Marketplace Scratch Pad

A tax pardon for Citigroup

Scott Jagow Dec 16, 2009

It turns out the government is providing yet another assist to its problem child bank. An IRS exception will allow Citi to potentially benefit from up to $38 billion worth of tax deductions. Otherwise, the bank would be in no position to pay back the taxpayers. Let’s see if we can understand this.

Before the IRS change, Citi would’ve been barred from getting the tax benefit when the government sold its shares in the bank. That equates to an “ownership change.” The rule was designed to keep corporate raiders from essentially buying tax benefits.

The Washington Post says under the exception, the government will be losing out on revenue that could put taxpayers in the red vis-a-vis the value of Citi’s payback:

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 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.”

But the Treasury says the Post story is baloney — that taxpayers will benefit from this ruling because Citi’s shares will be much more valuable.

Our Washington bureau chief John Dimsdale has been tracking down the truth and says his tax analyst sources agree with the Treasury. They say if this tax break wasn’t allowed, Citi’s shares would plummet because as you know, Wall Street is all about future earnings.

Here’s how it works. Let’s say Citi made $48 billion next year. Without the exception, Citi would have to pay taxes on all $48 billion. With the exemption, Citi only has to pay taxes on $10 billion because it can deduct up to $38 billion worth of past losses. That’s a big difference, and you can see why investors would dump Citi’s stock in a heartbeat.

Still, we should not forget the government’s generosity here, should Citigroup wind up at the brink again anyway. Based on recent experience, don’t you think the government would just change the rules again? There is probably no clean, feel-good way for Citi’s release from TARP to occur because of the incestuous nature of these unprecedented relationships.

More from John tonight on Marketplace.

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