How do we know that Treasury knows that this tax giveaway was illegal? From the way they sneaked it out the back door under cover of the bailout to-do

Sen. Chuck Grassley (right), ranking Republican on the Finance Committee, is reportedly "particularly outraged," and Chairman Max Baucus (left) isn't happy either. But everyone is -- shhh! -- whispering.

"We're left now with congressional Democrats that have spines like overcooked spaghetti. So who is going to stop the Treasury secretary from doing whatever he wants?"

-- tax attorney Lee Sheppard, quoted by Amit R. Paley in "A Quiet Windfall for U.S. Banks," in today's Washington Post

by Ken

Obviously you can't turn your back for a second on our pals the corporate predators -- or on their bosom cronies in the Bush regime. In this case we're talking about the U.S. Dept. of the Treasury Inc., under the splendid direction of Treasury Sec'y (and Bailout Czar) Hank Paulson. It turns out that Capitol Hill insiders have been steaming for more than a month now over a breathtaking stunt pulled ever so quietly by the department's tax policy people on Sept. 30. As Post reporter Paley reports:

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.

As far as the Treasury elves are concerned, they were just engaging in a wee bit of administrative fine tuning, as authorized within the very bit of tax code they tinkered with: section 382, described as "so little-known that even influential tax experts sometimes draw a blank at its mention." It's a 1986 congressional attempt to fix a loophole whereby, as I understand it, companies doing mergers were simultaneously acquiring shell companies with no value except tax losses in order to lower the tax bite.

And it turns out -- surprise! -- that the usual klatsch of corporate predators has been targeting section 382 since 1986, on the ground that it's unhelpful to corporations doing mergers by depriving them of this clever gimmick for lowering the tab. Which, you know, was kind of the idea.

Oh, the usual tax and legal "experts" whose philosophy is that rich people and corporations have the right to do any damn thing that comes into their larcenous heads say that sure, the Treasury Dept. had the right to do this, you betcha. The rest of the business-law community is saying, basically, WTF???

"Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no," said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. "They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks."

[Just to be clear -- because it's easy to misread -- Mr. Yin is saying that Treasury now, not Congress back in 1986, is essaying this "backdoor way of providing aid to banks."]

Reporter Paley did find "several tax lawyers, all of whom represent banks," who think Treasury action of Sept. 30 was legal. But "more than a dozen tax lawyers interviewed for this story -- including several representing banks that stand to reap billions from the change -- said the Treasury had no authority to issue the notice."

The guidance issued from the IRS caught even some of the closest followers of tax law off guard because it seemed to come out of the blue when Treasury's work seemed focused almost exclusively on the bailout.

"It was a shock to most of the tax law community. It was one of those things where it pops up on your screen and your jaw drops," said Candace A. Ridgway, a partner at Jones Day, a law firm that represents banks that could benefit from the notice. "I've been in tax law for 20 years, and I've never seen anything like this."

As if the whole thing didn't smell bad enough, there is additional concern over the timing of the administrative change:

The notice was released on a momentous day in the banking industry. It not only came 24 hours after the House of Representatives initially defeated the bailout bill, but also one day after Wachovia agreed to be acquired by Citigroup in a government-brokered deal.

The Treasury notice suddenly made it much more attractive to acquire distressed banks, and Wells Fargo, which had been an earlier suitor for Wachovia, made a new and ultimately successful play to take it over.

The Jones Day law firm said the tax change, which some analysts soon dubbed "the Wells Fargo Ruling," could be worth about $25 billion for Wells Fargo. Wells Fargo declined to comment for this article.

Ooh!

Iowa Sen. Chuck Grassley, ranking Republican on the Finance Committee, is reportedly "particularly outraged," and ordered his staff to get some answers from Treasury.

In an off-the-record conference call on Oct. 7, nearly a dozen Capitol Hill staffers demanded answers from [top Treasury tax policy official Eric] Solomon for about an hour. Several of the participants left the call even more convinced that the administration had overstepped its authority, according to people familiar with the conversation.

But lawmakers worried about discussing their concerns publicly. The staff of Sen. Max Baucus (D-Mont.), chairman of the Finance Committee, had asked that the entire conference call be kept secret, according to a person with knowledge of the call.

"We're all nervous about saying that this was illegal because of our fears about the marketplace," said one congressional aide, who like others spoke on condition of anonymity because of the sensitivity of the matter. "To the extent we want to try to publicly stop this, we're going to be gumming up some important deals."

So everyone is tiptoeing around, afraid even to talk too loud, let alone do anything about the rank administration abuse of power -- yet another illustration, as if it were needed, why a bailout supervised by Treasury Secretary Paulson is more likely to resemble a corporate giveaway. Which brings us back to Lee Sheppard:

Some legal experts said these under-the-radar objections mirror the objections to the congressional resolution authorizing the war in Iraq.

"It's just like after September 11. Back then no one wanted to be seen as not patriotic, and now no one wants to be seen as not doing all they can to save the financial system," said Lee A. Sheppard, a tax attorney who is a contributing editor at the trade publication Tax Analysts. "We're left now with congressional Democrats that have spines like overcooked spaghetti. So who is going to stop the Treasury secretary from doing whatever he wants?"

I'm thinking we need to get the attention of the corporate predators and their allies with a new set of laws -- or, better, not new laws, but new administrative applications of existing statutes, drawing in particular on those concerning treason and attempting to overthrow the government. You know, the sort of thing that involves the death penalty -- and maybe confiscation of all assets? Do you think that would get their attention?

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UPDATE: AND KEN ISN'T THE ONLY ONE PISSED OFF

I got a press release from California Assemblyman Ted Lieu that people angry about this latest outrage might be interested in digesting:

“Today we learned the US Treasury Department—without any apparent legal authority-- made a sweeping change to the tax code that gave US Banks a $140 billion windfall, and then tried to hide the action from Congress. This is unacceptable and undemocratic-- we live in a country of laws, not the Wild West. The Treasury Department’s action is tantamount to stealing from taxpayers. Two immediate actions must happen to restore trust and to provide justice.
 
“First, Treasury Secretary Henry Paulson should resign. Since last year, he has repeatedly misjudged the scale of the foreclosure crisis. Then he wakes up one morning and realizes we need an immediate $700 bailout, with much of that money going straight to the Wall Street firms that have been largely responsible for the financial meltdown. Now his Department has resorted to stealing from the taxpayer to benefit the banking industry. Who knows how much other damage he can cause from now until January 20th. For the good of the Department and of our nation he should resign-- he has failed us enough times. 
 
“Second, banks must give back their windfall. The best way for them to do this is by modifying loans to keep people in their homes. Since last year I and numerous consumer groups urged the banks to modify loans. We told them if they failed to modify loans and stem foreclosures, the situation was going to explode. Unfortunately, the banks failed to listen and now many of them have disintegrated. The remaining banks still standing and who have received this windfall should immediately give it back by using the windfall money to help modify loans and prevent further foreclosures.
 
“California stands to benefit from the banks giving back their windfall because one-third of the nation’s foreclosures occur in California. It is time the banks start giving back to the state that has in the past given them so much profit. It is time for the banks to help taxpayers, rather than take from taxpayers.”