Treasury’s Response

In December, the Treasury formerly responded to Schumer’s letter. Eric Solomon, an Assistant Secretary of the Treasury, in a written response to Senator Schumer, attempted to address each of Schumer’s concerns. He first addressed the Treasury’s rationale behind the notice. Solomon pointed to a long line of published guidance for §382, including Notices going back to 2003. He claimed that Notice 2008-83 only builds on 2003-65, and is meant to provide guidance tailored to the banking industry.  The Notice was supposed to provide guidance to banks that had no way of determining the amount of built-in gains or losses. Without the Notice, acquiring banks “would face significant uncertainty about the amount of available tax attributes when considering potential capital infusions, acquisitions, and other transactions, and similarly, the IRS would have difficulty examining the transactions.”[i]  He also notes that the banking industry is unique with the extra reporting and oversight to which they are subjected. Only this extra oversight allowed the Service to issue the Notice in good conscious. Solomon did briefly acknowledged Grassley’s accusations, and stated that the Notice “was intended to provide guidance to the entire banking industry and was not issued with an eye to any particular transactions or taxpayers.”[ii]

Solomon next addressed Schumer’s concerns over the potential revenue implications.  In response to Schumer’s concerns over the financial impact, Solomon pointed out that it would be almost impossible for the Service to complete a revenue estimate for every piece of tax guidance published each year, as there are hundreds per year. He qualified this by noting that in certain cases, the receipt baseline is modified to account for material changes in the interpretation of the existing tax law. Such a modification was considered with the pronouncement of Notice 2008-83, but the Service found the effect to be negligible. This conclusion was drawn from two main points. The first is that the potential benefit is “highly uncertain, especially in the current market environment.”[iii] The second, and the more important point, was the limited set of transactions that could possibly benefit from the Notice. A list of reasons why the set of transactions that benefit from the Notice is so limited was provided:

The effect of the Notice is limited because: there is currently a limited market in which a bank can dispose of loans; the utilization of losses requires the generation of income that could be offset; section 382(h) applies to the recognition of built-in losses only to the extent a corporation’s built-in losses in its assets exceed the built-in gains; in many cases the effect of section 382 is to postpone the use of losses rather than to result in their disallowance; an acquiror that acquires a bank that has received assistance from the Federal Deposit Insurance Corporation will not accede to any of the target bank’s attributes; some taxpayers are subject to the section 475 mark-to-market method of accounting that would limit the amount of potential built-in loss; bad –debt deductions taken by a corporation more than one year after an ownership change may be treated as not built-in under current law (Notice 2003-65); and section 382 does not apply to built-in losses or deductions recognized more than five years after an ownership change.[iv]

Solomon does acknowledge the media’s estimates of the cost of the Notice, but claims that such estimates are incorrect. This is based on the lack of evidence provided by the media, as well as the conflicting estimates provided by the Service.[v]

In reference to the remaining concerns that Schumer expressed, Solomon claimed that the Notice and the Emergency Economic Stabilization Act of 2008 (EESA) did not conflict as Schumer suggested, but were complementary. They both worked towards a goal of easier capital infusions in the marketplace. The Service also believes that the transactions, which do take advantage of the Notice, are occurring for valid business purposes, and not just for the tax benefit. However, the Service plans to continue monitoring such transactions closely during the normal course of audit, using its normal tools to ensure that only those transactions with a valid business purpose are allowed.[vi]

Shortly after Solomon’s letter, Jones Day published an article, which summarized the letter, and reversed earlier comments and articles that it had previously made. While this article acknowledge prior comments made by the firm, it did not expound on those comments or offer suggestions as to why the firm changed its opinion of the Notice.[vii]

[i]. Solomon, Eric. “Treasury Responds to Lawmaker’s Concerns About Guidance on Subsidizing Bank Acquisitions.” Tax Notes Today, December 11, 2008.


[ii]. Solomon, 3

[iii]. Solomon, 4

[iv]. Solomon, 4

[v]. Solomon, 4


[vi]. Solomon, 4-5

[vii]. Jenks, 1