Treasury and IRS respond quickly to financial markets crisis

Treasury and the IRS are responding quickly to the crisis in the financial markets. Most visibly, Treasury and the IRS have started to implement the $700 billion rescue package authorized by the Emergency Economic Stabilization Act of 2008 (EESA). Treasury and the IRS have also issued targeted guidance to help particular segments of the financial community. In coming weeks, Treasury and the IRS are expected to issue more guidance to help stabilize the financial markets.

Priority track

"The unique market developments we are witnessing bring attention to areas of tax law that need clarity," Jeffrey Van Hove, deputy tax legislative counsel, Treasury, recently said. "If a tax issue is relevant to the current financial markets crisis, we will give it priority." Van Hove's comments were echoed by David Shapiro from Treasury's Office of Tax Policy. "In these unprecedented times, it is important to get guidance out quickly."

"Treasury has moved quickly since enactment of EESA to implement programs that will provide stability to the markets and help enable our financial institutions to support consumers and businesses across the country," Treasury Interim Assistant Secretary for Financial Stability Neel Kashkari recently told Congress. "We are focused on applying the authorities Congress provided in ways that are highly effective and protect the taxpayer to the maximum extent possible."

Financial institutions

Congress gave Treasury broad powers under EESA to acquire troubled assets from financial institutions and to recapitalize financial institutions. Treasury is moving forward on both fronts.

Treasury has announced that it intends to directly purchase troubled assets from financial institutions as well as to acquire them via auction. Additionally, Treasury will spend $250 billion to recapitalize financial institutions. Treasury and the IRS have released detailed guidance about the mechanics of these programs and more guidance is expected in the coming weeks.

The IRS has also liberalized the rules under Code Sec. 382 for financial institutions struggling with huge losses. Code Sec. 382 generally limits a corporation's ability to use losses after an ownership change, such as when the government acquires stock in the corporation or otherwise takes an ownership interest. In a series of Notices, the IRS indicated that it will generally not treat the Treasury's temporary intervention in these institutions as changes in ownership.

More projects

Overshadowed by EESA are some other activities by Treasury and the IRS to help stabilize the financial markets. When auctions for auction rate securities started to fail earlier this year, the Treasury and the IRS responded with guidance. Notice 2008-55 was issued in June and addresses the effect of adding liquidity facilities to support certain auction rate preferred stock on the equity character of stock. In September, the Treasury Department and the IRS issued Rev. Proc. 2008-58 clarifying settlement offers related to auction rate litigation.

Treasury and the IRS have also issued guidance to help Real Estate Mortgage Investment Conduits (REMICs) that hold subprime loans. Rev. Proc. 2008-47 allows certain asset securitization vehicles to avoid a challenge to their tax status in the event disqualifying modifications are made to subprime mortgage loans held by the vehicle.

Many other members of the financial community have asked Treasury and the IRS for help. Community banks want Treasury to expand participation in the $700 billion rescue plan to them. States and municipalities burdened with debt have also asked to participate in the rescue program. Likewise, bond insurers want help. So far, Treasury has listened to their concerns but has stopped short of expanding participation in the rescue package.

Retirement savings

The financial markets upheaval is also causing distress for qualified retirement plans, retirees and individuals saving for retirement. The American Benefits Council, Washington, D.C., has urged Congress to act quickly to help all three groups.

The Council has recommended that Congress expand the income level at which the existing Saver's Credit would be available; allow retirees a chance to keep their retirement accounts whole while catching the market on the upswing by temporarily suspending required minimum distribution rules; and allow hard-strapped defined contribution plan and IRA participants to withdraw up to $10,000 with easy repayment terms. Additionally, Congress could ease some of the tough funding rules in the Pension Protection Act of 2006.

Lame duck session

Congress is expected to return for a lame-duck session after the November 4 elections. Lawmakers could take up some of the proposals to relax the retirement rules as well as pass a second economic stimulus package. Another stimulus package is unlikely to include tax rebates but Congress could boost spending on infrastructure projects and extend unemployment benefits.