Treasury's Shock and Awe on AIG

According to CNN, the Treasury and Federal Reserve finalized details of the latest restructuring of the financial giant yesterday. The agreement will allow AIG to borrow funds from the Treasury to repay the federal government. This will leave the Treasury a 92% stake in the company.

"Today's announcement is a milestone in the government's long-stated efforts to exit our investments in private companies as soon as practical while protecting taxpayers," the government said. "When all is said and done, we believe taxpayers will recover every dollar invested in AIG and stand a good chance of making a profit."

That's a large chunk of stock, and the government – which is not exactly eager to be seen in the bailout business nowadays, what with all the associated bad press – would surely like to sell it sooner rather than later so it can advertise all the profits its so-called investments are making for taxpayers. This has worked wonders lately with two other bailed-out outfits, Citi (C) and GM (GM).

Thus, the Wall Street Journal reports the government wants to sell a quarter of its stake -- $15 billion worth -- in a series of deals that would ideally start early in 2011.

Continue reading at CNN.com...

Your Tax Questions, Asked and Answered (by a U.S. Treasury Official)

Yesterday the Freakonomics blog, on NYTimes.com, posted a blog entry with questions from readers and answers from Michael Mundaca, the Assistant Secretary of the Treasury for Tax Policy. Topics include common tax issues ranging from offshore tax shelters to the messy estate tax situation. You can find a few of the questions below, or go to NYTimes.com for the full article.

Q. Is this really a good year to die — tax wise? And do you expect an uptick in deaths as the calendar year ends? Have we ever seen a similar incentive to die, and did it spur deaths? – Drill-Baby-Drill Drill Team

When will congress straighten out the estate tax mess so that people will know how to plan? – n bergman

A. In general, I wouldn’t think any year is a good year to die, but you are correct that, under current law, the estates of those who die in 2010 are not subject to the estate tax. However, not being subject to the estate tax is not advantageous to all estates and heirs. Under 2009 law, $3.5 million of each estate was essentially exempt from the estate tax, but the heirs receiving property from such an estate nevertheless received assets with a “stepped up” tax basis, meaning that when such assets were sold, tax would be due only on any appreciation during the time the heir held the asset. For example, assume that someone died with an estate valued at $3 million dollars, all in stock, which passed to one non-spouse heir. Assume that the decedent had paid $1 million for the stock. If the decedent died in 2009, no estate tax would be due (because the estate is worth less than $3.5 million), and the heir’s basis in the stock would be increased to $3 million. Thus, if the heir immediately sold the stock, no capital gains tax would be due either, as there would be no gain. If instead that same person died in 2010, again no estate tax would be due, because it has been allowed to expire, but if the non-spouse heir immediately sold the stock received, capital gains tax would be due, because the value would exceed the basis. The Administration has proposed extending the estate tax (and the related gift and generation skipping taxes) at 2009 parameters (for the estate tax, an exemption amount of $3.5 million and a top rate of 45 percent). We are hopeful that Congress will address the estate tax before year end.

Q. Has anyone figured out exactly how it is going to work for same-sex married couples in community property states like California? My accountant still has no clue… – Paul

A. Regarding tax issues faced by same-sex married couples in community property states such as California, there are some helpful IRS resources, including a Chief Counsel Memorandum issued in May of this year that addresses some tax issues faced by California Registered Domestic partners (the memo is available here). Same-sex couples should consider consulting a tax professional about their particular situation.

Continue reading at NYTimes.com...

Bailout Loss Estimated at $29 Billion

In a new report released yesterday, the Treasury Department announced that they expected to lose around $29 billion from the financial crisis bailouts. More than half of the loss is a result of the bailout of the auto industry, with a considerable amount of funds also going to the departments housing finance program. Check out the following story about the announcement courtesy of NYTimes.com.

The Treasury Department expects to lose $29 billion on the federal bailouts stemming from the financial crisis, with most of the losses in its housing finance program and the auto rescue.

In a report released on Tuesday, the administration said it expected a $17 billion loss from its investments in General Motors, Chrysler and the auto finance companies, as well as a $46 billion loss from housing programs like the mortgage modification program known as the Home Affordable Modification Program.

The new figures, which include profits that offset some of the losses, come just as the Obama administration tries to wind down the bailout program known as the Troubled Asset Relief Program, or TARP. Last week, the government announced a plan to exit its investment in the insurer the American International Group.

Treasury officials have declared the bailout a success, emphasizing that much of the program’s money has been returned and that losses are now likely to be less than once expected. The cost, the report says, is far below the $350 billion the Congressional Budget Office once estimated.

“Because of the success of the program, TARP will likely cost a fraction of this amount,” the report said.

Continue reading at NYTimes.com…

Treasury's Bailout Overseer Quits

Treasury Department assistant secretary Herb Allison, who oversaw the bank bailout fund, stepped down this morning. He reportedly decided to step down because the program was nearing an official end. According to Reuters.com:

Allison had been in charge of the $700 billion Troubled Asset Relief Program that is scheduled to expire in two weeks.

"With the TARP program entering a new phase and continuing to wind down, I have decided that now it is the right time for me to step down," Allison said in an e-mail to staff members that the Treasury made available.

He said he was returning to Connecticut after two years' service in Washington to spend time with his wife, who had been unable to join him during that time. The chief counsel for the financial stability office, Tim Massad, will take over as acting secretary on September 30.

Though TARP is officially ending on October 3, after which it cannot make any new investments in financial institutions, its work in recouping the money that it did lend will continue for years.

Allison is one in a line of officials preparing to take their leave from Washington, many of them more senior, including Larry Summers, director of the White House's national Economic Council; Council of Economic Advisers Chair Christina Romer and White House budget chief Peter Orszag.

Treasury Secretary Timothy Geithner, in a town-hall style event with Treasury staff, lavished praise on Allison and cast TARP as a highly effective mechanism despite the fact that it was "a four-letter word" for lawmakers and most Americans who saw it as a handout for bankers.

Continue reading at Reuters.com…

Government Could Seek Foreign Investors for GM

From Yahoo News:

Investment bankers handling the upcoming General Motors Co. stock sale are expected to court foreign investors as well as those in North America, according to a U.S. Treasury Department statement.

GM and the Treasury Department would not comment Sunday on reports that the automaker is in talks with its current partner in China, SAIC, about buying a stake in the Detroit company. SAIC is owned by the Chinese government.

The Treasury Department, in a statement issued late Friday, said investors in GM would be sought across "multiple geographies," with a focus on North America.

The U.S. Treasury loaned GM about $50 billion to help it through bankruptcy protection last year. GM has repaid $6.7 billion. The rest of the bailout money was converted to a 61 percent government stake in the company.

The government hopes to get the remaining $43 billion back with stock sales that could start in mid-November.

Foreign investment in U.S. automakers and other companies is common. Before the stock sale, GM will put on a two-week "road show" of presentations for investors, and several stops are expected to be in cities outside the U.S.

Small Banks Are Big Problem In Government Bailout Program

Although Wall Street and large financial institutions are usually the subject of negative bailout headlines, according to new reports many smaller banks are also behind on their payments to the Treasury Department. According to this article on WashingtonPost.com, over 100 “small” financial institutions that received federal aid are behind on payments. That total is up by around 25% since February, and has reportedly doubled since last year.

The rising number of "deadbeat" banks, as they are known, could force Treasury to become more deeply entangled in the affairs of small financial firms that are troubled. The bailout legislation gives Treasury the right to appoint members to the boards of banks that miss six dividend payments.

So far only one firm, Saigon National Bank in Southern California, has missed that many payments. Eight others have missed five payments and 16 have missed four. Most banks that received federal aid agreed to pay the government a 5 percent dividend every three months upon taking funds from the Troubled Assets Relief Program.

Treasury officials declined to answer questions about whether they were preparing to make board appointments.

IRS Issues Call for Tax Statistics Research Proposals

From Tax Prof:

The Treasury Department has issued a solicitation notice for tax statistics research for the IRS's Statistics of Income Division:

The SOI requires high quality proposals for research projects that would necessitate access to federal tax microdata and are for statistical puposes, not tax compliance. A proposal should explain why it is not feasible to conduct the proposed research by using aggregate tax data – either from a special tabulation that SOI might produce or from existing publicly available data, including the SOI Individual Public Use File (PUF). Please review attached solicitation package for full details.

For this statement of work, consideration will be given only to proposals involving research on statistical methodologies, international income and taxation, non-profit organizations, estate and/or gift taxation, individual income taxation related to unincorporated businesses (except partnerships), or individual taxpayers with retirement accounts. In addition to describing the research merits of a project that will result in presentations/publications for professional conferences and journals, a proposal should specifically address the researcher’s familiarity with SOI, including the required data and metadata. A proposal must also address specific contributions to SOI’s staff development program, such as through the researcher’s mentoring and/or collaborating with SOI staff.

Three New Issues to be Addressed by IRS Industry Issue Resolution Program

In their newest press release, the Internal Revenue Service and Treasury Department announced that guidance will be developed and published under the IRS’s Industry Issue Resolution (IIR) program for several significant issues affecting the telecommunications and retail industries.

Telecommunication issues include the proper treatment of unit of property for network assets, and the appropriate asset class for wireless telecommunications assets. The retail industry issue selected will address vendor mark-down allowances under the retail inventory method. These issues affect nearly all taxpayers in the respective industries.

Since its inception in 2000, the IIR program has resulted in resolution of many different tax issues cumulatively affecting thousands of taxpayers in many different lines of business. For each issue selected, a multi-functional team gathers and analyzes the relevant facts and recommends guidance.

At any time, business associations and taxpayers may submit tax issues that they believe could be resolved through the IIR program. IIR project selection criteria and submission procedures are outlined in Revenue Procedure 2003-36, which is available on the IRS Web site at IRS.gov. While issues may be submitted for consideration for inclusion in the IIR program at anytime, submissions must be received by August 31st for the summer screening of submissions.

Four Treasury Dept Nominees Left Hanging As Senate Leaves Town

According to Nasdaq.com, the Senate adjourned Thursday for a break that will last until January 20^th, 2010. Although the Senate was able to pass a health care bill, and raise the government’s debt limit, they left four Treasury Department nominees waiting on their confirmation.

Those nominees include Lael Brainard, the White House's pick for Treasury under-secretary for international affairs, whose nomination had been delayed for months as Senate Finance Committee staff scrutinized her tax returns.

The Finance Committee approved the nominations of Brainard and the other three Treasury officials Wednesday, but the nominations did not clear the full Senate because of an objection from at least one senator. At press time the source of the objection could not be learned.

Meanwhile, the Senate confirmed Miriam Sapiro as Deputy U.S. Trade Representative, before adjourning. It also confirmed Paul Anastas as an assistant administrator at the Environmental Protection Agency, and John Norris as a member of the Federal Energy Regulatory Commission.

The other Treasury nominees who will have to wait until the Senate returns for final confirmation include Michael Mundaca for assistant secretary for tax policy; Mary John Miller for assistant secretary for financial markets; and Charles Collyns for deputy under secretary for international finance.

Sen. Charles Grassley (R., Iowa), had threatened to block those nominees because of a dispute with the Internal Revenue Service over small business tax penalties, but he lifted that objection Wednesday evening.

Fannie And Freddie Receive Unlimited Future Funds To Stay Afloat

From Huffington Post.com:

The government has handed its ATM card to beleaguered mortgage giants Fannie Mae and Freddie Mac.

The Treasury Department said Thursday it removed the $400 billion financial cap on the money it will provide to keep the companies afloat. Already, taxpayers have shelled out $111 billion to the pair, and a senior Treasury official said losses are not expected to exceed the government's estimate this summer of $170 billion over 10 years.

Treasury Department officials said it will now use a flexible formula to ensure the two agencies can stand behind the billions of dollars in mortgage-backed securities they sell to investors. Under the formula, financial support would increase according to how much each firm loses in a quarter. The cap in place at the end of 2012 would apply thereafter.

By making the change before year-end, Treasury sidestepped the need for an OK from a bailout-weary Congress.

While most analysts say the companies are unlikely to use the full $400 billion, Treasury officials said they decided to lift the caps to eliminate any uncertainty among investors about the government's commitments. But the timing of the announcement on a traditionally slow news day raised eyebrows.

U.S. Already $292 Billion in the Red this Year – CBO

From Reuters.com:

The U.S. government racked up a gaping shortfall in the first two months of this fiscal year after posting a record budget deficit last year, congressional analysts said on Friday.

In October and November, the government spent $292 billion more than it took in, the nonpartisan Congressional Budget Office said. That was even worse than the same period last year, when the government was on its way to posting a record $1.4 trillion deficit for the fiscal year that ended Sept. 30.

The federal budget has been battered by the worst economic downturn since the Great Depression of the 1930s, as tax revenues have plunged and spending on safety-net programs like unemployment insurance have skyrocketed.

The budget deficit was $176.4 billion in October, according to Treasury Department records, and the CBO estimated the deficit for November will have come in at $115 billion. The CBO gave its figures in billions of dollars and said numbers may not add up to the totals because of rounding.

Receipts totaled $132 billion in November, the CBO estimated, down 9 percent from the same month last year. That was partly due to new legislation that gives increased tax write-offs to corporations.

U.S. to Sell $81 Billion in Long-Term Debt Next Week

According to Bloomberg.com, the U.S Treasury Department plans to set a new record next week, by selling $81 billion in long-term debt, as part of their quarterly auctions. They plan to replace the inflation-protected 20-year bond with a reintroduced 30-year security. The move comes as an attempt to reduce the massive budget deficit of over $1 trillion.

The Treasury will auction $40 billion in three-year notes on Nov. 9, $25 billion in 10-year notes Nov. 10 and $16 billion in 30-year bonds Nov. 12. The amounts were in line with the median forecast of $80 billion in a Bloomberg News survey of nine analysts.

The U.S. is headed for a second straight year of budget deficits exceeding $1 trillion, and the country’s legal limit on debt may be reached next month. Treasury debt-management director Karthik Ramanathan told bond market participants this week to expect another year of government debt sales of $1.5 trillion to $2 trillion, minutes of the meeting showed today.

“Treasury debt managers will continue to remain aggressive in managing financing needs while minimizing potential market implications,” the Treasury said in a statement in Washington.

The government is on course to reach the debt limit, which currently stands at $12.1 trillion, by mid- to late-December, the department said. If the Treasury is forced to take evasive maneuvers to stay below the limit before Congress raises it, existing tools won’t create much extra room, officials said at a press conference.

Debt Limit

“Depending on the date that we hit the debt limit, they could last days or at most weeks,” compared with five or six months in previous debt-limit impasses, said Matthew Rutherford, deputy assistant Treasury secretary for federal finance.

Treasury Dept. Unveils Program To Fund Mortgages

The Treasury Department recently unveiled new plans to help more first time homebuyers get approved for mortgage loans. They are hoping to begin selling HFA bonds to the federal government in order to fund additional loans for struggling homebuyers. I’ve included a clip of an article from NPR.org explaining the Treasury Department’s new announcement, but you can read the full article here.

In a normal year, the so-called HFAs, or housing finance agencies, finance about $15 billion worth of mortgages, but the credit crisis has made it difficult for them to raise money for the loans.

Basically, the HFAs work like an affordable housing bank, says Steven Spears, acting executive director of the California Housing Finance Agency.

He explains that the agencies issue tax-exempt bonds to Wall Street and then the HFAs use the money to make loans. But investors have become reluctant to put their money into anything related to mortgages, especially in parts of the country, such as California, where home prices have fallen significantly since the market peak in 2006.

"They were just not interested," Spears said, explaining that his agency has been out of lending capital for a year now.

"Two years ago we had record lending, he said. "We had $1.7 billion in mortgages for first-time homebuyers. We're not making any loans at all really right now."

Treasury's plan is for the federal government to buy the bonds from HFAs, who will in turn have the money to lend to first-time homebuyers such as Natasha Henry, who is looking to buy a foreclosure in Boston's Dorchester neighborhood.

White House Moves To Fill Top Treasury Tax Post

From the Wall Street Journal:

President Barack Obama Wednesday nominated Michael Mundaca to serve as assistant secretary for tax policy at the Treasury Department.

Mundaca has been serving as acting assistant secretary for much of this year. He served in the Clinton administration's Treasury Department as deputy international tax counsel, and returned to Treasury in 2007.

A previous nominee for Treasury's top tax job, University of Southern California Professor Elizabeth Garrett withdrew her nomination earlier this year.

Tax Inquiry Delays Pick by Obama at Treasury

From the Wall Street Journal:

President Barack Obama's nominee for the top international post at the Treasury Department has been sidetracked by a Senate committee's investigation into her personal tax returns.

Lael Brainard, nominated in March as Undersecretary for International Affairs, is the latest Obama appointee to be tripped up by the Senate Finance Committee. Of particular concern is Ms. Brainard's use of a home-office tax deduction, according to people familiar with the inquiry.

The delay in considering her nomination has left empty a treasury position responsible for negotiating with foreign governments as the U.S. gears up for the Group of 20 summit later this month, a meeting expected to focus heavily on financial regulation and economic stimulus programs. It is also reviving questions about whether a rigorous vetting process has gone too far and hobbled the administration.

"We're into September and with no confirmed undersecretary it seems to me that's a serious disadvantage," said John B. Taylor, a Stanford University professor who served in the post from 2001 to 2005.

Ms. Brainard has been working at the Treasury on preparations for the G-20, people familiar with the matter say, but until she is confirmed she can't directly negotiate with foreign governments.

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Treasury Pick Misfiled Using Off-the-Shelf Tax Software

From WashingtonPost.com:

Millions of Americans might be surprised to learn that the man nominated to be the next Treasury secretary -- New York Fed President Timothy F. Geithner -- did his taxes using the same software they do: TurboTax, a fact revealed in his Senate confirmation hearing yesterday.

Geithner's tax returns from 2001 through 2004 have become an embarrassment, if not a stumbling block to his confirmation. A 2006 IRS audit informed Geithner that he had failed to pay self-employment taxes in '03 and '04, when he directed the International Monetary Fund's policy development and review department. While being vetted for Treasury secretary late last year, he was told he made the same errors on his '01 and '02 returns. He calls them "careless mistakes" that he should have caught and has paid $42,702 in back taxes.

It's an unlikely image: The man charged with leading this nation out of recession -- an architect of the $700 billion financial rescue package -- hunched over a computer, surrounded by stacks of paper, trying to figure out his taxes, just like the 18 million other working stiffs who bought TurboTax last year.

But the disclosures raise another issue: When Geithner found he owed back taxes for '03 and '04, and had probably made the same mistakes on his '01 and '02 returns, why did he wait until confronted by Obama's vetters to check?

That was the question Sen. Jon Kyl (R-Ariz.) tried to get at yesterday, suggesting that Geithner was hoping to ride out the statute of limitations on audits.

"The question is whether it occurred to you before you were nominated or approached to be nominated that, in point of fact, you didn't have to go beyond 2003 and '04 because of the statute of limitations," Kyl said.

Geithner said: "I did not believe I had the obligation to go back. I had no occasion to think about it, and I might not have thought about it had I not gone through the vetting process."

Department of Treasury Responds to Letter

As you may recall I sent an open letter to congress and the Department of Treasury asking them to update their expense standards. Less then a month after I sent the letter the IRS announced they were indeed making the change, and on November 1st I received a letter from the Department of Treasury regarding my open letter. The message claims that Secretary Paulson had requested they respond to my letter informing me of the new changes and explaining the delay. According to the letter the delay was necessary to implement significant improvements that will enhance the accuracy and fairness of the standards. In addition the letter claims that Automated Collection System (ACS) personnel have been instructed to use judgement when applying standards, which was another complaint of my letter. I’m glad to hear the Department of Treasury is treating this issue with the importance it deserves. Hopefully the new standards will help make the process a little easier on taxpayers that need to negotiate IRS tax settlements.

US Government Has Record Breaking Collections In April

According to the Treasury Department the government collected a total of $1.505 trillion so far in 2007. This represents an increase of 11.2% over the same period last year. Included is $383.6 billion that was collected in April, the largest single month tax collection ever. In the beginning of the year government spending was at an all time high, but the total spending of $1.585 billion was only up 3.2% from last year. The Congressional Budget Office said it expects the total deficit for 2007 to total between $150 and $200 billion. This would be a significant decrease from last year's deficit of $248.2 billion.
Source: CBS News