wednesday, 21 october of 2015

Citigroup Accused of Improperly Avoiding $800 Million in New York State Taxes

An economics professor has filed a lawsuit against Citigroup accusing the bank of using an unusual federal tax break during the financial crisis to avoid paying $800 million in New York State taxes.

In a lawsuit transferred to Federal District Court in Manhattan on Oct. 2, Eric B. Rasmusen, a professor of business economics and public policy at the Kelley School of Business at Indiana University, challenged the validity of the unusual federal tax break for the bank’s New York State returns. His claim, originally filed under seal in New York State Supreme Court in 2013, seeks treble damages, or $2.4 billion, under the False Claims Act.

The case says that Citigroup used the federal government’s $45 billion taxpayer-funded bailout to improperly reduce its New York State franchise taxes in 2010 and 2011. New York levies the annual tax — effectively a general corporate income tax — on businesses registered in or doing business in the state.

“We believe the claims are without merit,” a Citigroup spokesman, Mark Costiglio, said on Monday. The bank is expected to respond to the lawsuit by Dec. 7. A spokesman for the New York attorney general’s office said that “we are not involved in the case” and declined to comment further. The lawsuit was earlier reported in The Buffalo News.

The case reignites an issue that roiled Congress after the bailout of Wall Street. When Citigroup won approval in December 2009 to begin repaying its bailout money, it also got what critics called a “bailout within a bailout”: one-time approval from the Treasury Department to hold on to $38 billion in tax-related benefits that under other circumstances it would have lost.

The tax-related benefits are known as net operating losses, which are valuable deductions that can be squirreled away in money-losing years to lower future tax bills in good years. They allowed Citigroup to improperly avoid paying New York State franchise taxes of $800 million, the complaint said, citing securities filings.

To prevent the losses from being sold off, the Internal Revenue Service, an arm of the Treasury Department, bans profitable companies from acquiring control of money losers solely for their losses. Those change of ownership rules were triggered when Citigroup won approval to repay the government, which had taken a one-third stake in the bank, and to issue stock to investors.

But Citigroup got a special exemption that allowed it to keep the tax-related benefits. At the time, Treasury officials defended the move as vital to keeping Citigroup financially healthy.

Robert Willens, a tax and accounting expert in New York, said that because state tax laws governing net operating losses typically follow federal laws, the plaintiff must successfully challenge the validity of the federal exemption.

Daniel C. Oliverio, a lawyer for Mr. Rasmusen at Hodgson Russ in Buffalo, said that New York State did not have to follow certain federal tax exemptions, and in this case could collect the franchise tax despite the federal exemption.

(Published by The New York Times - October 19, 2015)

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