Wells Fargo announced early this week that it will repay $25 billion received under the Troubled Asset Relief Program (TARP). The announcement comes on the heels of a similar announcement from the Bank of America. Citibank rushed to join the ranks of those banks committed to repaying TARP funds over the next few months.
So, I guess this means it’s over. The economy has finally settled and things are getting back to normal now. Right?
Maybe not.
Last week, the Congressional Oversight Panel released its 181 page report on the TARP program, “Taking Stock: What Has the Troubled Asset Relief Program Achieved?” (downloadable as a pdf here) The panel, consisting of former Securities and Exchange Commissioner Paul S. Atkins; Congressman Jeb Hensarling (R-TX), Richard H. Neiman, Superintendent of Banks for the State of New York; Damon Silvers, Policy Director and Special Counsel for the AFL-CIO; and Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard Law School, found that “after 14 months… significant underlying weaknesses in the financial system remain.”
Hmm. Then, that begs the question: why exit the program now?
Let’s look at a time line.
In February 2009, President Obama signed the American Recovery and Reinvestment Act of 2009 (ARRA) into law. ARRA allowed small corporations the ability to carryback net operating losses (NOLs) an additional three years. The traditional carryback period for NOLs had been two years: the new law extended the carryback period to five years for businesses with gross receipts of less than $15 million. This means that small businesses which recorded losses for 2009 could carry those losses back to the past five years offset any tax liabilities from profitable years (potentially resulting in a refund).
Wells Fargo, Citibank and Bank of America sat on their TARP funds.
On November 6, 2009, President Obama signed the Worker, Homeownership, and Business Assistance Act of 2009. The Act expanded the NOL carryback provision to include all businesses – the $15 million gross receipt no longer applied. The revised law allows all corporate taxpayers to carryback NOLs incurred in 2008 or 2009 up to five years. The Act also suspended the normal rule that only 90% of NOLs can be carried back for AMT purposes. In other words, even big companies that once reported profits could now benefit from showing losses. Big companies like, say, banks.
There was just one problem: businesses that receive assistance under TARP are not eligible.
But banks (and other companies) that exit TARP?
Just putting it out there.
Considering that many of the banks are reporting that they might incur losses as a result of the payback(Citi alone is predicting an approximate $8 billion pre-tax loss), you’d think that they’d dread rushing to pay those loans back. Unless, say, they owed unpaid federal taxes that might get wiped with some losses? According to TaxProf Blog, of the 23 top recipients of TARP funds, 13 owe a combined $220 million in unpaid federal taxes, even though compliance was a requirement to get the funds in the first place (the names of those 13 recipients have not been released).
“To get money from Treasury, banks and others must sign a contract that states they have no material unpaid taxes. Treasury did not ask these banks and companies to turn over their tax records. Treasury relied on the signed statements when it agreed to invest billions of taxpayer dollars.” – House Ways and Means Oversight Subcommittee Chairman John Lewis (D-GA).
Oops.
Or maybe they had really good years a few years back that might now lend itself to a refund or two?
Of course, I could be wrong here. And I realize that not all of the banks that are in repayment would be eligible to claim the NOL.
The whole thing is making me a little cynical. It could just be that these banks really are “committed to serving the financial needs of consumers and businesses as the economy continues its recovery.”
I’m sorry. I couldn’t even type that with a straight face…
Didn’t know where to tell you this, but just wanted to say that I love tax girl! I’ve learned a lot while being thoroughly entertained!
Here will do! Thanks so much for that – I really appreciate it!
Interesting point, but are you sure it is accurate?
You say:
“There was just one problem: businesses that receive assistance under TARP are not eligible.
But banks (and other companies) that exit TARP?”
The Rev Proc that the IRS recently issued on the 5-year carryback, 2009-52, provides as follows in section 2.10:
Section 13(f) of the Act provides that § 172(b)(1)(H) does not apply to any taxpayer that received certain benefits (whether or not repaid) under the Emergency Economic Stabilization Act of 2008, Title I of Div. A of Pub. L. No. 110-343, 122 Stat. 3765 (TARP recipients), or to members of the taxpayer’s affiliated group.
Note the “whether or not repaid” parenthetical.
The text of section 13(f) of the law is not as completely clear as this Rev Proc language, but it is at least consistent with the Rev Proc as it does not include any exception for companies that have repaid TARP funds.
Here is the text of 13(f):
(f) Exception for TARP Recipients- The amendments made by this section shall not apply to–
(1) any taxpayer if–
(A) the Federal Government acquired before the date of the enactment of this Act an equity interest in the taxpayer pursuant to the Emergency Economic Stabilization Act of 2008,
(B) the Federal Government acquired before such date of enactment any warrant (or other right) to acquire any equity interest with respect to the taxpayer pursuant to the Emergency Economic Stabilization Act of 2008, or
(C) such taxpayer receives after such date of enactment funds from the Federal Government in exchange for an interest described in subparagraph (A) or (B) pursuant to a program established under title I of division A of the Emergency Economic Stabilization Act of 2008 (unless such taxpayer is a financial institution (as defined in section 3 of such Act) and the funds are received pursuant to a program established by the Secretary of the Treasury for the stated purpose of increasing the availability of credit to small businesses using funding made available under such Act), or
(2) the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, and
(3) any taxpayer which at any time in 2008 or 2009 was or is a member of the same affiliated group (as defined in section 1504 of the Internal Revenue Code of 1986, determined without regard to subsection (b) thereof) as a taxpayer described in paragraph (1) or (2).
I feel pretty sure that the government is going to allow it. The IRS has issued a number of clarifications which indicate that these banks are now eligible to preserve losses. There’s a lot of interesting maneuvering, see the latest, from Friday: http://www.nytimes.com/2009/12/16/business/16citi.html?_r=1
You may have a gut feeling about what will happen, but, frankly, your post is then completely based on speculation (without saying as much) and is inaccurate based on current law and rules. In other words, there is no current indication (public at least) that the repayment of TARP funds has anything to do with the 5-year NOL carryback provision.
The Citigroup section 382 ruling with respect to TARP funds to which you link is fundamentally different than the 5-year carryback rule. There are many good arguments for why the government’s temporary share ownership via TARP should be disregarded for section 382 purposes. The Wells Fargo – Wachovia section 382 ruling is also quite different, although less defensible.
I beg to differ that I didn’t say that it was speculation – I think that it’s clear that this is an opinion piece. I actually wrote:
But here’s what we do know: the rules keep shifting. I happen to think that’s not a coincidence.