The myriad efforts to hold together the U.S. financial sector have been accompanied by a series of Treasury regulatory notices designed to ease the implementation of these measures. Most of the changes went unnoticed, but not Treasury Notice 2008-83, which gives a tax break to banks who acquire weaker institutions with built-in losses on their books.

The IRS has long targeted trafficking in net operating losses, and the current statutory limit dates back to 1986. Various U.S. senators and representatives charged Treasury with gouging the taxpayer, stealing from government tax coffers, or possibly crossing the conflict-of-interest line.

Senator Chuck Grassley (R-IA) demanded that Treasury Inspector General Eric M. Thorson "conduct an investigation into the facts and circumstances leading to the Treasury Department's issuance of Notice 2008-83... as well as possible conflicts of interest involving [Treasury] officials, former Goldman Sachs executives, and board members in the sale of Wachovia Corporation to Wells Fargo." Thorson started such a probe.

Legislation has also been introduced in the Senate and the House to roll back the waiver. The good news? Wells, PNC Financial, and others with binding contracts before the rescission would get to keep their tax breaks.

The idea that the Treasury notice is illegal "is offensive," says Mark J. Silverman, a partner who heads the tax practice at law firm Steptoe & Johnson LLP. "Section 382 (m) gives Treasury the authority to develop regulations applicable to the tax limits on built-in losses," he explains. "Notice 2008-83 carves back these restrictions for a limited time. Treasury looked at all those losses on loans and bad debts, and its tax guys determined that a temporary change would be beneficial and might allow the government to avoid buying all those bad loans."

Silverman believes that Treasury must retain as much leeway as possible in addressing the financial sector meltdown. "Both these bills are wrong-headed. We should not be focused on how to limit Treasury's flexibility. Congress has to get back to what needs to be done."

Pam Olson, a tax partner at law firm Skadden, Arps, Slate, Meagher and Flom LLP believes such legislation "seems unlikely to be enacted without something blessing the transactions that have been done with the waiver in place."

As to the merits of the waiver, in 1986 "it couldn't have occurred to anyone that we would have the financial and equity market meltdown we have now. The measure has a horribly draconian effect. Treasury very sensibly stepped in and exercised its authority under 382 and under the economic stabilization act to waive the statutory provision. It's not like institutions are using the financial crisis to traffic in net operating losses."

In Olson's view, the "numbers bandied about as to how much tax revenue would be lost because of Notice 2008-83 are wildly speculative. If you factor in the potential costs of the failures averted through acquisitions, including the potential impact on the FDIC, it seems likely, all in all, that the waiver didn't cost Treasury very much, if anything."

Indeed, PNC estimates in a S-4/A filing that the tax benefit derived from the waiver "would result in a net present value of no more than approximately $725 million, and it may be substantially smaller." Some press reports had put PNC's benefit at $5 billion.

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