California to Repudiate Treasury on Treatment of Net Operating Losses?

In the geeky but important category, the California legislature attempted but failed to pass a budget that included a provision that effectively repudiated the recent Treasury directive to eliminate the limitation on acquiring banks’ ability to use the net operating losses of acquired banks. That rule change was widely described as instrumental in the catfight over Wachovia. Wells Fargo was able to mount a vastly more attractive offer than Citigroup thanks to this change.

And consider, as we have noted in passing: Treasury’s authority to implement this change is very much in dispute. Congress, after all, is in charge of the tax code; the Treasury/IRS merely implements it. An “interpretation” that is estimated to reduce Federal revenue by $140 billion does appear to be more than a bit of a stretch.

The latest development is that Wells may be partially hoist on its own petard. A bill introduced by Assembly member Charles Calderon takes issue with the Treasury notice of this supposed administrative change:

The Corporation Tax Law, in specified conformity to federal income tax laws, imposes certain limitations on the use of built-in losses in conjunction with corporate reorganizations.

This bill would clarify that a specified federal administrative notice relating to those limitations does not apply for purposes of California law.

This bill would declare that it is to take effect immediately as an urgency statute.

Given that other states are revenue-starved, it is likely that they would follow the Golden State’s lead. Linda Beale provided further commentary:

The state ordinarily follows federal income tax law in determining California taxable income, but the Treasury action is expected to cost the state at least $300 million in 2009 and as much as $2 billion over the next few years, depending on the number of bank mergers. The Board said that California should not follow the Notice since it was issued by Treasury without statutory authority.

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  1. Anonymous

    If you can’t beat them, starve them. The feds haven’t considered the microeconomic impact of anything it has done in years.

  2. Independent Accountant

    There is nothing that requires any state to follow the federal lead with respect to the tax treatment of NOLs. Some states do not recognize NOLs at all.

  3. Anonymous


    It is not right that there is nothing requiring states to follow federal tax law. Many states have tax statutes incorporating the federal tax code by reference or by including provisions that copy the federal tax code. And either way, they have case law that treats IRS regulations and rulings as authority for state tax purposes.

  4. artichoke

    But you say they failed to pass this. I hope they can succeed, soon. This Treasury “announcement” is quite bogus, and any bank that relied on it has only its lawyers to blame if, to their surprise, it is reversed.

  5. Independent Accountant

    You don’t know what you are talking about. Many states incorporate the IRS code for their own tax codes. So? They need not follow every change in the IRS code. And don’t.

  6. Anonymous

    IA, “You don’t know what you are talking about. Many states incorporate the IRS code for their own tax codes. So? They need not follow every change in the IRS code. And don’t.”

    You are willfully misstating what I said. Treasury guidance on irc 382 would be authority in CA, absent action to the contary.

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