Does IRS Notice Allowing TARP Recipients to Save Billions in Taxes Cost Ordinary Americans?


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In a move that helps the banking giant Citigroup, the IRS issued a notice last Friday granting TARP recipients an exception to the restrictions on using losses of acquired companies to reduce future taxes.

The limitations (known as Sec. 382 limitations) are meant to restrict a company from using the Net Operating Losses (NOLs) of companies it buys to reduce its own taxable income in the future. Sec. 382 was clearly never meant to apply to a situation in which the government acquires and then sells stock in a company, but rather was meant to prevent taxpayers from buying companies purely as tax shelters.
 
Sec. 382 generally limits the use of NOLs when there is a more-than-50% change in the ownership of a company. The IRS issued a ruling last May that any ownership by the government would not count towards an ownership change. Last Friday's notice expanded that exception to include any shares sold to the public by the government.
 
This notice particularly helps Citigroup since Treasury is planning to sell its stake in Citigroup to the public. This exception will allow Citigroup to avoid the Sec. 382 limitations and be able to use its NOLs against future taxable income.
 
Some commentators have noted that this will increase the cost of the federal bailout for TARP recipients, taking additional money out of the pockets of ordinary taxpayers. But if the government's bailout has, as most economists believe, avoided a much more serious recession, most Americans are probably still better off.
 
Unlike the previous administration's infamous "Wells Fargo ruling," the IRS has the authority to issue this notice under the provisions of the 2008 Emergency Economic Stability Act and the 2009 American Recovery and Reinvestment  Act. One of lawmakers' objections to the Wells Fargo ruling was that it applied only to a specific industry, but this new notice applies to all TARP recipients.

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