Friday, December 18, 2009

House Panel to Investigate Citi Tax Break

by Bill McBride on 12/18/2009 08:29:00 AM

From the WaPo: Kucinich panel to investigate Citigroup tax ruling

House subcommittee said Thursday that it will investigate the Treasury Department's decision to change a long-standing law so that Citigroup could keep billions of dollars in tax breaks.
...
The Internal Revenue Service ... ruled last Friday that Citigroup could keep $38 billion in tax breaks that otherwise would decline in value as the government sells its stake in the company. Federal law lets companies shelter profits from taxes in good years based on the amount of losses in previous bad years. But the law restricts the use of past losses if a company changes hands, to discourage profitable companies from buying unprofitable firms to avoid paying taxes.

Treasury's plan to sell its $25 billion stake in Citigroup would have qualified as a change of ownership under the law. ... Treasury officials said the government needed to grant the tax break in order to sell its shares in Citigroup because the company could not afford the loss. Officials also said that preserving the tax break would help the government sell its shares at a higher price.
The key question is who benefits from the law change? The value of the shares the U.S. owns should increase, but only 34% of the share price increase accrues to U.S. taxpayers The other current shareholders receive the rest.

Of course the U.S. delayed selling shares because of the weak Citi share price (Treasury would have had to sell at a loss), but this is still an issue when Treasury eventually sells.