Tax experts say settlements on federal charges carry tax loopholes
When Bank of America agreed in December to pay $335 million to resolve federal charges that its mortgage-lending arm discriminated against black and Hispanic borrowers, government officials hailed it as the largest fair-lending settlement in history.
But, in fact, the banking giant has the right to a substantial discount on the payout. Nearly 40 percent of the settlement is deductible. That means Bank of America could wind up saving $117 million on its tax bill.
Over the past year, federal prosecutors and regulators have lauded a series of multi-million dollar settlements against big corporations that have done everything from duping customers into buying unneeded products to foreclosing on active duty troops. But little mentioned is a tax law that takes these firms off the hook for a huge chunk of that money.
Corporations can write off any portion of a settlement that is not paid directly to the government as a penalty or fine for violation of the law. A majority of the settlements that federal regulators announced in the past year include some form of restitution that is eligible for a tax deduction.
That means Wells Fargo could claim its $175 million fair-lending settlement with the Department of Justice as a deductible corporate expense. Or Capital One could write off a portion of the $210 million agreement it reached in July with the Consumer Financial Protection Bureau (CFPB). And American Express can save millions on the $112.5 million settlement it negotiated last week.
“No corporation should ever save money by violating the rules that are in place to protect people,” said Virginia Robnett, outreach coordinator at OMB Watch, a government watchdog group. “These tax write-offs should be rescinded.”
Consumer advocates say the deduction is a slap in the face to taxpayers who are ultimately left on the hook for corporate misdeeds. But tax experts and corporate attorneys argue that preventing companies from writing off these expenses could encourage firms to forego settlements.
“If you were to disallow deductions for settlements, then that would create an incentive for companies to litigate the case all the way to a trial verdict,” Victor Fleischer, a tax law professor at the University of Colorado, said. “If the company had to pay a claim in that instance, it would be deductible. That's not wise public policy either.”
Officials at the Justice Department, the CFPB and the Federal Deposit Insurance Corp. declined to comment.
It is not yet known whether any of the firms involved in recent federal settlements will take advantage of the deduction, as they are months away from filing 2012 taxes.
Few corporations have ever passed up the deduction, and those who have did so under intense public scrutiny, analysts say. Take Boeing, which in 2006 abandoned plans to deduct a $615 million settlement with the Justice Department after several senators raised objections.
Four years later, Goldman Sachs agreed to waive tax deductions it could have claimed in a $550 million settlement with the Securities and Exchange Commission. The agency specifically placed language in the agreement to prevent the investment bank from receiving a tax break. Goldman, which gave up as much as $187.5 million in savings, could have contested the arrangement, but backed down.
“It was pretty unusual,” said Robert Willens, an expert on tax accounting. “But there has been a backlash through the years about companies financing their penalty payments on the backs of taxpayers.”
Lawmakers have routinely raised concerns over companies being able to deduct large civil settlement payments.
“Our tax laws ought to measure tax income. And once we start to depart from the measure of income to pursue social goals, then a variety of complications arise in where do you draw the line,” said Steven Rosenthal, a visiting fellow at the nonpartisan Urban-Brookings Tax Policy Center.
To offset tax deductions on damages, Rosenthal said government agencies could impose higher fines or penalties that cannot be deducted.
Fleischer said increasing penalties would serve as a more effective deterrent .
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Identity of Route 30 suicide victim revealed
- Starkey: Penguins’ season impressive so far
- Man dies in jump from Route 130 overpass onto passing tractor-trailer in Hempfield
- Firefighter hurt in 3-alarm fire at Jefferson Hills restaurant
- Penguins a love affair for Evancho sisters
- Poll shows Clinton slipping in trustworthiness among voters
- Pennsylvania religious freedom law does not extend to for-profits
- Hornqvist’s net-front presence with Penguins could be valuable asset
- Chick’s Bar in McKeesport catches fire
- Big names highlight Three Rivers Arts Festival’s 2015 musical lineup
- Planned Uptown revival priority for City of Pittsburgh