updated 10/3/2008 4:16:58 PM ET 2008-10-03T20:16:58

The biggest tax breaks in the financial industry bailout may be those that aren't even in the bill. Banks and other financial institutions can conceivably write off billions of dollars in losses after they sell bad mortgage assets to the government.

Congress passed a rescue package Friday that allows as much as $700 billion of taxpayer money to be used by the Treasury Department to buy up distressed mortgage-backed securities. Those securities are now dead weight on banks' balance sheets, smothering their ability to lend to each other, businesses and consumers.

If a company ends up selling their securities at a loss to the government, the amount of the loss may be applied toward a deduction on their corporate taxes — meaning that in addition to the $700 billion, the U.S. Treasury may also see less money coming back in corporate taxes as a result of its own program.

For instance, if a company has what it had valued at $20 billion worth of such securities on its books, and sells them for $10 billion through the government bailout program, it can claim a tax deduction of $10 billion. At the normal corporate tax rate of 35 percent, that could add up in theory to a $3.5 billion savings for the company, and $3.5 billion less in taxes paid to the government.

All that assumes, though, that the companies are making enough money to claim the deduction against other profits.

Under a tax provision called loss carryback, a company can use a loss in one year to offset the taxes owed on the two previous years of profits. So, if a firm lost money this year, it could still take advantage of a deduction — and maybe even get a refund — based on their previous profits.

"It's going to drain the Treasury, but I don't think it's going to be a giant drain. It will be significant," said Robert Losey, a professor of finance at American University in Washington, D.C. "But those losses would have been taken in the future, most likely, and the secondary effect of this all should help the economy, so you're going to get some more taxes collected."

Figuring out how many such deductions there may be is difficult because of so many variables — particularly since no one is sure what price the government will end up paying for the securities.

"The real question is how much does the Treasury pay for those assets," said James Angel, an associate professor of finance at the McDonough School of Business at Georgetown University.

Angel said he doesn't think the overall impact of business loss tax deductions will be large, because the firms involved would likely get such a deduction whenever they were able to sell the securities.

"However, the ability to realize the deduction sooner rather than later makes it a little bit better for the institutions involved," said Angel.

And he said it was also possible that some banks already may have written down their assets so far, that in selling to the government, they could even claim a profit and end up paying more taxes.

While the plan broadly aims to prevent banks from profiting on the sale of troubled assets to the government, there is an exception made for assets acquired in a merger or buyout, or from companies that have filed for bankruptcy.

This detail could allow JPMorgan Chase & Co. to sell toxic mortgages and other assets it gained control of last week when it purchased Washington Mutual Inc. for a higher price than the failed thrift paid for them.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.


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