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Rethinking the Tax Treatment of Government Assistance to Financial Institutions in Light of Treasury’s 2008 Capital Purchase Program  

Author:  Jonathan  Prokup.; Dustin  Covello.

Source: Volume 25, Number 03, January/February 2012 , pp.5-20(16)

Journal of Taxation and Regulation of Financial Institutions

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In October 2008, facing an historic financial crisis, Treasury undertook a bold experiment, investing billions of taxpayer dollars in the nation’s banking system in an effort to stabilize the institutions and stave off disaster. Though nominally structured as an equity investment in each of the banks, the objective indicia suggest that the investment more closely resembled debt for federal tax purposes. Consequently, the banks should have been permitted to claim deductions for distributions made to the Treasury in respect of the investment. Although Congress subsequently passed the Dodd-Frank Act in part to protect taxpayers from the possibility of suffering losses on such investments, the Act leaves open the possibility that the government could make a similar investment in the future without being secured by the intended protection, and leaves the door open for financial institutions receiving government assistance to treat preferred stock dividends as deductible interest payments.

Keywords: TARP; debt; equity; Dodd-Frank Act; interest deduction; Notice 2008-101; Notice 2009-14; Notice 2009-38; deemed distribution; IRC Sec. 385(c)

Affiliations:  1: Chamberlain Hrdlicka; 2: Chamberlain Hrdlicka.

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