Tax Change Leads to Investigation at Treasury

Last week Senator Charles Grassley sent a letter to Eric Thorson, the Treasury Department's Inspector General, asking Thorson to investigate the "facts and circumstances" leading to the issuance of IRS Notice 2008-83. Notice 2008-83, issued days before the economic rescue law was enacted, changed the tax treatment under IRC section 328(h) of losses realized after one bank acquires another. At issue are losses from selling instruments for less than they cost (say, for instance, mortage-backed securities). 2008-83 removed the ceiling on the amount of such losses that can be deducted against income. For a smarter and more detailed discussion see this memo written by Annette Ahlers of Pepper Hamilton LLP.

Grassley is concerned because so many former bankers were involved in drafting 2008-83. He thinks it suggests that treasury is giving preferential treatment to banks and that there may also be an appearance of conflict of interest when former bankers give huge tax breaks to other bankers. Grassley also mentions that this tax break actually made it possible for Wells Fargo to acquire Wachovia without any government money.

Today, the New York Times reports that Thorson has opened an investigation.