A new tax ruling that could make it easier for bank mergers such as Wells Fargo & Co’s planned purchase of Wachovia Corp to take place was criticized Thursday by Sen. Charles Schumer, who said it may prove too expensive for taxpayers.
In a letter to U.S. Treasury Secretary Henry Paulson and Internal Revenue Service Commissioner Doug Shulman, Schumer said that by making acquired banks’ loan losses more valuable for tax deduction purposes, the IRS ruling could cost taxpayers $140 billion, citing an estimate from the law firm Jones Day.
Schumer, a New York Democrat who sits on the Senate Banking Committee, said the ruling could save Wells Fargo alone $19.4 billion of taxes on its purchase of Wachovia, more than the $15.1 billion in stock that San Francisco-based Wells Fargo agreed to pay.
“I am concerned that the notice, which was never debated by Congress, could end up costing taxpayers tens of billions of more dollars on top of the hundreds of billions of dollars already approved by Congress in the financial rescue plan,” Schumer wrote, referring to this month’s $700 billion financial industry bailout.
“I also fear that the notice could have the unintended consequence of motivating more financial firms wanting future tax deductions to shelter their earnings to buy competitors, leading to more consolidation in the financial industry than would be necessary to restore stability,” he added.
Senater Chuck seems to be asking all of the after the fact questions. I have to ask where was Chuck while the Mortgage Meltdown was happening?
Schumer said takeovers by PNC Financial Services Group Incof National City Corp and by Spain’s Banco Santander SA of Sovereign Bancorp Inc may afford those acquirers billions of dollars of tax benefits.
Treasury Department spokesman Andrew DeSouza said “we have received the letter and are reviewing it.” An IRS spokeswoman referred a request for comment to the Treasury Department.
Wells Fargo agreed to buy Charlotte, North Carolina-based Wachovia on Oct 3, three days after the IRS ruling, creating the nation’s fourth-largest bank by assets.
Wachovia later reported a $23.9 billion quarterly loss, and projected $26.1 billion of future losses on a troubled $118.7 billion portfolio of mortgages. Wells Fargo expects $74 billion of losses on Wachovia’s entire $482.4 billion loan portfolio.
Pittsburgh-based PNC this month agreed to pay $5.2 billion in stock for Cleveland’s National City, helped by a $7.7 billion capital infusion from the Treasury Department.
Santander, meanwhile, this month agreed to pay $1.9 billion for the 76 percent of Philadelphia-based Sovereign it did not already own.
Separately, in a U.S. Securities and Exchange Commission filing, Wachovia said it offered to accept an IRS settlement over leasing tax shelters that the agency considers abusive.
More than 30 companies have made similar offers. Wachovia’s use of the leases resulted in a $975 million second-quarter charge, following court rulings against other lenders.
In addition, Wachovia said the SEC and Massachusetts are separately probing its Evergreen asset management unit over a plunge in value of the Evergreen Ultra Short Opportunities Fund, which invested in asset- and mortgage-backed securities. Evergreen decided in June to liquidate the fund.