Tax Losses and the Banking Crisis

Treasury, by two rule changes, has changed the tax loss carry forward rules for banks.  On September 30th, Treasury decided that a buyer of a troubled bank could use all the tax losses of the selling bank to offset the buyer's taxable gains.  It was a $100 billion change.  In October, Treasury decided that a bank receiving TARP money (bailout funds), could carry forward tax losses longer.  The second rule added value to the first, attracting buyers to banks with old tax losses.  Now foreign banks want the break, adding that it is unfair that only domestic banks get the benefit of the new rules.  Soon other buyers of failing non-banks (auto companies???) will want the benefit of the new rules.  This decidedly lack of principled approach to crisis should led to a reexamination of the principle of limiting tax loss carryovers for everyone -- a rule that was borne to limit tax shelter abuse and was applied too broadly.  The new rule should be tailored to limit abuse while still permitting liberal use of tax losses in acquisitions where there is no abuse.