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Abstract: 

The U.S. tax treatment of stabilizing investments by governments in troubled financial institutions is inconsistent. While the Treasury Department has exercised its authority under Code Section 382 to issue guidance relieving the harsh impact of the mechanical loss trafficking rules on stabilizing investments by the United States in troubled financial institutions by largely disregarding those stabilizing investments for Section 382 purposes, Treasury has not extended that relief to identical stabilizing investments by foreign governments. Differential treatment of stabilizing investments is inconsistent with U.S. tax policy, U.S. bilateral tax treaties, and U.S. banking policy. Consequently, U.S. policy obliges the extension of similar treatment to foreign governments’ stabilizing investments in their financial institutions to ensure that those investments are not treated as “loss trafficking transactions” and penalized under the loss limitation rules of Section 382.

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Affiliations:  1: Skadden, Arps, Slate, Meagher & Flom LLP; 2: Skadden, Arps, Slate, Meagher & Flom LLP.