Oct. 30 (Bloomberg) -- New York Senator Charles Schumer asked Treasury Secretary Henry Paulson to justify a tax ruling that helped spur Wells Fargo & Co. to buy Wachovia Corp., saying Congress wasn't consulted on the change.

Schumer, a New York Democrat, said the Sept. 30 ruling may lead to unnecessary tax-motivated consolidation that wouldn't help stabilize the financial-services industry. The ruling may cost taxpayers as much as $140 billion, according to an estimate by the law firm Jones Day.

``I am concerned that the notice, which was never debated by Congress, could end up costing taxpayers tens of billions of more dollars on top of the hundreds of billions of dollars already approved by Congress in the financial rescue plan,'' Schumer said in a letter to Paulson.

``I also fear that the notice could have the unintended consequence of motivating more financial firms wanting future tax deductions to shelter their earnings to buy competitors, leading to more consolidation in the financial industry than would be necessary to restore stability in the financial sector,'' the letter said.

Treasury spokesman Andrew DeSouza said, ``We have received the letter and are reviewing it.''

Schumer is the second member of the tax-writing Senate Finance Committee to raise questions about the notice, which makes banks' loan losses more valuable as tax deductions and has helped trigger a flurry of bank acquisitions.

Conference Call

Iowa Senator Charles Grassley, the panel's top Republican, demanded a conference call between congressional aides and Treasury officials on the matter earlier this month.

``Congress should have been informed and consulted before Treasury took such an extraordinary action that will likely add billions of dollars to the deficit,'' Grassley said. ``I'm looking further into it and if this is indicative of Treasury's mindset, I'm concerned about what may be next.''

Matthew Beck, a spokesman for the tax-writing House Ways and Means Committee, declined to comment on the issue.

Wells Fargo offered to buy Wachovia for $15 billion on Oct. 3, three days after the IRS notice was issued. The offer set up a clash with New York-based Citigroup Inc., which maintained in court that it had reached an exclusive agreement on Sept. 29, the day before the IRS notice was issued, to buy Wachovia's banking operations for $2.16 billion.

More Valuable

Wells Fargo ultimately bought Wachovia for $12.2 billion. The tax change making Wachovia's losses more valuable as tax deductions may ultimately save Wells Fargo $25 billion in future years, said Robert Willens, a former Lehman Brothers Holdings Inc. tax and accounting analyst who teaches at Columbia Business School in New York.

Citigroup alleged in state court filings that Wachovia's acquisition by Wells Fargo ``triggered the golden parachutes of Wachovia CEO Robert Steel and its other senior executives, which would enable these executives to bestow upon themselves a $225 million windfall.''

Steel was undersecretary of Treasury in charge of domestic finance from October 2006 until July, when he became chief executive of Wachovia.

PNC Financial Services Group Inc., which will become the fifth-largest U.S. bank by deposits after its purchase of National City Corp., also may get tax benefits that far exceed its purchase price, Willens said.

``The present value of the tax savings that PNC will enjoy from this `relaxation' of the normal prohibitions against `trafficking' in losses will equal or exceed the entire amount PNC is paying for the stock of NCC,'' Willens wrote in a letter to his clients today.

PNC Agreement

PNC agreed on Oct. 24 to acquire National City for $5.2 billion in stock after receiving an infusion of $7.7 billion from a Treasury program to inject cash into financial firms. The Pittsburgh-based bank said the deal would add to earnings in 2010 and that the combined lender will cut $1.2 billion in costs.

Citigroup has given Schumer's campaigns and political action committees $410,216 during his career, making the bank the second biggest lifetime donor to the New York senator, behind Goldman Sachs Group Inc., which has contributed $458,440.

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net

Last Updated: October 30, 2008 18:19 EDT