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Bank loss tax change continues to boil

The federal bailout of financial institutions, or Troubled Asset Relief Program (TARP) as it's officially known, reminds me of refrigerator stew.

Soup on stove_proud-italian-cook (2) You know the recipe.

You take every still-edible leftover, toss them in the biggest pot you've got, add water and then throw in some seasonings. Adjust the heat as necessary and cook until it tastes good or you're just too hungry to wait any longer to eat.

When it comes to the bailout stew, Chief U.S. cook Hank Paulson, whose other job is Secretary of the Treasury, keeps adding new ingredients every day. And he turns the stove top flame up or down as he, and apparently he alone, sees fit.

Now I appreciate creativity in the kitchen. In fact, the hubby says I view recipes as mere suggestions.

But when I cook something up on the fly, it generally is a meal only for the two of us. Chef Paulson, however, is trying to force feed all us taxpayers his unique blend of financial gruel.

And one item in his particular bailout stew keeps threatening to boil over and make yet another big mess.

At a loss over bank operating losses: Yep, I'm talking about that bank loss rule that that Paulson decided needed changing shortly after the bailout started simmering.

Back in early September, I blogged about the Section 382 change implemented by Treasury.  Back then, in connection with the Fannie Mae and Freddie Mac deals, Paulson had the IRS issue Notice 2008-76, which essentially allowed the lending enterprises to retain all of their net-operating losses (NOLs) despite a change of control of ownership.

The original Section 382 rule was created to prevent tax-motivated acquisitions of loss corporations. But as the bailout expanded, the rule change was applied to other financial institutions and the tax benefits to other banks expanded.

A second edict, Notice 2008-83, dealing specifically with the application of Section 382(h) to banks soon followed. This notice allows some financial institutions to deduct unlimited losses from loans, bad debt, or additions to loss reserves that are from a bank acquired in a merger or takeover.

Questions continue: Paulson subsequently defended the bank loss rule change (blogged here). But his brief excuse explanation -- that the existing rule was "an impediment to activity that was very worthwhile activity" -- has not quieted critics.

Over at TaxProf Blog, Victor Fleischer notes that tax lawyers are scratching their heads over the Treasury's legal authority to issue Notice 2008-83.

"I've heard that the Treasury has pointed to two sources of authority (1) its authority to promulgate regulations under 382 and (2) its authority under the TARP bill," writes Fleischer. "Neither seems adequate."

Fleischer also is bothered by what he aptly describes as "the unsupervised, non-transparent, unaccountable exercise of lawmaking."

That's apparently a concern of the folks who are charged with the actual making of laws. So some members of Congress have decided it's time that they took legislative action.

Lawmakers get in on the act: Rep. Lloyd Doggett (D-Texas), who serves on the tax-writing Ways and Means panel, says his recently-introduced bill H.R. 7300 "sets reasonable boundaries" on "Treasury's back-door giveaway" to banks.

Doggett and bill cosponsors Jim McDermott (D-Wash.), Pete Stark (D-Calif.), Bill Pascrell, Jr. (D-N.J.) and John Lewis (D-Ga.), all members of Ways and Means, say Notice 2008-83 amounts to a tax break worth more than $100 billion to eligible banks and that it ultimately allowed Wells Fargo to purchase Wachovia. Their legislation would prevent banks from sheltering income under Section 382 by purchasing companies with net operating losses.

H.R. 7300 also would instruct the Treasury inspector general to investigate the circumstances surrounding the notice's issuance, with particular attention to possible conflicts of interest.

Across Capitol Hill, Sen. Bernie Sanders (Independent-Vt.) introduced a companion bill, S. 3692, to rescind Notice 2008-83.

Not enough time? These legislative efforts are good news for all of us with questions about just how the bailout is being run. But the bad news is that the chances for passage of the bill are dwindling along with the days left in the 110th Congress.

If they don't make it into law this time, look for the bills to be reintroduced when the new Congress convenes in January.

In the meantime, keep a sponge handy to wipe off all the mess that this financial stew is making. If it burns on, we'll never be able to clean it off completely.

Photo of simmering soup courtesy of Proud Italian Cook


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