Rule Boosts Treasury Profit on Citigroup, Preserves Tax Losses

c.2009 Bloomberg News

Dec. 16 (Bloomberg) -- An Internal Revenue Service ruling designed to maximize profits for taxpayers after the bailout of Citigroup Inc. will also preserve as much as $38 billion in tax deductions for the bank.

The IRS issued the guidance Dec. 11, suspending restrictions on loss deductions when companies, such as Detroit- based General Motors Co. and Washington-based Fannie Mae, sold stakes to the government as part of the Troubled Asset Relief Program.

The tax guidance was intended to ensure that common stock sold by the Treasury Department as part of TARP wasn't devalued by investors who anticipated the bank would be denied the deductions, Nayyera Haq, a Treasury spokeswoman, said Dec. 11. She said yesterday the rules were designed to prevent tax abuses.

"This rule was designed to stop corporate raiders from using loss transactions to evade taxes, and was never intended to address the unprecedented situation where the government owned shares in banks," Haq said. "And it was certainly not written to prevent the government from selling its shares for a profit."

A Treasury Department official said Dec. 14 it expects a net profit of at least $13 billion from its investment in Citigroup. The estimate includes about $3 billion in dividends and gains on the Treasury's common equity stake, roughly $5.8 billion based on the Dec. 11 share price.

The government also holds a trust preferred stake with a face value of $5.2 billion that the Treasury received as part of a loss-sharing agreement, the official said.

The tax guidance issued Dec. 11 follows a similar ruling when the Treasury Department first took a stake in the banks. As early as September 2008, the IRS said mortgage giants Fannie Mae and Freddie Mac would return their tax loss deductions should they return to profitability and leave government control.

Dispelling Fear

Robert Willens, a certified public accountant who advises investors on how tax and accounting rules affect Wall Street, said the IRS rule "dispelled" fear that Citigroup would lose tax attributes when Treasury began selling its stake.

Citigroup's tax losses "will not be adversely affected by transactions with respect to its stock engineered by the Treasury Department," Willens said in a note to clients this week. The IRS is a Treasury Department agency.

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