Note to Citi: Get Your Fiscal House In Order!

The IRS has agreed to give up billions in tax money in exchange for Citigroup’s repurchase of $20 billion of its assets held by TARP. In a notice released on Friday, the IRS will exempt up to $38 billion in future Citi profits from taxable income.

Federal tax law permits companies to reduce their taxable incomes in profit-earning years by the amount of losses in bad years (it's called carryback loss). Under the law, the IRS, which is part of the Treasury, restricts the transfer of these benefits to new ownership in the case of a merger—as a way of preventing companies from buying unprofitable firms to evade taxes. As the law exists, Citi’s repurchase of assets held by the Treasury would qualify as a change in ownership, and thus exclude Citi from the tax benefit.

Since Citi has built up $38 billion in losses, the IRS notice on Friday will exempt up to $38 billion in future profits from taxable income.

According to a Washington Post article this morning, the exact value of the IRS ruling will depend on Citi’s future profits and other factors. But accounting experts have estimated that Citi will save at least several billion dollars. Some experts have also said that the lost tax revenue could easily outweigh the profits the Treasury will likely make in selling its ownership stake in Citi.

This IRS ruling just adds to the list of all the unprecedented methods in which the Treasury, FDIC, and Fed have provided lifelines to Citi (track them all at