Last week, House and Senate offices received a letter signed by Citizens for Tax Justice, the Coalition on Human Needs, and OMB Watch, asking Congress to reverse a Treasury notice that essentially told banks that they could ignore an explicit provision in the revenue code intended to prevent abusive tax shelters. The notice, dubbed the "Wells Fargo ruling," after its largest beneficiary to date, will cost the federal government $140 billion according to one widely-cited analysis.
As the letter was being sent, legislation was introduced in both the House and Senate to reverse the Treasury notice. (In the House, Congressman Lloyd Doggett (D-TX) introduced H.R. 7300. In the Senate, Vermont's Bernie Sanders introduced S. 3692.)
As the letter sent to the Hill explains, IRS Notice 2008-83 essentially repeals, for banks only, Section 382 of the tax code, which bars companies from using the losses of companies they acquire to reduce their own tax liability. Section 382 was enacted by Congress in 1986 to stop companies from sheltering their income by purchasing shell companies with losses on their books. Before that time, many mergers took place not because they made economic sense but merely because they offered a tax shelter. Ever since Section 382 was enacted to end these abuses, corporate lobbyists have been promoting its repeal.
Now it seems those lobbyists have achieved their goal without using the same long and difficult legislative process that lawmakers and advocates face when they want to enact, say, a $3 billion increase in the child tax credit for low-income families. Instead, bank lobbyists achieved their $140 billion goal through an agency action that contradicts the explicit intent of a statute enacted by Congress.
Another alarming aspect of the Wells Fargo ruling is its impact on states. As CTJ's recent report explains, because most state corporate taxes are linked to the federal corporate tax, a cut in the federal corporate tax leads to a reduction in state revenues as well. It has been reported that the total loss in state revenue for California alone will be $2 billion, and $300 million of that will be lost this year.
Many lawmakers and analysts are rightly concerned about the economic effects of any change in tax law enacted by Congress. But that can be no excuse to leave unchallenged a $140 billion tax subsidy for bank mergers created in direct contradiction to a law enacted by Congress. The House and Senate will likely meet in December to consider a bailout for the automotive industry and other legislation to boost the economy. During that time, they should approve legislation to reverse the Wells Fargo ruling.