Some of the nation's biggest banks including Wells Fargo & Co. are in for a windfall – on top of the $700 billion government bailout – thanks to a new tax policy quietly issued by the Treasury Department.
The notice gives big tax breaks to companies that acquire struggling banks hit hard by the mortgage crisis. In some cases, the breaks could exceed the cost of acquiring the banks, according to private tax experts.
The change could cost the Treasury as much as $140 billion by enabling firms that acquire struggling banks to use more losses incurred by those banks to offset their own profits.
Wells Fargo, which made a bid to acquire Wachovia Corp., just days after the notice was issued, stands to reap about $20 billion in additional tax savings because of the change, according to the experts. Wells Fargo paid $14.8 billion in a stock deal to buy Wachovia.
The notice was issued Sept. 30 as Congress debated the $700 billion bailout plan. Some members of Congress are upset that such a sweeping tax change was issued with no public hearings or congressional input.
“I am concerned that the notice, which was never debated by Congress, could end up costing taxpayers tens of billions of more dollars on top of the hundreds of billions of dollars already approved by Congress in the financial rescue plan,” Sen. Charles Schumer, D-N.Y., said in a letter last week to Treasury Secretary Henry Paulson.
Treasury Department spokesman Andrew DeSouza said the notice was issued to provide tax guidance to firms involved in bank takeovers. He said it wasn't aimed at any one specific taxpayer or transaction.
When one bank acquires another, it is allowed under tax law to use some of the unrecognized losses of the bank it acquires to offset its own revenues for tax purposes. That lowers the tax liability of the merged bank.
Before the notice was issued, the merged bank could write off only a limited amount of the losses. The notice removed those restrictions, enabling the acquiring banks to make huge reductions in their tax liabilities.
In some cases, banks can qualify for refunds of taxes paid in previous years through writing off losses of the banks they acquire, said Robert Willens, a corporate tax lawyer in New York.
DeSouza said the Treasury Department did not issue a formal estimate on the cost to taxpayers.
But Willens estimates the change will cost taxpayers $105 billion to $110 billion. Willens doubts the legality of the notice.
But, he said, repealing it could be disastrous for the banking industry and for financial markets.
“I suppose that some of these banks would have to be seized by the government,” Willens said. “That would just send shock waves through the market.”