Wednesday, April 15, 2009
In a Letter to the Editor published in the April 6 issue of Tax Notes, Prof. Nina Crimm of St. John's University proposes a way to deal with toxic assets held by banks. In "A Hybrid Nonprofit Model: Private Investors and Banks' Legacy Assets," she notes that banks have had trouble finding private-sector buyers for the toxic assets, and she proposes that the government provide tax incentives to encourage purchasers. The idea would be to provide an income tax exemption for gains realized by the private-sector purchasers from later dispositions of the assets. Losses would remain deductible, so the purchaser of the assets would get the best of both tax worlds. The tax exemption might be sufficient to overcome the current market failure - the lack of buyers for the assets at purchase prices enticing to banks. (Precedent for such a tax subsidy exists in the form of an income tax exemption for charities that theoretically relieve a governmental burden where there is a market failure.) The Treasury would have to analyze the cost, of course, but given the magnitude of the current problem, the cost might be worth it.