December 31, 2009

New IRS Rule Good News for Ailing Companies

Section 382 of the tax code is a long-standing IRS rule that prohibits profitable companies from buying loss-making companies simply to deduct its losses to reduce taxes. But the downturn in the economy has compelled the US government to intervene by buying stakes in ailing companies in exchange for bailout money to save these companies from going under. Under normal circumstances, companies are generally allowed to deduct losses on their current and future tax returns and carry them back for one year if necessary.

However, the government owning stakes in certain companies is not considered ‘normal circumstances’. Some of these companies include well known giant corporations like Citigroup Inc, Fanny Mae and Freddie Mac, GM, American International Group and GMAC Financial Services. Now when they exit government control and the government sells its stakes, Section 382 would have meant that these companies would have to forego all tax benefits.

But last Friday, the IRS came up with a new ruling that allowed these companies to avoid Section 382. This new ruling basically recognizes that no change in ownership takes place when these companies repaid their federal bailout money hence they are allowed to keep their tax benefits.

One such company in question is Citibank, in which the government bought 34% and injected $20 billion into the bank to prevent its bankruptcy. Now Citigroup Inc has received the green light from the government to repay the $20 billion and the government has agreed to sell its 34% stake. Now with the new ruling in place, Citibank is allowed to keep its $38 billion in tax benefits, known as deferred tax assets, which it can use to offset future taxes.

Likewise GMAC Financial Services also stands to gain about $1.7 billion in tax benefits should it repay its bailout money. However, companies that received bailout money but did not sell part of its stake to the government are not affected by the new ruling.

The new ruling is seen as aiming to shore up the value of the stocks of the companies the government is seeking to sell. Another way of looking at it is that the ruling allows the companies exiting bailouts to return to the same tax situation they would have been in had the government not intervened.

On the other hand, the ruling might be seen as a form of favoritism on the part of the government towards these companies by cutting them some slack. But essentially, this ruling merely recognizes the deferred tax assets of these companies. Furthermore, Section 382 is basically out to punish corporate raiders that intend to evade taxes on their profits and the US government is no corporate raider.

Darrin T. Mish is a veteran, nationally recognized tax attorney who has focused on providing IRS help to taxpayers for over a decade. He regularly travels the country training other attorneys, CPAs and enrolled agents on how to handle their toughest cases with the IRS. He is highly ranked among the top attorneys in the country, with an AV rating from Martindale-Hubbell and a perfect 10 on Avvo.com. Martindale-Hubbell has also honored him with a listing in their Bar Register of Preeminent Lawyers. He is a member of the American Society of IRS Problem Solvers and the Tax Freedom Institute. With clients on every continent but Antarctica, he has what it takes to solve your IRS problems no matter where you live in the world. If you would like more information about his practice and how he can help you, please call his office at (813) 229-7100 or toll free at 1-888-GET-MISH.

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