Financial Crisis Fallout: Lawsuit Seeks $2.4 Billion From Citigroup Over Bailout-Era Tax Liabilities

After the Treasury Department invested $45 billion in Citigroup during the throes of the financial crisis in 2008, the bank received an additional gift from the Internal Revenue Service in the form of a special tax exemption. Now an economist from Indiana is suing the bank, arguing that the state of New York is still owed $800 million in unpaid taxes, despite the exemption.

The economist dredging up the crisis-era decision, Professor Eric Rasmusen of Indiana University, told the Buffalo News that while the federal government might have been justified in allowing the tax exemption, New York didn't need to follow suit. “Maybe the IRS had some good policy reasons for going against what the law said, but it isn’t clear why New York taxpayers have to forfeit revenues in pursuit of some federal policy objective of the Obama administration,” he told the newspaper.

New York Attorney General Eric Schneiderman reportedly declined to pursue the case, which was moved from state court to a federal court in Manhattan at Citigroup's behest.

According to the complaint, Citigroup was able to write off $800 million in state taxes that would have been off-limits had the IRS not issued the special tax ruling. In normal times, companies can take net operating losses from a down year and use them to reduce tax liabilities in future years when business picks up. That privilege does not apply, however, when a company is acquired, a rule meant to prevent companies from buying one another simply to write off past losses.

As the federal government bailed out Citigroup, General Motors and others, the IRS ruled that the companies had not undergone a change in ownership, and therefore their losses could be applied to future tax bills. In total, the special treatment saved the companies an estimated $35 billion.

But Rasmusen's lawsuit argues that the taxpayers of New York ended up the losers as Citigroup applied big deductions to its state taxes. Under New York's False Claims Act, the complaint said, Citigroup would owe a total of $2.4 billion in taxes and penalties.

The False Claims Act would also entitle Rasmusen to a hefty monetary award should the lawsuit prevail, a windfall he has promised to donate. Citigroup has said the lawsuit's claims lack merit.