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Kai Ryssdal: Citigroup and all the other banks benefiting from taxpayer largesse are indeed getting another bennie from Uncle Sam. As part of their deals to repay the balance of their TARP money, the Internal Revenue Service has interpreted the tax code, one might say, in the banks’ favor. To the tune of billions of dollars. Sounds egregious. But Marketplace’s John Dimsdale reports now from Washington that it actually makes some sense.
John Dimsdale: Tax law lets companies deduct losses suffered one year from profits earned in future years. But that break isn’t allowed to companies that are sold to new owners. The government’s takeover of banks like Citigroup, qualifies as a change in ownership. But the IRS says banks can go ahead and deduct their losses from future profits anyway. And now that the government is selling its stake in banks, the IRS says the tax deduction will be extended again.
Cornell management school professor Robert H. Frank says without the IRS ruling, Citigroup and other banks that accepted bailout money, known as TARP, would have to pay higher taxes on the profits they’ll earn when the financial crisis is over.
ROBERT H. FRANK: If that were the case, then Citigroup wouldn’t be able to raise the money to pay back the TARP loan it took last year. So yes, it’s a break for them, but I think in this case it’s one that serves the public interest as well.
The government will lose revenue from the tax breaks although the exact amount depends on the banks’ future performance. Conceivably the IRS ruling is worth several billion dollars to banks that accepted TARP funds.
But Sheldon Cohen, a former IRS Commissioner now with money manager Farr Miller, says the lost revenue is worth it.
SHELDON COHEN: The bank’s stock would have fallen, people would have lost confidence in the banks and maybe the monetary system. The whole cycle would have fed on itself.
The government owns about $25 billion worth of Citigroup stock as a result of the bailout. So a drop in the stock price would also hurt taxpayers, says Cohen, more than offsetting any revenue gain from higher taxes.
In Washington, I’m John Dimsdale for Marketplace.
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