bailout

In a surprise move, the Bush administration has indicated that it might use taxpayer dollars previously earmarked for banks through the Troubled Asset Relief Program or TARP, to save the Big 3 automakers.

No, no, don’t read it again. You got it right the first time.

The White House had initially said “no way” to the auto industry pleas for a bailout. Maybe it’s the snow falling outside, maybe it’s the holiday spirit… or maybe it’s just the crappy economy… but the administration has now reversed its position on the automakers bailout.

The announcement came one day after the Senate voted no on a bailout.

The White House warned that a “precipitous collapse of this industry would have a severe impact on our economy” and said:

Given the current weakened state of the U.S. economy, we will consider other options if necessary — including use of the TARP program — to prevent a collapse of troubled automakers.

Details - including how much and how fast - haven’t been made available yet.

GM, of course, was thrilled. GM claims that it will need $4 billion in government aid by the end of the year - and $6 billion more in early 2009. Chrysler has indicated that it needs $4 billion in 2009. Ford Motors says that it anticipates that it can hold on through the end of the year and most of 2009 (rumor has it - and it’s just rumor - that the company has been kept afloat by my own family who has continuously owned Fords for as long as I can remember, including two ugly-colored Pinto station wagons and one deep blue Granada with vinyl seats).

So, it’s holiday cheers all around, right?

Not quite. Notwithstanding the idea that many in Congress, including Republicans, are reportedly angry at Bush for stepping in at the 11th hour, there are practical issues. Only half of the TARP money is available without further approval from Congress - that was part of the original deal with the Treasury. Only $15 billion of the $350 billion remains - it is, after all, the season of spending. So, the ultimate say will go back to Congress in early January for approval. Whether Congress is ready for a compromise at that time is anyone’s guess.

What is clear is that the automotive industry is breathing a sigh of relief from a near miss this holiday season. Whether voters - who are also taxpayers and consumers - will agree is another matter altogether.

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It’s Fix the Tax Code Friday!

For most of the week, the headlines have involved the crisis in the automotive industry with eyes on the “Big Three”: Ford, General Motors (GM) and Chrysler. Execs from the Big Three jetted to DC to beg lawmakers for loans worth billions of dollars, warning that the failure to deliver the loans could spell disaster for the industry and related commerce.

Congress refused to vote on the bailout, citing a lack of a restructuring plan from any of the three motor giants. Congressional leader Harry Reid has given the Big Three a deadline of December 2 to come back to Congress with a workable plan.

One version of a bailout would use $25 billion in funds from the Energy Department structured as a loan. The funds were previously earmarked for development of fuel-efficient vehicles. Repayments by the industry would serve to replenish the fund.

Another version of an auto industry bailout would take funds already promised to the banking industry as part of that $700 billion bailout.

Either version would rely on the immediate use of taxpayer funds, which is causing consternation in Congress. Funding for the next fiscal year is already tight which means that services may be cut and taxes may be raised in an effort to “right the ship” and settle the budget. With a majority of Americans unhappy with Congress right now, lawmakers don’t want to dig themselves an even bigger hole. But not acting at all could have a similar effect since so much of the American economy is related to the automotive industry.

So today’s Fix the Tax Code question is:

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AIG has revealed that they are suing the IRS for $329 million, claiming a refund for back taxes and penalties. Hmm, I wonder if they’ll return some of that bailout money if they win?

Oh wait. They won’t win.

That’s because the IRS has already labeled the transactions “abusive” and penalized the company for taking tax credits associated with “cross-border financing transactions.” Though details are sketchy, the WSJ suggests that AIG was allowing its overseas subsidiaries to pay foreign taxes and then claiming a US tax credit for paying those taxes which they then split with foreign lenders. The IRS claims this means that US taxpayers are effectively subsidizing the lending through the shared tax credit.

Former IRS commish Everson testified about these deals in Congress last year, noting that they are “designed to exploit inconsistencies between U.S. and foreign laws.” And, under proposed regulations passed last year, such transactions wouldn’t be allowed.

And yet AIG is pressing on with its claims.

The years at stake are 1997 through 1999. AIG noted in securities filings that it expects the IRS to expand its investigation to later years (of course it will). The taxes and penalties attributable to the first investigation total $329 million; neither the AIG nor the IRS has indicated the additional taxes and penalties which could be assessed for any later years. My bet is that it’s huge. Huge, huge, huge.

If that were to happen, it would mean additional funds that AIG would have to pony up this year. I say additional because AIG owes between $34 million and $100 million for a tax shelter dispute that was settled this quarter. The tax shelters, called Lilo (short for lease-in/lease-out) and Silo (short for sale-in/lease-out) allowed lenders to buy assets from municipal government agencies including those in Chicago, New York and San Francisco, and then lease those assets back to the agencies, often through sophisticated “on paper only” arrangements. The lenders, like AIG, took a tax deduction on the transaction. The IRS claimed that those deductions were not allowable and were eventually successful in banning Lilo and Silo altogether.

So let’s do the math. $329 million in “cross border financing transactions” + (up to) $100 million in tax shelter disputes = $429 million in taxes and penalties, so far.

But it will be fine, just fine. Don’t worry about those poor AIG execs scrambling to find coins under the sofa cushions. We’re buying, remember? We’re handing AIG more money so that they can pay off debts that they owe… to us. This whole scenario reminds me of the time that my brother wrecked my dad’s truck, so my parents bought him a new one so that he could work to pay them back. Some guys get all the luck.

(Note from taxgirl: The last paragraph is in jest… Sort of. I adore my brother and he knows it. His Chinese horoscope symbol is the rabbit (for luck) and mine is the rat, which may explain an awful lot.)

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Boy, am I glad that the government pumped billions of dollars into the banking industry!

Since that time, borrowing has become significantly easier. Wait, that hasn’t happened?

Well, at least the Dow regained its faith in the market. Wait, that didn’t happen either?

What did happen? Oh yeah, banks made more money.

Need proof? I mean, beyond the loss of bad debt and influx of capital, courtesy of we, the taxpayers? Look no further than PNC Financial Services Group Inc. According to reports, PNC will save billions in federal taxes after its purchase of National City Corp now that the IRS has issued a controversial notice following the failure of the original bail-out package.

So here’s what happened. It used to be the case that the built-in loss that a buyer could use to offset income after an acquisition was capped at 5% of the purchase price per year for five years. The new rule removes the limit for the banking industry - and only the banking industry - resulting in an immediate and significant tax benefit. The new rule is effective “unless and until” additional guidance is issued, whenever that might be.

How much of a benefit does that give PNC? Tax analysts have tossed around numbers as high as $5.1 billion. And PNC isn’t the only bank to benefit. Banks which gobble up other banks with just bad housing debt (not counting other bad debt) may now save up to $140 billion in taxes - about 20% of the total banking bailout put up by the feds. And who pays for that? Who do you think? Tax savings for those banks equals lost revenue in an already strained economy.

And you don’t even have to be a “real bank” to qualify. All banks, including credit card companies, industrial loan companies, trust companies and thrifts (used for mortgages) are included.

Congressional officials - who weren’t consulted on the IRS notice - are not necessarily thrilled with the results. Senator Charles Schumer (D-NY) who sits on the Senate Banking Committee voiced concerns that the ruling would give some banks an unfair advantage. For example, Schumer claims that Wells Fargo will save $19.4 billion in federal taxes for its win over Citibank to purchase Wachovia, an amount which surpasses the proposed purchase price.

Those cheering the notice say that this gives banks an additional incentive to buy “struggling” banks. But opponents say it just feeds merger mania, giving mega-banks an disproportionate financial incentive to take on more bad debt. Further, those in other sectors of the economy question why incentives were limited to the banking industry; so far, the IRS has not issued additional comment.

I’m not sure where I fall. I believe that something needs to be done to get us out of this mess - but the fixes seem haphazard and short sighted. Plus the timing and process of this tax incentive doesn’t quite meet the smell test: one day after Congress rejects the bailout, the Treasury changes the rules on its own? What do you think?

You can read the entire text of Notice 2008-83 here.

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I’ve been tossing around blog post after blog post in my head, trying to figure out what to write exactly about the tax provisions in the most recent bailout package. And I think I’ve finally figured out what’s been bothering me: the darn thing just doesn’t make sense.

I knew that the bill was going to be a hot mess. The bill which managed to pass the Senate wasn’t just about the bailout - it was everything but the kitchen sink. But the final bill is even worse.

So here’s just a taste of what the bill, known as H.R. 1424, the Emergency Economic Stabilization Act, says:

FDIC caps raised. As previously reported, the FDIC insurance limit was raised from $100,000 to $250,000. This cap is temporary and was supported by both Senators McCain and Obama. And yes, it’s supposed to make us feel better about our banks (is it working?).

AMT “relief”. Congress finally did something to fix the AMT before the end of the year… Really. But just like in prior years, this is a temporary patch. We’ll be yelling about it again next year.

Gain or Loss From Sale or Exchange of Fannie Mac and Freddie Mac Stock. The bill treats losses on sales of Fannie Mae and Freddie Mac preferred stock by financial institutions or banks as ordinary losses.

Golden Parachute Rules Modified. The bill applies limits on executive compensation and golden parachutes for executives of employers who participate in the bailout.

Extension of Mortgage Forgiveness Tax Treatment. The bill extends current law tax forgiveness on the cancellation of mortgage debt. A forgiveness of debt had been traditionally included in income, but was exempted in 2007 - the bill extends that deadline through 2012.

Taxes Paid and Other Deductions Extended. For taxpayers who itemize, there are extensions for deductions for state and local sales tax; qualified higher education expenses; school supplies expenses for educators; and the recent additional standard deduction for property taxes.

Donations To Charity From Retirement Accounts. The bill also extends the ability of people over age 70½ to make a donation to charity from an IRA of up to $100,000 and exclude that amount from income.
Child Tax Credit Modified. The bill enhances the child tax credit by lowering the “floor” for the refundability of the credit.

Extensions and Modifications of Production Tax and Energy Credits. The bill extends the date for the production credit and expands the types of facilities qualifying for the credit. The bill extends the 30% investment tax credit for solar energy property, qualified fuel cell property and microturbines.

Extension of Energy Credits for Homeowners. The bill extends the credit for residential solar property and removes the credit cap for solar electric investments. The bill adds residential small wind investment and geothermal heat pumps, as qualifying property.

New Clean Renewable Energy Bonds (“CREBs”). The bill authorizes $800 million of new clean renewable energy bonds to finance facilities that generate electricity from wind, closed-loop biomass, open-loop biomass, geothermal, small irrigation, qualified hydropower, landfill gas, marine renewable and trash combustion facilities.

Steel Industry Fuel. The bill adds a credit for coal used in the manufacture of coke, a feedstock used in steel production (taxgirl trivia: I’m a coke expert! As a kid, we named Coke, after this very product. Really.)

Plug-in Electric Drive Vehicle Credit. The bill establishes a new credit for plug-in electric drive vehicles. The credit for passenger vehicles and light trucks ranges from $2500 to $7500. The credit will operate like the existing credit for hybrid vehichles.

Bicycle Commuters. The bill allows employers to provide employees who commute to work by bicycle limited fringe benefits to offset costs like storing the bike. This puts bike commuters in the same category as drivers (imagine that!).

Extension of Credits for Energy-Efficiency Improvements For Homeowners. The bill extends the tax credit for energy-efficient existing homes and includes energy-efficient biomass fuel stoves as a new class of energy-efficient property. The credit that contractors receive for the construction of energy-efficient new homes is also extended.

Investments in Recycling. The bill allows taxpayers to claim accelerated depreciation for purchase of equipment used to collect, distribute or recycle.

Basis Reporting by Brokers on Sales of Stock. Brokers are going to be required to report basis information to the IRS for transactions involving publicly traded securities, such as stock, debt, commodities and derivatives. As a tax professional, I can’t tell you what a great thing this is - assuming that they get it right. The lack of information provided to investors is appalling.

FUTA Surtax. The Federal Unemployment Tax Act (”FUTA”) imposes a 6.2% gross tax rate on the first $7,000 paid each year by employers. The “temporary” surtax of .2% imposed by Congress in 1976 has been extended for another year. Interesting take on the word “temporary”, no?

Charitable Giving. The bill offers tax incentives for charitable giving to help victims of summer storms, tornadoes, and floods in the Midwest. The bill also extends special deductions for businesses for donations of food, as well as books and computers to schools.

And now some of my favorites:

Extending credits for mine rescue training team expenses and an election to expense advanced mine safety equipment;

Increasing deductions for film and TV production costs if the costs are incurred in economically depressed areas;

Accelerated depreciation for casinos business property on Indian reservations;
An economic development credit for American Samoa;

Tax rebates for rum imported from Puerto Rica and the American Virgin Islands;

Allowing commercial fishermen and those affected by the Exxon Valdez oil spill in Alaska to average out damage awards over three years;

Extending programs that fund rural schools and communities which depend on income from logging on federal land;

Imposition of a break on excise tax for the manufacture of wooden arrows used in toys for children;

Extending a write off for NASCAR and other motor tracks to offset racetrack costs; and

Tax breaks to support the “Wool Research Fund”

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So we covered everything, right? Nobody feels left out?

And yes, I know this post is tinged with my political views - but it’s not partisan. It’s about simplicity. At my office, if a client wants three things, we don’t throw them all together, we tackle them one at a time. We don’t do a combination will + noncompete + incorporation in one document because those are different issues that require different levels of discussion and attention. And that works for us.

Why doesn’t the “one thing at a time” bit work for Congress?

[author's note: My apologies if you read the original, sadly unformatted version of this in the feed. I hit "send" instead of "save" cause yes, it's been that kind of day.]

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Why is it that Congress can’t pass a bill without a bunch of add-ons? As it turns out, the bailout of the economy will be no different.

This evening, the Senate passed a version of the bailout bill by a vote of 74 to 25 (in case you’re wondering, both McCain and Obama voted yes).

The centerpiece of the bill remains an asset purchase of nearly $700 billion of worthless at risk assets from failing troubled banks. The idea is that relieving the banks of these credit burdens will allow lenders to begin making loans again.

That, on its own, is not going to be enough to woo more votes in the House, especially among the GOP; nearly 2/3 of the House GOP voted against the plan two days ago. So, the Senate packed on more stuff. And yes, that means that the bill will end up costing more than $700 billion - perhaps as much as $810 billion (since apparently we can just print more money).

As expected, the bill increases the FDIC insurance cap to $250,000 from $100,000, but only temporarily. Both McCain and Obama went on record in support of the higher cap. The bill also allows the FDIC to borrow from the Treasury to cover any losses from the increase.

Those energy credits that weren’t going to be discussed before the elections? They’re included.

Research and development credit for businesses? Included.

A credit that allows taxpayers to deduct state and local sales taxes on their federal returns? Also included.

Heck, the Senate even added another patch to the AMT - this time in October (can’t you feel the excitement?).

Now, I’m not saying that any of these provisions aren’t worthwhile or important - that’s another post for another day. I just can’t understand how such a controversial bill to begin with - the largest bailout in American history - became a magnet for all kinds of legislation. And we haven’t even seen what the House might tack on…

Sen. Richard Shelby (Rep - AL) may agree. He felt that the Senate rushed into this latest version of the bill. He said:

I agree we need to do something. … [But] we haven’t spent any time figuring out whether we’ve picked the best choice.

Will it pass? I’m not sure. In between the partisan bickering, the worries about a disgruntled public (the site at www.house.gov crashed earlier in the week because of all of the traffic) and the calls from conservative leaders to let the free market play out, it will not be an easy vote. And the added tax cuts may sway some Democrats who initially voted “yes” since there is no offsetting revenue for the cuts.

The bottom line? Don’t expect an easy debate in the House.

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In light of the recent government bailouts of several high profile companies, some pundits are rushing to attempt to correct the idea that taxpayers are paying the tab. Some analysts are trying to push the idea that the billion dollars’ worth of bailouts are merely structured as loans or investments by “the government” and thus don’t cost taxpayers anything… which is fair enough except that “the government” isn’t some enigmatic entity, nor is its funding. Government dollars are largely tax dollars. They belong to you and I. Our tax dollars are footing the bill for the bailout whether or not you believe that those dollars are actually at risk (and I believe that they are).

And yes, I realize that the cash that is generated to fund these bailouts is not funded by an immediate tax increase. No one will come knocking on our doors tomorrow looking for more cash. I know that most of this type of funding comes from money in the government’s portfolio (um, guess where most of that comes from?). And I realize that doesn’t immediately add to the deficit.

But just as when you or I raid our reserves, less money in the bank means less more for both existing and unexpected expenditures. What happens when you can’t pay your bills? You either search for ways to generate more revenue (raise taxes), borrow more (adding to the deficit) or you make cuts. All of those options affect taxpayers.

Does this mean the bailout isn’t a good idea? I’m not saying that at all. But let’s call a spade a spade. It’s our money being offered up, so stop pretending that it’s not.

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