The IRS agreed to give up billions in tax money in exchange for Citigroup’s repurchase of $20 billion of its assets held by TARP.

Following long-standing carryback loss rules, federal tax law permits companies to reduce their taxable incomes in profit-earning years by the amount of losses in bad years. 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 exempts up to $38 billion in future Citi profits from taxable income.

This IRS ruling adds to the list of methods in which the Treasury, FDIC, and Fed have supported Citi. Click to see companion programs under TARP (Capital Purcahse Program and Targeted Investment Program), FDIC Gaurantee of Citigroup Assets, and Fed Guarantee of Citigroup Assets.