Grassley puts pressure on Treasury in tax dispute

By Binyamin Appelbaum
Washington Post Staff Writer
Thursday, December 24, 2009

Sen. Charles E. Grassley (R-Iowa) on Wednesday criticized a Treasury Department ruling that let Citigroup keep billions of dollars in tax breaks and threatened to prevent the confirmation of several nominees for senior Treasury posts until the department suspended efforts to collect a tax penalty from hundreds of small businesses.

Hours later, the Internal Revenue Service, an arm of Treasury, announced that it would extend a moratorium on collecting the penalty. Grassley's office, in turn, said the senator would allow the nominations to move forward, but that he still planned to investigate the Citigroup ruling.

Grassley, the ranking Republican on the Senate Finance Committee, which oversees tax policy, had said he was troubled that Treasury hurried to help Citigroup while negotiations over the tax penalty dragged on for months.

"Treasury is quick to help out big banks but slow to act when small businesses need fair treatment," Grassley said. "There seems to be a double standard and a failure to recognize that small businesses are just as critical to the economy as big banks, if not more critical."

Grassley's attack linked two issues that have emerged as political vulnerabilities for the Obama administration: the public perceptions that big banks are getting special treatment and that the government is not doing enough to help small businesses weather the recession.

Treasury has strongly defended the Citigroup decision as appropriate and necessary so the government can get the best possible price for selling its shares in the company, which were obtained in exchange for federal bailout funds.

The Obama administration also has launched a wave of rhetorical attacks on large banks while simultaneously highlighting a pair of recent White House meetings with bankers at which the president urged the financial industry to increase the flow of money to small businesses.

Large banks "did a huge amount of damage to the country, lost a huge amount of trust and confidence," Treasury Secretary Timothy F. Geithner said in an interview with "Good Morning America" that aired Wednesday morning. "They need to work very hard to restore that."

The IRS ruled earlier this month that Citigroup could keep $38 billion in tax breaks that otherwise would decline in value as the government sells its stake in the company. Federal law lets companies avoid taxes on profits based on the amount of losses in previous years. But the law restricts the use of past losses if a company changes hands, to discourage profitable companies from buying unprofitable firms as a tax dodge. Without the IRS ruling, the sale of the government's 27 percent stake in Citigroup would have qualified as an ownership change under the law.

Grassley wrote Geithner on Tuesday "to express my disappointment" with the Citigroup decision and to request an accounting of how the decision was made. Rep. Dennis J. Kucinich (D-Ohio), who chairs the domestic policy subcommittee of the House Committee on Oversight and Government Reform, launched a similar investigation last week. Both Grassley and Kucinich question Treasury's assertion that the ruling will benefit taxpayers. Both also plan to explore whether Treasury had the authority to make the ruling.

Grassley also asked Treasury to address the unintended consequences of a law he helped author in 2004 imposing fines on companies that failed to report the use of a tax shelter. The law, which Grassley describes as aimed at large companies, lets the IRS impose fines that can easily approach $300,000 a year. But Grassley's staff has reviewed cases in which small businesses face more than $1 million in multi-year fines after avoiding just a few thousand dollars in taxes.

Pending legislation supported by key lawmakers in both parties would make the fines proportionate, reducing the penalties faced by small businesses. Until the bill passes, Grassley has pushed the IRS to suspend its efforts to collect the fines. In particular, he wants the IRS to reconsider liens imposed on some businesses, which can make it impossible for companies to take or refinance loans, limiting their ability to expand or even to survive.

Grassley and the IRS have discussed the issue for months, but after the Citigroup ruling Grassley decided to pursue a more confrontational approach. Aides said he was angered that the IRS set aside its usual process of long and careful deliberation to make a questionable ruling in Citigroup's favor, while hesitating to make what Grassley viewed as a clear-cut decision to help small businesses.

The Senate allows any member to pause consideration of a nominee, and Grassley threatened to hold up four: Lael Brainard, to serve as undersecretary for international affairs; Michael Mundaca, as assistant secretary for tax policy; Mary J. Miller, as assistant secretary for financial markets; and Charles Collyns, as deputy undersecretary for international finance.

Many of Treasury's top offices remain unfilled almost one year into the Obama administration. That has deepened Geithner's reliance on several counselors who have not been vetted or confirmed by the Senate, including Gene Sperling, a former director of the National Economic Council under President Bill Clinton; Jake Siewert, a former Clinton press secretary; and Lee Sachs, also an official in the Clinton administration.

The IRS agreed to a temporary moratorium on collecting fines in July after concerns were raised by lawmakers. The moratorium was later extended until the end of December, and earlier this month the IRS stopped filing new liens. The moratorium has been extended until March 1.

"These actions are highly unusual for the IRS, and we have exercised significant administrative discretion in providing temporary relief," the agency said in a statement Wednesday night announcing the decision. "Our actions have been undertaken in the spirit of helping to mitigate the impact on the small businesses and individuals affected."

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