Stephen Gandel of TIME Magazine on “The Hidden Corporate Bailout”:
While the $700 billion bailout has been the focus of attention and scrutiny, the Internal Revenue Service and lawmakers have quietly been making changes to the tax code and how it is followed in an effort to further boost the financial strength of ailing companies. At the same time, though, the changes drain billions of dollars of badly needed tax revenue at a time when the federal deficit is mushrooming. Many of the changes may lower corporate tax revenue for years to come.
In the past, corporations could deduct from their taxes only a small portion of the losses incurred by a company they acquire. The rule, commonly called Section 382, eliminated the practice of companies avoiding taxes by buying failing corporations just for their losses.
But in late September, just after Congress defeated the first bailout bill, the IRS issued a notice to change that rule to allow banks to significantly lower their taxes when they purchase other banks.
Now, after an acquisition a bank can reduce its IRA bill by claiming that loans on the books of an acquired rival are worth far less than the previous owners thought, not a hard claim to make these days. The acquirer can deduct from its taxes the full amount of the write-down. Before it could only lower its taxable earnings by a small percentage of the write-down of the pre-acquisition loans.
Jones Day lawyers estimate that the rule change could cost the federal government up to $140 billion in revenue during the next few years. But it would only get that high if every bank in the U.S. were sold and their troubled mortgage assets were all written down to zero. Still, a number of banks have made acquisitions since the rule change and are already benefitting. Wells Fargo will book an estimated $25 billion tax credit from its November acquisitions of Wachovia. PNC, which bought National City in October, could get as much as $5 billion in tax benefits from that merger. And Capital One, which bought Chevy Chase Bank earlier this month, is looking at a $500 million tax windfall.
Aww, such a heartwarming story guaranteed to put us all in the holiday spirit! Nice to hear that, during times of great tribulation for Big Rich, the IRS is going “above and beyond what’s been allowed in the past” to help engineer a soft landing for its favourite constituents–all at the expense of, er, the broader US public. And there’s much, much more loophole swag tailor-made for corporate citizens being stuffed in the financial goody bags, so for the complete 411 make sure to read the whole damn thing.
Just don’t call it asymmetric class war, kiddies.