Businesses still benefitting from hidden federal bailouts

Potential inequities exist but Congress should make process more transparent, WUSTL tax law expert says

The federal financial bailouts of the last few years received tremendous publicity, but multiple sources of “hidden bailouts” eluded notice, says Cheryl D. Block, JD, law professor at Washington University in St. Louis.


Some hidden sources of federal financial rescue include new, expanded tax credits, the more liberal IRS interpretation of regulations, and “off-off budget” bailouts by quasi-governmental agencies such as the Federal Reserve Bank, according to research by Block.

For example, the American Recovery and Reinvestment Act of 2009 temporarily allowed businesses to “carry back” their net operating losses for as much as five years, a much longer period than the original two years they were previously allowed. The result was that companies could claim a refund on taxes paid in prior profitable years, thus siphoning funds from federal coffers.

Another little-recognized example of “hidden bailout” was a revised IRS interpretation of loss-limitation rules that were designed to prohibit an acquiring company from using prior losses of the troubled acquired company.

The idea behind these rules was to prevent “loss trafficking” – healthy companies interested in buying struggling companies primarily to take advantage of the target company’s loss deductions.

The IRS’ revised liberal interpretation reversed years of prior policy, and enabled Wells Fargo & Co. to triumph over Citigroup Inc. in its battle to buy Wachovia Corp. in 2008. Other banks took advantage of the same deduction at a cost to taxpayers that some estimate at between $100 billion and $140 billion.

“The revenue foregone is an example of the very real government expense not reflected anywhere in agency financial statements or the federal budget,” Block says.

In order to “make the budget more transparent and expose potential inequities in the distribution of economic relief,” Block explains that Congress should acknowledge and account for the various “hidden bailouts” and include them in the federal budget.

At a minimum, the IRS should be required to generate cost-benefit analyses of major interpretive changes and make them available to Congress, Block says.

When rescue efforts include a long-term government ownership interest of particular companies, such as Fannie Mae and Freddie Mac, they should be included in the federal budget.

Congress should improve its valuation methodologies to consider risk and subsidy rates, and accounting methodologies of different government agencies should be harmonized to enable Congress to compare them fairly, Block recommends.