A new report from Citizens for Tax Justice explains that if Congress again takes up legislation to save the automobile industry from collapse, it should exclude (or dramatically revise) two tax provisions that were included in the bill passed by the House and rejected by the Senate this week.
The Expansion of the Wells Fargo Ruling
The first provision waives a section of the tax code (Section 382) that was enacted by President Reagan as part of the Tax Reform Act of 1986 to prevent abusive tax shelters. Section 382 restricts companies from using the losses on the books of companies they acquire to reduce their own tax liability. Before this section was enacted, mergers often took place not because they made economic sense but because they offered a tax shelter.
In October, the IRS issued a two-page notice that simply declared, with no authorization from Congress, that Section 382 does not apply to banks. It has been estimated that this notice (often called the "Wells Fargo ruling" after its largest beneficiary to date) will cost $140 billion. Over a hundred organizations signed a letter that was sent to House and Senate offices on Monday asking Congress to reverse the notice.
Instead, House leaders inserted a provision in the end of the auto bailout bill that actually extends the Wells Fargo ruling to the automobile industry!
Some people knowledgeable about the legislation have argued that this provision is necessary because, under current law, limitations on the use of losses can be triggered by some situations that may occur as a result of the auto bailout but which are not what the section was intended to prevent. As the CTJ report explains, if that's true, then the provision can be dramatically revised to prevent an open-ended giveaway for any company that acquires an automobile manufacturer.
Transit Agencies and Banks Entered into Illegal Tax Plans that Are No Longer Profitable -- and Now They Want a Bailout!
The second troubling tax provision in the auto bailout bill would have the federal government guarantee lease arrangements made between transit agencies and banks as part of tax avoidance schemes -- which have been found illegal!
These schemes were called sale-in, lease-out (SILO) arrangements or lease-in-lease-out (LILO) arrangements. Essentially, some tax-exempt entities, such as public transit systems, abused their tax-exempt status to allow banks and other corporations to get huge federal tax write-offs. The tax-exempt entities were paid large fees for their cooperation in these abusive (and illegal) schemes.
Some of these schemes were banned by Congress in 2004, but the remaining deals are also clearly illegal and the IRS has successfully challenged several of them. Most of the participants in these deals have now agreed to settle with the IRS.
The deals are unraveling now and in some cases the banks may try to declare the transit agencies to be in "technical default" and collect payment. The last thing public transit needs right now is a reduction in available funding. But the approach taken by this legislation would essentially bail out entities when their tax planning schemes are found illegal and no longer profitable. Clearly, this should not be a goal of Congress.