Wednesday, December 16, 2009

Citibank robs from Peter (Taxpayer) to pay Paul (US gov't)...

It appears that Citibank's TARP repayment is more of a tax evais... oops, there I go again --- I mean, a tax planning strategy.

According to the Washington Post "US gave up billions in tax money in deal for Citigroup's bailout repayment"...

"The Internal Revenue Service on Friday issued an exception to long-standing tax rules for the benefit of Citigroup and a few other companies partially owned by the government. As a result, Citigroup will be allowed to retain billions of dollars worth of tax breaks that otherwise would decline in value when the government sells its stake to private investors.

While the Obama administration has said taxpayers are likely to profit from the sale of the Citigroup shares, accounting experts said the lost tax revenue could easily outstrip those profits.

The IRS, an arm of the Treasury Department, has changed a number of rules during the financial crisis to reduce the tax burden on financial firms. The rule changed Friday also was altered last fall by the Bush administration to encourage mergers, letting Wells Fargo cut billions of dollars from its tax bill by buying the ailing Wachovia.

"The government is consciously forfeiting future tax revenues. It's another form of assistance, maybe not as obvious as direct assistance but certainly another form," said Robert Willens, an expert on tax accounting who runs a firm of the same name. "I've been doing taxes for almost 40 years, and I've never seen anything like this, where the IRS and Treasury acted unilaterally on so many fronts."

As I've noted before, I worked with Mr. Willens for a few years in late 90's and he is the greatest tax analyst I've ever encountered ----- well, maybe the greatest tax analyst that doesn't live with me :)

"Officials also said the ruling benefited taxpayers because it made shares in Citigroup more valuable and asserted that without the ruling, Citigroup could not have repaid the government at this time." Doesn't that sound an awful lot like a pyramid scheme? We couldn't payback investor 1, if our stock doesn't go up, so we need artificial tax breaks to push up the stock so we can sell more shares...

"At the end of the third quarter, Citigroup said that the value of its past losses was about $38 billion, allowing it to avoid taxes on its next $38 billion in profits. Under normal IRS rules, a change in control would sharply reduce the amount of profits that Citigroup could shelter from taxes in any given year, making it much more difficult for Citigroup to realize the entire benefit before the tax breaks expired.

The precise value of the IRS ruling depends on Citigroup's future profitability and other factors, but two accounting experts said it was fair to estimate that Citigroup would save at least several billion dollars as a result."

I was extremely disappointed with the Bush Administration's handling of the crisis and I was hopeful that the Obama Administration would stand up for the taxpayer. However, given Geithner's ties to Wall St. I guess it's not that surprising.

The arrogance of this action is beyond comprehension.

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