Back in October we noted that the Treasury had waived the “built-in loss” limitation for bad debts of newly-acquired banks. At the time there were already questions on whether the Treasury had exceeded its authority:
Guest-posting at Marc Ward’s LLC blog, Christine Holbrook points out that the IRS has ruled that built-in loss limits won’t apply to bad debt deductions taken by newly acquired banks (Notice 2008-83). That means if Wells Fargo buys Wachovia and has to write off humongous bad debts, they won’t have to apply the Sec. 382 limits to the bad debt deduction. While the post questions the IRS authority to do this, really, who is going to stop them? But while the IRS is clearly doing this to help smooth the way to sorting out the banking mess, it may prove an awkward precedent for them when times get better.
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.
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.
Today’s Washington Post reveals a truly audacious stunt that the Treasury Department pulled in late September, essentially repealing on its own motion Code section 382 as applied to banks. The ruling through which it did this is available here, and it appears to be aptly described as flat-out repeal of the provision so far as banks are concerned.
The controversial notice allows acquiring banks to deduct bad debts of acquired banks without subjecting such “built-in” losses to the “Section 382” rules. These rules limit the amount of losses they can use from acquired companies to a fraction of the value of the company – currently 4.94%. If you acquire a worthless company, the deduction is 4.94% of nothing.