruptcy.
Recent Comments