Get a Bailout, then Get a Tax Break

Remove all ads!

This is political enough to go here, IMO.

But he IRS has agreed to forego billions in tax payments from Citigroup from the money received in the bailouts in the past 18 months or so. The reasoning here is that with the tax break, Citigroup will be able to pay back the money more quickly, but how does it make sense to give a break to a company of long-standing tax law, costing the government revenue, so they can pay a loan back. Isn't this equivalent of saying they don't have to pay all the bailout money back? Giving a tax break worth billions is effectively reducing the cost of the loan...

Here's the Washington Post's version of the story.

 

If the bailout money was a loan, why would any taxes be paid on it at all?

Edit: Nevermind. I misread your original post. The government basically reclassified Citigroup and the purchase of the stock by the US Government. Had Citigroup not taken any bailout money (and given stock to the government) it looks like they wouldn't have had to pay the taxes anyway (of course they would have gone under instead...).

It makes no sense to me to punish those you're trying to help. If the manditory actions by the government forced additional tax then the government should be willing to cut a break -- which is what appears to have happened here.

I don't see what the big deal is here.

 

From other sources I read, the tax break is similar to what homeowners get on the interest on their mortgage. The loans were not interest-free, and it appears that the tax break is allowing them claim the interest as a loss. I'm not nearly familiar enough with tax law to say this for sure, but from the articles I read, it implied this is something which homeowners can do, but businesses typically cannot. Again, I certainly stand to be corrected.

 

In reading the article I gathered something different from what you are saying. The tax break came from being able to spread out gains and losses over a few years to mitigate the impact (something companies are allowed to do). Companies are not allowed to change ownership and spread out these gains and losses to the new owners -- the huge stock transactions required by the government technically required a change in ownership by tax laws and the losses from previous years could not be used to mitigate the gains of this past year. The tax break came from the government stating that Citigroup can use the lossed of previous years to mitigate gains (and thereby lower their taxes).

 

It is a valid point, but I think it is probably the correct move. Here is what the issue is. There is a rule that if you purchase a corporation that has "Net Operating Losses" that are being carried forward to future years, some of those NOLs disappear and the purchaser cannot use them to offset the purchaser's taxable income.

What that means is that if a company had a million dollars of income it couldn't purchase a company that was essentially bankrupt that had ten million dollars of losses that were being carried forward for $1, then consolidate the two entities and have $0 taxable income. It was a great return on investment as small money could save you huge money on taxes.

The issue is that when the government is finally bought out of Citigroup (either by one big buyer, Citigroup itself, or many shareholders), the ownership will change significantly enough that the NOL's would disappear. By changing this rule the NOL's will continue to be alive and will shield future taxable income until they are exhausted.

The reason why I'm not that opposed to it is that it is actually kind of fair. If in year one you made $100, in year two you made $150, and then in year three you lost $300. In this situation you would file a carryback claim and get the taxes on the $250 you paid in year one and two back and then carryforward the remaining $50 to year four. If in year four you made $75 you would only have to pay taxes on $25. Translating this to Citigroup the NOL carryforward is strictly related to them and wouldn't be an issue if the government didn't take an ownership interest as a security. If the rule stayed in place (using my scenario) the $50 of tax loss would disappear and the company would never receive any benefit from it. Clearly, the IRS and I assume Treasury has decided it is in the best interest of the taxpayer and the government to get Citigroup back on its own feet and remain viable. Doing this helps that.

For disclosure purposes I own indirectly 600 shares of Citigroup.

 

I own no shares in anything, and I agree with Snook and others (pretending to understand all that tax jargon and all). In short, it makes no sense to me for the gov't to lend someone money, only to ask them to pay taxes on the loan the next day. If they're in the position that they need the government bailout, they're in the position that they can't pay taxes on it, as well.

 

Just to clarify, they aren't paying taxes on the amount that was loaned. The only thing that is changing is how soon they would have to start paying taxes if/when they return to having taxable income.

 

I would like to point out that this may well be the first time I've ever given positive rep to Snook. He is the local subject matter expert in this field from SP (just like people listen to dmc when it's about law, and T2 when it's about science), and his explanation was detailed enough to get why this was being done, and yet simple enough for a layman with no experience in the field to understand. Good on ya, Snook.