One Final Citigroup Bail Out?

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Even as Citigroup cuts its cord to the government, the ailing bank can’t help but grab a final freebie on its way out the door.

The WSJ reported earlier this week that Citigroup received an exemption from an Internal Revenue Service rule that will help the firm preserve billions in income tax breaks that could have otherwise been lost when the government sells off its 34% stake in the company.

(Under current tax rules, a company forfeits the tax break when 50% of its shares change hands over a three year period. When you add up the government shares and the shares that changed ownership after the Citigroup’s recapitalization this July, the 50% number is breached)

Today, the Washington Post follows up with an article about how the tax break will wipe out a significant chunk of the profits that it expects to gain from selling its Citigroup shares.

The article amounts to a big wet blanket on Treasury’s victory over the Wall Street bailout. Treasury has been pointing to the capital injections in Citigroup and the eight other large banks as a success for tax payers. By many measures, they have been a success. The $700 billion Troubled Asset Relief Program stabilized the financial system and bolstered the large banks’ balance sheets. As a bonus, taxpayers are profiting on their investments in banks like Citigroup, as the banks share prices have bounced back.

At Citigroup, the government expects to net about $14 billion in profit from its investment. Meantime, the exact amount that Citigroup can reap from the tax break depends on the bank’s future profitability, but tax experts and financial analysts say it could total more than $10 billion. That is significant considering the Citigroup received $50 billion in Trouble Asset Relief Program funds

Of course, there is a chance that Congress could block Citigroup’s tax break. “That is the big question,’’ says Robert Willens, a New York tax accountant, who has reviewed Citigroup’s tax assets for Calyon Securities analyst Mike Mayo. “Does Treasury have the authority to eliminate a large portion of the law at its discretion?’’

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