by Calculated Risk on 10/03/2008 04:12:00 PM

IRS Notice:

For purposes of Code Sec. 382(h), any deduction properly allowed after an ownership change of a corporation that is a bank with respect to losses on loans or bad debts, including any deduction for a reasonable addition to a reserve for bad debts, shall not be treated as a built-in loss or a deduction attributable to periods before the change date. This guidance does not affect the application of any provision of the IRC except Code Sec. 382. Banks may rely on this guidance until further guidance is issued.

This new rule apparently allows Wells Fargo to accelerate the use of Wachovia's huge write-downs as an offset to their own income, saving Wells Fargo a substantial amount in taxes over the next several years.

In an email memo sent yesteryday, the law firm Wachtell, Lipton, Rosen & Katz noted:

As part of the federal government’s ongoing comprehensive response to the current credit crisis, the Treasury Department and the Internal Revenue Service have acted decisively to ameliorate the impact of Section 382 of the Internal Revenue Code in the context of bank mergers and acquisitions and capital raising by banks and others. In an environment where asset quality concerns are giving potential bank acquirors and investors pause about engaging in acquisitions or supplying badly needed equity capital, these steps are likely to significantly enhance the risk/reward calculus by facilitating the deductibility of losses.

This IRS change probably motivated Wells Fargo to acquire Wachovia. This is another way to help recapitalize the banking system.

Note: according to the WSJ Law blog, Wells Fargo was advised by Wachtell, Lipton, Rosen & Katz in the Wachovia deal.