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PNC tax breaks in buyout multiply

| Thursday, Jan. 8, 2009

PNC Financial Services Group will gain more than twice the amount in tax breaks from the purchase of rival National City Corp. than the financial giant originally estimated.

A change in Internal Revenue Service rules to encourage strong banks to acquire weak banks will allow PNC to take a $1.6 billion tax benefit this year, according to calculations by tax analyst Robert Willens.

The calculations are based on documents PNC filed with the Securities and Exchange Commission.

The tax savings would pay for more than one-quarter of the $5.6 billion National City purchase price.

In a Nov. 19 letter to the Securities and Exchange Commission, an attorney for the law firm Wachtell Lipton Rosen & Katz, representing PNC, said the company this year intends to charge off $4.6 billion in loan losses stemming from National City.

"Using a 35 percent tax rate, meaning each dollar of deduction saves about 35 cents in tax, the $4.6 billion would produce a tax benefit of $1.6 billion," said the New York-based Willens, whose tax speciality is mergers and acquisitions.

Before the IRS rule change on Sept. 30, the $1.6 billion benefit would have been spread over a number of years, Willens said.

Soon after PNC's deal to acquire National City was announced Oct. 24, Willens issued a widely publicized estimate that PNC would collect a $5 billion tax break and conceivably not pay income taxes for six years.

PNC later said the tax benefit wouldn't be that much and Wednesday stood by a lower estimate despite the letter from its lawyer to the SEC.

"PNC continues to believe that the recent interpretation of the tax code, IRS Notice 2008-83, will result in a net present value benefit of less than $725 million," PNC spokesman Fred Solomon said.

PNC's attorney issued a specific tax benefit estimate because the SEC asked for it, citing "numerous press articles describing the significance of IRS Notice 2008-83."

SEC attorney Christian Windsor asked PNC for a summary of the impact of the notice in relation to the merger, including tax benefits that would have resulted before and after the IRS's rule change.

In the response, PNC attorney Nicholas Demmo said the change was not "a significant factor in PNC's decision to proceed with the transaction."

National City agreed to be acquired by PNC for $5.6 billion in stock, a deal assisted by the Treasury Department, which bought $7.7 billion in PNC's preferred shares and warrants. The deal was completed Dec. 31.

The deal gave PNC $98 billion in National City deposits and 1,570 branches and made PNC the nation's fifth-largest bank.

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