It Would Be Nice if This Stuck, But It Won't, the Sequel

Is Yves Smith at Naked Capitalism noted some time ago, the failure to properly convey notes to trusts technically to the trusts that managed the mortgage backed securities means that there are tens, if not hundreds, of billions in tax liabilities owed:

The Internal Revenue Service has launched a review of the tax-exempt status of a widely-held form of mortgage-backed securities called REMICs.

The IRS confirmed to Reuters that the review comes in response to mounting evidence that banks violated tax requirements by mishandling the transfer of mortgages to REMICs, short for Real Estate Mortgage Conduits.

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As of the end of 2010, investments in REMICs totaled more than $3 trillion, according to data supplied by the Securities Industry and Financial Markets Association.

In a brief statement in response to questions from Reuters, the agency said: "The IRS is aware of questions in the market regarding REMICs and proper ownership of the underlying mortgages as set out in federal tax law, and is actively reviewing certain aspects of this issue."

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The review, however, is a sign that the widespread bank misdeeds in home foreclosure cases are spilling over to threaten the interests of investors in mortgage-backed securities. The banks originated the mortgages and packaged them into securities.

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For investors, one of the big attractions of REMICs has been that they aren't "double-taxed." While individual investors pay taxes on income they receive from REMICs, the securities themselves are exempt from business income tax.

But if the IRS concludes that the REMIC investments failed to comply with strict requirements in the federal tax code, the REMIC would have to pay a 100 percent tax on the income from those investments.

That means that the IRS could confiscate the full amount. Tax law experts said the REMICs also could be subjected to additional penalties for failing to file tax returns on the income.

James Peaslee, a partner at law firm Cleary Gottlieb who is an expert on taxation of securitized investments, said that even if the IRS finds wrongdoing, it might be loath to act because of the wide financial damage the penalties would cause. He notes that the REMIC investors, who he called "innocent parties," would have to pay rather than the banks that were responsible for any wrongdoing in transferring mortgage ownership.

But Adam Levitin, a Georgetown University Law School professor and expert on taxation, said that if the IRS fails to act, "it would be a backdoor bailout of the financial system."

Well, we know nothing is going to happen, because Obama and Geithner have made it clear that the banksters never pay, the taxpayers do.

Of course they are going to go for the backdoor bailout, particularly because this would reflect back on the banks:

If the IRS did impose penalties, the REMICs could turn around and sue the banks for causing the problems and not living up to the terms of the agreements establishing each REMIC, thus transferring the costs to the banks. If the IRS finds wrongdoing but fails to act, the IRS would forego "potentially enormous tax revenue that would be passed on to the federal government," Levitin said. "Given the federal budget deficit that's not something to sniff at," he added.

Yeah, let's run the numbers.  $3 trillion, let's assume 5 years of 5% returns, and no compounding.

Well, with the 100% tax rate, regulatory forbearance will cost the taxpayers $750 billion for the taxpayer before even considering penalties and interest.

The scary thing is that by the standards of the bankster bailouts, this is just pocket change.