NOLs and the Rule of Law

Posted by Victor Fleischer

As Paul has already highlighted, tax lawyers are scratching their heads over the Treasury's legal authority to issue Notice 2008-83, which allows banks (but no one else) to avoid the usual application of Section 382's limitation on built-in losses following a change in control.  Apparently the staffs of the tax-writing committees were not consulted, and Senator Grassley wants to know why. 

I've heard that the Treasury has pointed to two sources of authority (1) its authority to promulgate regulations under 382 and (2) its authority under the TARP bill.  Neither seems adequate. 

Under section 382, the Secretary of the Treasury has the authority to promulgate regulations implementing that legislation.  But there is no ambiguity in the language of 382 that the Notice is intended to cure -- there is no reasonable argument that "losses on loans" are somehow not "losses" for purposes of 382.  Rather, the Notice carves out a new exception that was not included in the original legislation.  There is no coherent argument that Congress delegated lawmaking authority to the Treasury to make new exception to the statutory language.  Administrative law principles do provide somewhat broader latitude for regulations that go through the notice and comment procedure, but that hasn't happened here. 

Nor does the TARP bill provide adequate authority.  The TARP bill gives the Treasury broad authority to purchase assets and securities, but it does not grant authority to re-write tax legislation in whatever manner promotes bank mergers.  There is some tax relief in the bill for companies that would otherwise be stuck with short-term capital losses on Fannie and Freddie preferred stock, but the scope of that section is quite limited.  If Congress wanted to give Treasury the authority to fiddle with 382, it clearly could have done so. It did not.

Instead, the Treasury, on its own, determined that a change in 382 would make good policy, and it implemented the change on its own.  The Treasury, in this instance, adopted the view that it has the legal authority to do whatever it can get away with -- the only limitations are political, not legal.  No one has legal standing to block the change in law; taxpayers don't normally have standing to sue merely because a Notice has administrative defects.  And by the time Congress takes any legislative action, we'll have a new administration running the Treasury department.  While it is possible that Congress or new officials at Treasury could reverse the change, no one seems eager to do so, as a change would upset some bank mergers that are already in the works.  

What bothers me about this isn't the underlying policy --- 382 is not a well-designed statute, and creating $100 billion in tax assets to fuel bank mergers probably helps stabilize the financial system -- but the unsupervised, non-transparent, unaccountable exercise of lawmaking.  The Treasury gave away $100 billion of our money without so much as a courtesy call to Congress.  Nor does the $100 billion count against the $700 billion which Congress did authorize under TARP.  I don't think that anyone at Treasury was doing this to help out a friend, or for any reason other than to promote the public interest.  But the absence of malice does not justify an end run around Congress.