'Wells Fargo Ruling' May Be Illegal
The US Treasury, under cover of the uproar over the Wall Street Bailout, issued a notice in which it claimed authority to overturn Section 382 of the Tax Code, a two-decade old law created to stop mega-conglomerates from using shell companies to hide losses and avoid taxes. This notice quickly became known as "the Wells Fargo Ruling", as it saved the new "superbank" from about $25 billion in taxes when it snapped up Wachovia at a distress-sale price in the midst of the bailout negotiations. Congress was not informed about this beforehand, and some lawmakers have privately been questioning whether the ruling was even legal. They had not wanted to make any public statements regarding that aspect of it, out of fears it would lead to even more tumoil in the financial sector. According to some estimates, the US Treasury stands to lose over $100 billion in tax revenue as a result of this change, if it's allowed to stand.
The financial world was fixated on Capitol Hill as Congress battled over the Bush administration's request for a $700 billion bailout of the banking industry. In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention.
But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion.
The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal. But they have worried that saying so publicly could unravel several recent bank mergers made possible by the change and send the economy into an even deeper tailspin.