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Repealing Tax Law by Fiat: Paulson as Dictator?

If you have more than a passing interest in “The Bailout” this Washington Post article is worth your time. Condensed highlights:

The change to Section 382 of the tax code — a provision that limited a kind of tax shelter arising in corporate mergers — came after a two-decade effort by conservative economists and Republican administration officials to eliminate or overhaul the law, which is so little-known that even influential tax experts sometimes draw a blank at its mention. Until the financial meltdown, its opponents thought it would be nearly impossible to revamp the section because this would look like a corporate giveaway, according to lobbyists.

Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would then use the acquired company’s losses to offset their gains and avoid paying taxes.

The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal. But they have worried that saying so publicly could unravel several recent bank mergers made possible by the change and send the economy into an even deeper tailspin.

“Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no,” said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. “They basically repealed a 22-year-old law…”

“It was a shock to most of the tax law community. It was one of those things where it pops up on your screen and your jaw drops,” said Candace A. Ridgway, a partner at Jones Day, a law firm that represents banks that could benefit from the notice. “I’ve been in tax law for 20 years, and I’ve never seen anything like this.”

More than a dozen tax lawyers interviewed for this story — including several representing banks that stand to reap billions from the change — said the Treasury had no authority to issue the notice.

Several other tax lawyers, all of whom represent banks, said the change was legal. Like DeSouza, they said the legal authority came from Section 382 itself, which says the secretary can write regulations to “carry out the purposes of this section.”

Wait a minute. The purpose of 382 was to minimize abuse of shell companies reducing the taxes of the acquiring firm in a merger? And now Paulson is “carrying out the purposes of the section” by eliminating the limitations on using shell companies to reduce the taxes of the acquiring firm in a merger? What!?

[C]orporate tax lawyers quickly realized the enormous implications … Administration officials had just given American banks a windfall of as much as $140 billion.

That’s $140 billion above and beyond anything discussed pertaining to “The Bailout.” So from what I’ve gathered, billions of taxpayer dollars have been pumped into the banks, with the idea of unfreezing the “credit crisis” (brought on by investment bank failures born of the sub-prime mortgage crisis) by encouraging lending. However, no strings (or the wrong strings) were attached, so big the banks aren’t lending the money — instead they’re just acquiring smaller banks. And with the repeal-by-fiat of a 22-year-old law (!!!), the big banks are receiving a substantial tax windfall on these acquisitions.

Somewhere there is a line between propping up the financial system (for everyone’s benefit) and unjustly enriching major financial entities. Meet that line. Oh wait, it’s back there

President-Elect Obama has his work cut out for him. This cliche brought to you by my desire to mention President-Elect Obama in this blog. Congratulations!