Find an Expert Witness

Forensic, General & Medical
Expert Witnesses

Obama Administration Shows Phony Tarp Profit Through Tax Trick

Expert Witness: Fulcrum Inquiry
Without any Congressional approval, the IRS quietly eased net operating loss (NOL) rules for companies that sold stock to the federal government under the TARP program. The new tax rule provides still further subsidies to non-government shareholders, while paying for the increased value entirely with foregone taxes that apply to other corporations.

In its Notice 2010-2, without any Congressional approval, the IRS quietly eased net operating loss (NOL) rules for companies that sold stock to the federal government under the TARP program. The notice removes restrictions on loss deductions when companies such as CitiGroup, General Motors, Bank of America, and Fannie Mae sold stakes to the government as part of the Troubled Asset Relief Program (TARP). When unmodified, the longstanding tax law limits NOL transfers to new owners as a way of preventing profitable companies from buying NOLs (tax savings) created from the acquired company’s losing operations.

new tax rule helps ensure that common stock held by the Treasury Department as part of TARP is not devalued by investors who otherwise would value the NOLs using rules that apply to other corporations. The companies seeking to repay TARP funds will generally do so by selling additional stock. By changing the tax laws without Congressional approval, Treasury provides itself and the other shareholders of these companies with higher stock values, but the gain in company valuation is entirely born by the government through lost taxes. The result is expensive window dressing that allows the Obama administration to falsely claim that the TARP loans were repaid and/or that a profit was made by the TARP program. The reality is instead that the so-called repayments and profits were funded by tax dollars that the IRS/Treasury gave away.

In Citigroup’s case, the new tax rule saves CitiGroup’s $38 billion NOL. Almost immediately after the IRS notice, Citigroup agreed to repay the $20 billion of TARP funds it received from the Treasury Department by selling new shares and using the proceeds to repay the government. The Treasury Department said that it expects a profit of at least $13 billion from its investment in Citigroup. So, Citigroup “repays” the TARP funds with the new tax savings, and the federal government brags about a “profit” that is entirely paid with foregone taxes.

Interestingly, a quite similar issue arose last year when Wells Fargo received a tax ruling from the Bush administration, which in turn facilitated Wells Fargo’s takeover of the Wachovia Corporation. At that time, Citigroup (the losing bidder) and others complained that Wells Fargo received inappropriate special tax treatment to do the Wachovia deal, and that such tax treatment did not have necessary Congressional approval. Congress, appropriately concerned that Treasury/IRS was indeed rewriting tax laws, passed legislation earlier this year that reversed the Wells Fargo ruling and restricted the IRS’s ability to make further changes. If Congress is consistent in its view of the current Obama administration’s tax change, Congress should similarly reverse Notice 2010-2.

Despite the nearly identical situation to what occurred before, this author expects no action by the current Congress to reverse the Obama administration’s current tax giveaway. The president acknowledged that the TARP loans are "wildly unpopular" with taxpayers, so it would be nice politically to draw TARP to a close. Undoing the tax giveaway weakens the ability of weak companies to sell additional stock and thereby make these TARP repayments.

The recent push to repay TARP funds by CitiGroup, Bank of America, Wells Fargo and others occurs because of the federal government’s executive pay restrictions. For example, right before the CitiGroup announcement that TARP funds would be repaid, White House "pay czar" Kenneth Feinberg capped salaries at $500,000 for 75 Citigroup executives, as well as similar others at other TARP recipients. Once TARP is repaid, these pay caps are no longer applicable.

Banks repaying TARP funds are providing lip service to loosening credit, but the TARP repayment undeniably removes cash that would otherwise be available for loans. After all, that was TARP’s purpose. See Banks Continue to Face Large Loan Losses and Are Not Making Loans for additional information.

Mr. Nolte has 30 years experience in financial and economic consulting. He has served as an expert witness in over 100 trials. He has also regularly served as an arbitrator. Mr. Nolte has achieved the following credentials: CPA, MBA, CMA and ASA.

Copyright Fulcrum Inquiry

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

Find an Expert Witness