Law Suit for Billions Against Citigroup Because of Treasury’s 2009 Waiver of Section 382’s Rule about Losing NOL’s after an Ownership Change

Today’s guest post is  from Eric Rasmusen, the Dan R. and Catherine M. Dalton Professor of Business Economics and Public Policy at the Kelley School of Business at Indiana University. In this post, Professor Rasmusen describes his New York State False Claims Act lawsuit that he has brought against Citigroup. The suit connects to tax procedure and tax administration because it stems from a series of controversial notices IRS issued in 2009 and 2010 to help with the government bailout of big finance in the great recession. Those notices raised questions, and now a lawsuit, as to whether IRS has the power to confer tax breaks through what appeared to be an administrative exercise of legislative power. In this post, Professor Rasmusen describes how New York’s False Claims Act allows a private party to sue “qui tam”— that is, to collect money on behalf of the state. While the federal government and many states have qui tam laws allowing a private person to sue when the government is defrauded in a contract, New York State also allows a private party to sue qui tam when the government is defrauded via a tax return. This case is getting lots of attention (see NY Times piece today). Les

In 2009, the U.S. Treasury acquired 34% of Citigroup’s stock, and Citigroup issued a large amount of new equity to the public as well. Ordinarily, this would have triggered section 382 of the tax code, as being an ownership change. Citigroup would have forfeited most of its old net operating losses (NOL’s) and tax credit carryforwards. This happens all the time. In August 2015, for example, Greatbatch acquired Lake Regional Medical  and announced that section 382 would apply  to  $360 million in NOL’s.

The U.S. Treasury, however, issued a series “EESA Notices” saying that it interpreted Section 382 as not applying to government purchases of stock (e.g. IRS Notice 2009-14), thus saving  $21 billion in NOL’s tax deferred asset. There is no language exempting government agencies from being purchasing person under Section 382, just as there is no language exempting non-profit corporations who invest in other companies. The IRS gave no reasoning in its notices, however, and they did not go through notice-and-comment. They were interpretive notices, giving the IRS’s opinion. When challenged, Treasury said the following:

There are two reasons why the law does not apply here. One, governments don’t pay taxes and cannot evade the obligation to pay taxes. Second, the government made only a short-term investment designed to stabilize the financial system, an investment that is now ready to be wound down. There is no acquirer looking to shield profits from taxes — the abuse the law was designed to prevent.

Whether saving Citigroup from well-deserved bankruptcy was helpful to the financial system is a policy question not relevant to its tax returns. Whether the government wanted to avoid taxes is also legally irrelevant. Greatbatch was not trying to avoid taxes either, when it acquired Lake Regional Medical. We know that because it went ahead and acquired it, knowing that Section 382 would apply. As for the U.S. Treasury, it’s true that it doesn’t pay income tax. It did, however, have a strong interest in reducing the income taxes of Citigroup. The deferred tax assets were a major part of Citigroup’s assets, and exempting Citigroup from Section 382 raised the price of Citigroup stock. The Treasury was making a short-term investment— as it said in the quote above, and it wanted to not lose too much money on its investment. Otherwise, the public outcry would be even greater. So it issued the Notices to raise Citigroup’s stock price.  It could of course have bailed out Citigroup anyway, without giving Citigroup a free pass on its income tax years after the crisis when it started making profits again.

That’s where I came in, writing an article on General Motors and the EESA Notices with J. Mark Ramseyer of Harvard Law. In that article we noted that nobody had standing to challenge the EESA notices.  Later, however, I came across New York’s False Claims Act, which extends qui tam suits to state taxes, with treble damages. So I contacted a law firm (Hodgson-Russ) and we filed suit.


My complaint estimates the value of the lost New York taxes at $800 million, which becomes $2.4 billion when tripled. We filed under seal, the usual procedure, so Attorney-General Schneiderman could decide whether to intervene on our side. The suit stayed under seal for two years, partly because both we and Schneiderman were hoping that the special inspector-general for TARP would finally issue the report Congress requested in 2010 on who in the Administration decided to issue the EESA Notices, how they decided, and whether they were legal. That report still hasn’t come out.

Attorney-General Schneiderman declined to join the case, but he, the New York Taxpayer Protection Bureau, and other New York tax administrators gave us no objections to our legal reasoning. So the case was unsealed— though we still hope Attorney-General Schneiderman will reconsider, since he and the Cuomo Administration have tools at their disposal that private citizens do not.

The latest procedural event is that Citigroup has removed the case to federal court. Why did Citigroup want that? Citigroup said that it should be transferred because of the important federal question— whether the US Tax Code says Citigroup owes taxes.  The jurisprudence and procedure here is confusing. When a state statute incorporates federal language by reference, does it thereby also incorporate (a) federal judicial opinion, and (b) federal executive interpretation or regulations? Citigroup says Yes and Yes. We say, No. So our position is that (i) Citigroup does owe federal taxes too, but (ii) even if a court found that the IRS notice meant Citigroup didn’t owe federal taxes, it still might also find that it does owe New York taxes, because that is a matter of New York law, which doesn’t defer to federal agency or judicial interpretation of language that the state uses in a statute.

Will the court stand up for Section 382 as written, or will it defer to the unreasoned and self-serving judgment of the Internal Revenue Service? We await Citigroup’s motion to dismiss with eagerness, wondering what the first legal argument in favor of the EESA Notices will look like.

For those who want to delve into documents, I’ve posted some FAQ’s and a lot of links. This is 2nd Circuit, case #1:15-cv-07826, and you need to search by the case number on PACER, not by “Rasmusen” as of yesterday, probably because I am just the relator, suing on behalf of the State of New York.

There are a lot of interesting legal issues in the case. For you tax procedure readers, here are a couple of them:

1. Should the IRS and AIG be allowed to have the right to participate in the suit? (I could have sued AIG instead, but Citigroup seemed simpler). They can apply to be amici, but that’s discretionary, if I remember rightly.

2. Suppose Citigroup loses and the court rules that Section 382 applies to both its state and federal taxes. This suit is only about its state taxes. If the IRS continues to refuse to collect the taxes, is there any procedure to force it to do so?