WASHINGTON — A tax decision that made it a better deal for Wells Fargo & Co. to purchase Wachovia Corp. would be eliminated by the economic stimulus bill being considered by Congress.
The Internal Revenue Service issued the controversial tax change two days before the Wells Fargo-Wachovia deal was announced Oct. 2, 2008.
Typically, businesses are limited in how much they can lower their tax liability when they acquire another company with built-in losses. But the IRS decision exempted banks, essentially providing no cap for how much a healthy bank could deduct from its taxes by realizing the losses that came with the troubled bank it acquired.
Several lawmakers cried foul when they learned about the preferred tax treatment for banks, saying the IRS had no authority to overturn tax policies without congressional input.
Sen. Charles Grassley, R-Iowa, is leading an effort in Congress to get the preferential treatment eliminated. A measure that would do away with it for any bank deal announced after Jan. 16 of this year is in both the House and the Senate versions of the stimulus bill still being ironed out by Congress.
Grassley told Treasury Secretary Timothy Geithner before his Senate confirmation that he found the decision troubling and asked him how to “deal with the mess.”
Geithner said in a written response that he’d review the matter, which is subject to an inquiry by Inspector General Eric Thorson.
“I realize that this is a complex issue that raises concerns about Treasury’s authority, differential treatment of the financial services industry and budgetary transparency,” Geithner said.
Reversing the tax change could save the Treasury an estimated $4.34 billion between 2009 and 2013, according to Congress’ Joint Committee on Taxation.
It’s unclear what Wells Fargo saved in the deal to buy Wachovia.
Robert Willens, a tax and accounting consultant on mergers and acquisitions, said that immediately after the sale it looked like Wells Fargo would be able to use $74 billion in losses that came with Wachovia to shelter its profits, provided the merged bank continued to make money. Without the IRS rule, it only would have been able to take $1 billion a year in losses over 20 years, Willens said.
Wells Fargo insists the actual tax benefits were marginal, only allowing it to get savings sooner than otherwise.
“We do not believe it affects the company’s total tax deductions allowable,” the company said in a statement. “It simply may accelerate the time when the tax deduction for certain loan losses can be taken.”
At least one other deal, PNC’s purchase of National City, would have qualified for the tax break, Willens said.
Grassley and other lawmakers are hoping the inspector general’s report will shed light on whether there was any impropriety related to the IRS decision, given its timing so close to the Wachovia deal and while Congress was weighing a bailout of the financial industry.
“We knew about the notice when we offered to buy Wachovia but we didn’t know about it in advance nor was the notice written specifically to benefit Wells Fargo,” Wells Fargo said in a statement.
Willens said the tax break might not have been the impetus for the deal between Wells Fargo and Wachovia, “but it definitely made the deal more attractive.”