As the deal stands, Bank of America may be able to avoid up to $500 million in federal taxes if its acquisition of Countrywide Financial Corp. proceeds according to plan, according to tax experts.
According to analysis by a long-time tax expert at Lehman Brothers, Robert Willens, the Charlotte-based bank will be able to offset a portion of its own taxable income with losses that Countrywide sustained prior to the acquisition.
Willens estimates that the tax break could total roughly half a billion dollars in just the first five years after the takeover.
Losses to federal revenues could take off even further after that, suggests Willens.
He estimates that Bank of America would be able to deduct $270 million of pre-acquisition losses at Countrywide's every year for the first five years based on the projected $6 billion cost of buying Countrywide.
The projected cost includes $4 billion of stock the bank plans to give Countrywide's common stockholders, in addition to $2 billion of preferred stock it bought from Countrywide last August.
With the long-term tax-exempt rate of 4.49%, Willens says that Bank of America would multiply the $6 billion that figure to determine how much of lender's losses it can deduct annually for five years after the purchase.
With a $270 million annual deduction, Bank of America would save over $100 million a year in federal and state income taxes.
If that figure is multiplied over five years, BoA could save about $500 million of taxes using a total of $1.35 billion of Countrywide's losses to shelter its own income.
Although not even Countrywide knows the extent of its losses from rising defaults and lower demand, the lender would tally both its realized and unrealized losses just before the deal closes.
If the losses exceed $1.35 billion, the bank would be free to deduct the rest of the losses without any limits starting in the sixth year, says Willens.
However, any losses incurred following the closing of the deal would be fully deductible by the bank.
When Bank of America purchase of the collapsed FirstRepublic Bank of Dallas in 1988, the company manipulated the tax codes to save $1 billion in taxes in a manner that shocked both regulators and rival bidders.
Bank of America ultimately lost money with its purchase of $2 million shares of Countrywide in August by underestimating the extent of the problems with the lender’s portfolio.
It remains to be seen whether the massive tax breaks the bank stands to get will be enough to cover the future losses that Countrywide may bring.
Posted on Tuesday, January 22, 2008
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