ANDREW HARRER/BLOOMBERG NEWS - American Express is one of several big banks that can save millions on government settlements by writing off any portion that is not paid directly to the government as a penalty or fine for violation of the law.
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 massive discount on the payout. Thirty-five percent of the settlement is deductible. That means Bank of America could wind up saving $117 million on its tax bill.
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Over the past year, federal prosecutors and regulators have lauded a series of multimillion 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. 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 “These tax write-offs should be rescinded.”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 lawyers argue that preventing companies from writing off these expenses could encourage firms to forgo 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 for this article.
It is not 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.
Bank of America and Wells Fargo declined to discuss whether they will claim the fair-lending settlements on their taxes. Capital One offered no comment on its agreement with the CFPB.
American Express spokeswoman Marina Norville said: “There will be some refund on the taxes paid on income that we are now reversing. These are simply accounting rules that we’re following.”
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