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"Citigroup deal to cede control of its brokerage unit to Morgan Stanley is set to result in a tax payment of about $4 billion to the US government in a sign of the political high stakes behind the transaction," The Financial Times said. 
The merger would provide more cash to the Citigroup and more manpower to Morgan Stanley.

The federal government had injected $45 billion in capital into Citigroup and holds warrants to buy 7.8 per cent of the company. Quoting people close to the situation The Financial Times said, "Citigroup would pay about four billion dollar in federal and local taxes on its expected $10 billion -plus gain from the combination of its Smith Barney brokerage arm with Morgan Stanley's broker".

Meanwhile, Citigroup and Morgan Stanley have declined to comment on the issue. The gain would comprise a 7.5 billion dollar revaluation of Smith Barney as a result of the deal and a $2.7 billion payment from Morgan Stanley for a 51 per cent stake in the venture as well as an option to buy the remainder in future years, The FT report published online said.

The deal would bring the banking giant over $6 billion in post-tax gains, with which it is considering to take care of its balance sheet and boost results of the first quarter of this year.

Besides, Citigroup is expected to report a multi-billion-dollar loss in the last three months of 2008, its fifth consecutive quarter in the red.