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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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November 2, 2008 12:01 AM ET
The big bank bailout could soon get a lot bigger, thanks to the continued relaxation of tax rules by the U.S. Treasury and the Internal Revenue Service. The breaks may mean that financial institutions that sell assets through the government's Troubled Asset Relief Program (TARP) or receive capital infusions in connection with its Capital Purchase Program (CPP) will become the potential beneficiaries of tax benefits that will eventually add billions of dollars to the cost of the $700 billion Wall Street bailout. The latest rule change encouraged PNC Financial Services Group's $5.2 billion purchase of National City Corp. That deal follows another, Wells Fargo's $15.1 billion purchase of Wachovia, aided by the same rule. Over the long run, the tax benefits will make the deals less expensive or even free for the purchasing institutions. The Treasury's latest move waives a provision of Section 382 of the tax code for financial institutions. Normally, this provision would limit the extent to which “recognized built-in losses” can be used to offset taxable earned income after the completion of an acquisition. For PNC, which received a $7.7 billion cash infusion as part of the CPP, the benefits are enormous, as all of the approximately $20 billion in losses the bank inherited from National City's loan portfolio would be treated as ordinary losses that could be used to offset such income. PNC could carry those losses back two years to offset income and potentially receive a tax refund, and then carry whatever losses are left forward for 20 years into the future. “PNC will be able to utilize those losses to reduce its taxable income without limit,” said Robert Willens, who runs a tax and accounting consultancy in New York. “The present value of the tax savings that PNC will enjoy from this relaxation of the normal prohibitions against "trafficking' in losses will equal or exceed the entire amount PNC is paying for the stock of NCC.” If PNC recognizes the $20 billion in losses for tax purposes, it could be used to offset income that would allow it to eliminate $491 million in federal income tax paid in 2007 and $565 million in 2006, potentially recouping more than $1 billion. Had the Section 382 limitation remained in place, PNC would only be able to offset a maximum of $265 million of taxable income in any year after the ownership change. As more financial institutions cut deals to buy and sell toxic assets with the support of Treasury, the potential cost of these relaxed tax rules will increase. Some companies could come out of this crisis with a healthy tax refund and the ability to reduce their taxes for years to come. “There is vast potential to recoup all the taxes these guys have paid over the last two years—every bit of it,” said Mr. Willens, adding, “If companies are able to reduce their tax bills, that's revenue the government doesn't get. It's equivalent to them spending more than $700 billion on the bailout.” Treasury department public affairs specialist Andrew DeSouza said it was “impossible to say” whether the tax consequences of the two programs would add more cost to the bailout. “It's not a stated fact that any company will get a refund,” said Mr. DeSouza. “It would depend on each specific company and how their tax situation is every time they file.” He also argued that since companies selling distressed assets must report any losses on their tax returns whether they are in the programs or not, it would be difficult to tie specific tax outcomes back to Treasury's programs. Other tax attorneys argue that tax relief is indeed an essential element to making Treasury's plan to revive credit markets a success. “[Government] has done a good job of making sure that the tax law doesn't get in the way of what the Secretary of the Treasury decides needs to be done,” said Mark Silverman, chairman of the tax group at Steptoe & Johnson. Mr. Silverman and Mr. Willens said Wells Fargo's acquisition of Wachovia was helped by the fact that losses Wells Fargo might incur are also no longer subject to limitations because of the changes to the tax code. Mr. Silverman said that if Wachovia now sells some of its debt to the government or anybody else, “normally a loss would be available, but it would be subject to the limitations under provisions of Section 382. But since it's been waived, the loss is not subject to limitations.” Last week, as many as 22 banks, including Capital One Financial and KeyCorp, reported they would be receiving infusions of capital from Treasury similar to PNC's, increasing the number of candidates likely to buy weaker rivals or pick up distressed assets and benefit from relaxed tax rules. This is in addition to nine of the largest lenders having received $125 billion in October. These lenders receive an additional benefit under Tax Notice 2008-101, which says Treasury's purchase of their shares under CPP is not considered “federal financial assistance,” thereby making those capital infusions ineligible for consideration as gross income. The notice also extends this benefit to institutions that receive other cash infusions that help them purchase distressed assets under TARP. Without that little tax wrinkle, the infusions would be considered taxable income. As Treasury rolls out its plan, the amount of distressed debt held by U.S. banks continues to climb. The Bank of England reported on Tuesday that losses at U.S. banks have reached nearly $1.6 trillion. In early October, the International Monetary Fund put the figure at $1.4 trillion. With the debt mounting, and the financial markets still in turmoil, Mr. Silverman said the tax benefits will help clear some of the toxic assets out of the banking system, but companies won't enjoy the full benefits for some time. “Tax losses only work when you have a lot of income, and right now the institutions don't have a lot of income.” FW
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