Taxing our Credibility

Taxpayers are biting the big one again. In years gone by, Congress became wary of big corporate structures with massive profits subject to federal (and usually state) tax actually looking for shell companies whose only real asset was something called a “net operating tax loss carry forward” (“NOL”) – in short a big loss that they did not have any profits to charge against. Since our tax code allows tax losses to be stored for a few years like a reserve (lean years being balanced by fat years), there were lots of companies whose only value were those losses. So big profitable companies used to buy these “tax loss” storage bins (the shell companies) for chump change (good for the shareholders in the “tax loss” company who didn’t expect much anyway), and use the losses in the acquired company to offset their profits and pay a whole lot less to a government in need of tax funds to operate.

In 1986, Congress limited this form of abusive tax avoidance, and this practice became vastly more difficult if not almost impossible to implement. The current Administration has opposed this law (it stifled the mergers and acquisition frenzy that obsesses Wall Street, they claimed), but until the “bailout” legislation, they had to stew in the fact that Congress was unlikely to repeal Section 382 of the Internal Revenue Code. This might seem like a pile of mumbo jumbo to most Americans… except right now, when the government really needs the money to care of “us;” maybe now is not the best time to add yet one more huge corporate “perk” to America’s financial institutions. The bailout bill has enough in it already for them.

As a part of the new bailout legislation (combined with the regulatory aspects of Section 382 itself), the Department of the Treasury believes that it has the power to waive that tax rule where they think appropriate (they call it the “Wells Fargo Ruling”). So in an era where the government is funneling cheap money to mega-banks by reducing the Federal Reserve discount rate, providing direct cash infusions into their balance sheets, it seems that whatever profits might have otherwise been taxed by the government in those financial institutions that made a big fat juicy profit, are now moderated or completely eliminated (maybe for years to come given the carry-forward provisions of NOLs) with this new interpretation.

How? As these mega-financial institutions use this government cash to absorb and eliminate their competitors and grow their market share (enhancing their long term power), they are obviously acquiring the losers – very cheaply I might add (a loser is a loser) – and they are also acquiring their loser-target’s pile of unused losses. And under the Treasury’s interpretation, the financial institution with profits now gets to reduce or eliminate those profits for tax purposes by applying the losses of the company they just bought.

The November 10 Washington Post reported this interesting reaction to the new rule: “ ‘It was a shock to most of the tax law community. It was one of those things where it pops up on your screen and your jaw drops,’ said Candace A. Ridgway, a partner at Jones Day, a law firm that represents banks that could benefit from the notice. " ‘I've been in tax law for 20 years, and I've never seen anything like this.’” Experts put the short term value on this little ruling at somewhere between $100 and $150 billion! Wells Fargo alone is rumored to get as much as $25 billion in benefits.

There are unemployed Americans – a list that just keeps growing – and mounting home foreclosures out here! Hey, what about the people in this country?! When does the government do something meaningful for us instead of reducing the money they will have to work with to the benefit of those who do not need it?

I’m Peter Dekom, and I approve this message.