WASHINGTON — Citigroup and other banks starting to repay the billions of dollars they borrowed from the government are getting another boost as they exit the bailout program: Billions more in tax breaks.
Tax law allows money-losing corporations like Citigroup Inc. and General Motors Co. to use current net operating losses to offset future taxable income, reducing their tax bills for up to 20 years after the losses occur.
Under ordinary circumstances, those tax breaks would be severely limited if the companies underwent an ownership change, much like many of them did when the government acquired big blocks of their stock.
Losing the tax breaks would have substantially reduced the value of the companies, even as the government was trying to prop them up with bailout funds.
The Treasury Department didn't want that to happen, so it started issuing tax guidance about a year ago that said the rules didn't apply when the government, through its bailout programs, caused the ownership change.
Last week, Treasury issued additional guidance saying that the rules also won't apply when the government sells its stock. The new rules mean that Citigroup and other bailout companies will still be able to take advantage of tax breaks worth billions of dollars, once they become profitable and start paying taxes again.
For tax purposes, it's like the government's ownership never happened, said Robert Willens, a corporate tax accountant in New York.
The size of the tax breaks will depend on how soon the companies become profitable, Willens said. "It's certainly in the billions," he said.
Citigroup announced this week that it was repaying $20 billion to the government's Troubled Assets Relief Program, or TARP. Citigroup had taken $45 billion in rescue funds – among the largest bailout packages received by any bank – but the government converted $25 billion of that amount into a 34 percent equity stake, which it is now selling.
The tax breaks will cost the government billions of dollars in tax revenue, but the government's stock in the companies is worth more because the value of the companies is higher.
Treasury spokeswoman Nayyera Haq said the guidance issued last week was not targeted toward any individual company. It was released last week because Treasury was expecting a number of banks to start paying back their loans, exiting the bailout program.
"This guidance is the part of the government's orderly exit from TARP," Haq said.
She defended the overall strategy of helping bailout companies preserve their tax breaks, pointing out that the original law was intended to prevent corporate raiders from taking over money-losing companies simply to cash in on their tax breaks.
"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."
White House spokesman Robert Gibbs said the policy merely allows Citigroup and other bailout companies to preserve the tax breaks they were entitled to before the government intervened.
"There are tax breaks in the law for companies that are losing money. That's been the tax law for quite some time," Gibbs told reporters. "Citigroup's losing money. They can use that against their taxes."
Willens said the Treasury Department's strategy makes sense. However, he said, it highlights an unprecedented government intervention in the private sector.
"We've never seen anything like this," Willens said. "The unilateral actions they are taking are unprecedented. This is just one of many."