Research

New Tax Law a Windfall for Buyers of Struggling Banks

With all eyes on the $700 billion in bailout funds, some of the nation’s largest banks have received additional financial help thanks to a new tax policy quietly issued by the Treasury Department in September. Professor Paul Griffin an internationally recognized specialist in the areas of accounting, financial valuation and business taxation, has been called on to unravel the complex implications of the sweeping change, which gives substantial tax breaks to companies that acquire struggling banks hit hard by the sub-prime mortgage crisis.

According to reports, the change could cost the U.S. taxpayers as much as $140 billion by enabling firms that acquire struggling banks to use more losses incurred by those banks to offset their own profits. Wells Fargo, which made a bid to acquire Wachovia Corp., just days after the notice was issued, stands to reap about $20 billion in additional tax savings because of the change, according to experts.

Wells Fargo paid $14.8 billion in a stock deal to buy Wachovia. When one bank acquires another, it is allowed under tax law to use some of the unrecognized losses of the bank it acquires to offset its own revenues for tax purposes. That lowers the tax liability of the merged bank. Before the notice was issued, the merged bank could write off only a limited amount of the losses. The notice removed those restrictions, enabling the acquiring banks to make huge reductions in their tax liabilities. Some have doubted the legality of the tax change.

Griffin is currently advising the government on the fairest way to distribute claims against the government and whether claimants should be reimbursed for potential taxes payable on those claims.

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