There’s a section (382) in the Internal Revenue Code that limits the amount of loss a corporation can take when it acquires another corporation that has so many losses it can’t use them (net operating loss carryovers). The purpose of this section is to limit trafficking in what are called “loss corporations.” Last fall, the IRS issued Notice 2008-83 which states that banks will not be subject to the Section 382 loss limitation rules.

The purpose of the notice was to facilitate Wells Fargo’s acquisition of Wachovia. The Notice apparently allows Wells Fargo to apply the Wachovia losses to Wells Fargo’s prior year tax returns and claim refunds. Since California follows federal law, the state has already indicated that it will lose perhaps $2bn in tax revenues as a result of this notice.

Some commentators have suggested that the Treasury Department exceeded its authority by issuing the Notice, since the Treasury’s role is to administer tax law rather than change it. However, it has been pointed out that at the time Wachovia was about to tank (that’s a technical accounting term) it was holding billions of dollars in customers’ payroll funds. Had Wachovia failed, many people would have missed their payroll.

Source: “The IRS Bailout of the Bailout,” Thomas Wechter and Colleen Feeney Romero. “Notice 2008-83: The Ripples Keep Spreading,” George White.