It got around the Department of Jusitce’s recent policy of nixing tax
deductions. See DOJ Allows Bank of America to Deduct $12 Billion of $17
Billion Settlement. Not everyone is pleased that BofA gets to pass on $4
billion to taxpayers, though the $4 billion figure was confirmed by a
bank spokesman. Some lawmakers and consumer advocates say the DOJ and
regulators need to take taxes into account in touting the settlement
figures.
Otherwise, people think it’s costing a targeted business one thing,
when the after tax cost—paid for by taxpayers—is something else. But
isn’t everything in business deductible? Not always.
In general, fines and penalties paid to the government are not
deductible, and in this case that agreed civil penalty is $5.02 billion.
Amazingly, though, there’s even a chance that the $5.02 billion is
deductible too. The U.S. Public Interest Research Group
tracks the tax implications of legal settlements, and they are not
easy on the DOJ, saying that the DOJ should forbid deductibility.
The tax code already speaks to this subject. Section 162(f)
of the tax code prohibits deducting ‘‘any fine or similar penalty paid
to a government for the violation of any law.’’ Despite punitive
sounding names, though, some fines and penalties are considered
remedial and deductible. That allows some flexibility. As a result,
some defendants insist that their settlement agreement confirms that
the payments are not penalties and are remedial.
Explicit provisions about taxes in settlement agreements are becoming more common. For example, the DOJ did expressly forbid Credit Suisse from deducting its $2.6 billion settlement for helping Americans evade taxes. Ditto for the BNPP terror settlement, which states that BNPP will not claim a tax deduction. Sometimes the government and a defendant split the baby.
Of the $13 billion JP Morgan settlement struck in late 2013, only $2
billion was said to be nondeductible. The DOJ doesn’t always disclose
the terms of settlements either. But that could change. The proposed
Truth in Settlements Act (S. 1898 – fact sheet) would require agencies to report after-tax settlement values. Another bill, S. 1654, would restrict tax deductibility and require agencies to spell out the tax status of settlements.
A poll
released by the U.S. Public Interest Research Group Education Fund
says most people disapprove of deductible settlements. The BofA deal
might fuel such sentiments, particularly since the government’s deal
with BofA seems to go out of its way to allow tax deductions, saying
that:
“Nothing in this Agreement constitutes an agreement by the United
States concerning the characterization of the Settlement Amount for the
purposes of the Internal Revenue laws, Title 26 of the United States
Code.”
Assuming BofA does not deduct the $5.02 billion in civil penalties,
the bank’s deduction is worth $4.0705 billion. If the bank succeeds in
writing off the full $16.65 billion, including the civil penalties, its
write-off is worth $5.8275 billion. U.S. PIRG has also created a fact sheet on Wall Street settlement tax deductions.