Immediate Reaction to 2008-83

Public and Grassley

The reaction to the Notice was widespread. There were companies, which immediately took advantage of the benefit, such as Wells Fargo.  Other companies were less enthusiastic about the consequences. In the same deal, once the Notice was announced, and Wells Fargo attempted to purchase Wachovia, Citigroup moved to block the deal.  Outside of those that were directly impacted by the Notice, the opinions varied just as widely. On the topic of the Service’s authority to issue such a Notice, Andrew Eisenberg of Jones Day stated that he “would be surprised if Treasury’s interpretation of its administrative authority was not extremely well thought out.”[i] Jones Day would later support the authority for the Service. Eisenberg also commented that the Notice could cause “banks [to] become much like some of the automobile companies in that these losses could offset future income for many years.”[ii] Matthew Stevens of Alston & Bird saw the Notice the Service effectively stating, “they are not going to enforce the law.”[iii] 

At the same time many commentators were wondering not only if the Service had the authority to issue the Notice, but also if it did not, then what oversight actually existed. Taxpayer’s standing to sue the government over such matters is very limited, and at first Congress did not react. However, in November, Chuck Grassley, at the time the chairman of the Senate Finance Committee, formerly requested the inspector general to investigate the Treasury’s release of the Notice. In his letter, Grassley questioned not only the Treasury’s authority to issue such a Notice, but also possible conflict of interests that might have resulted in the Notice[iv]


In a similar move, Senator Charles Schumer authored a letter to Treasury Secretary Hank Paulson and IRS Commissioner Doug Schulman. Schumer did not question the possible conflict of interests concerns, as Grassley did, but he did question the rationale for the initial decision, type of cost-benefit analysis, as well as concerns over the lack of consultation with Congress and follow-up analysis on the impact to the markets.  In total, five questions were stated as follows:

1.     What was Treasury and IRS’s rationale for making this change? Why was there no consultation with Congress?

2.     The Section 382 change was made prior to the Treasury’s rollout of its capital infusion program.  Does the Treasury still think the change to Section 382 is necessary as part of its financial rescue efforts? Does the Treasury believe that the above acquisitions would not have taken place were it not for the change to tax law?

3.     What analysis, if any, has the Treasury done to ensure that this change will not create an incentive for consolidation beyond what is necessary for stability in the financial sector? Is there a concern that this may motivate takeovers in the financial industry solely for tax savings?

4.     What are your plans for reviewing the outcome of this change to the tax law and assess its cost-effectiveness?

5.     As one of the main goals in designing the financial rescue program is allowing taxpayers to share in the upside as the financial industry recovers, is it not against taxpayers’ interests to allow these tax deductions to be carried forward, since it reduces the taxable profits of the banks making the purchases and reduces taxpayers’ potential upside?[v]

[i]. Coder, Jeremiah. “News Analysis: What Will the Banking Industry Look Like Next Year?.” Tax Notes Today, October 14, 2008.

[ii]. Coder, 123

[iii]. Coder, 123

[iv]. Grassley, Charles. “Grassley Seeks Inspector General Review of Treasury Bank Merger Move.” Senator Chuck Grassley of Iowa. (accessed December 9, 2009).

[v]. Schumer, Charles. “SCHUMER SEEKS ANSWERS FROM IRS, TREASURY ON TAX CODE CHANGE THAT SUBSIDIZES BANK ACQUISITIONS.” Senator Charles E. Schumer. (accessed December 9, 2009).