In the news

Brian Faler

The administration’s tentative $13 billion settlement with JPMorgan Chase is drawing some bipartisan fire in Congress where lawmakers say it could leave taxpayers on the hook.

Some complain any agreement is likely to prove smaller than advertised because it will allow the biggest U.S. bank to claim tax breaks that will substantially reduce the settlement’s ultimate cost.

“It’s ridiculous,” said Sen. John McCain (R-Ariz.). “A bad joke.”

The complaints — which come from Republicans like McCain and Iowa Sen. Chuck Grassley as well as liberal Democrats such as Sen. Elizabeth Warren (Mass.) — could prove a headache for the administration, already criticized for not being tough enough on Wall Street firms blamed for the 2008 financial crisis.

The Justice Department has not said publicly how the pact would be considered for tax purposes. Talks to seal the deal have hit a roadblock in recent days, over the issue of liability for actions taken by Washington Mutual and potential future criminal charges.

An agency spokesman did not respond to requests for comment.

Tax experts, though, say the details that have leaked out suggest much of the $13 billion total will be deductible to reduce the bank’s taxes.

Complaints have been growing in recent days, with five Democratic senators firing off a letter Tuesday to Attorney General Eric Holder demanding he not allow the breaks.

“Allowing major corporations to write off penalties for breaking the law and harming the public are impossible to justify,” they wrote. “Fines and penalties are intended not to just compensate the public, but also to serve as deterrents to others who might break the law in the future.”

Sen. Sherrod Brown (D-Ohio), who sits on the tax-writing Finance Committee, plans to file legislation this week limiting breaks for punitive damages. Rep. Peter Welch (D-Vt.) is going further with a measure his spokesman said is aimed at barring companies from writing off any part of their settlements.

Such legislation has been introduced before but quashed by corporate lobbyists, former aides say.

The issue has also become fodder for Daily Show host Jon Stewart who joked that “this confirms what I’ve always said: Settlements for corporate fraud and malfeasance and donations to breast cancer charities are equal in the eyes of the law.”

The Senate’s top tax writer, Finance Chairman Max Baucus (D-Mont.), was more circumspect Wednesday, saying he did not think the companies are doing anything wrong by claiming the write-offs.

“The law is the law,” he said, though “that begs the question of whether the law should be changed.” Baucus hasn’t made up his mind. “That’s something that requires a lot more sophisticated examination to see what makes sense,” he said.

The JPMorgan agreement is just the latest of deals the government has struck over the past year with banks to settle allegations stemming from the housing crisis. The complaints have included sketchy mortgages, improper foreclosures through so-called robo-signings and racial discrimination. Collectively worth billions, the deals have come with scores of major banks, including Bank of America, Citigroup, SunTrust and UBS. Tax experts say they too will likely be able to write off at least a share of those settlements.

Companies are barred from considering “fines or penalties” paid to the government to be a deductible expense. But just because banks agree to pay something as part of a settlement doesn’t mean that’s a penalty, said Dan Shaviro, a tax law professor at New York University.

“There might be multiple different grounds for them to pay money and some would be called fines or penalties and [for] others, there might be an argument saying they’re not,” he said.

So-called compensatory payments, which are designed to make a party or parties financially whole, are not considered penalties under long-standing tax rules, and may be deducted. And the bank settlements often include a mix of payments for different purposes, including compensation for homeowners or to the government for financial losses.

There are good reasons for allowing those deductions, said Robert Willens, a tax consultant.

“The income tax is a tax on net income, not gross income, and these outlays are costs of doing business even though they arise from unusual circumstances and circumstances that are objectionable,” he said. “It just doesn’t sit well with people, but if you step back and look at it dispassionately, I think it’s easy to conclude that they should get a deduction.”

The government has sometimes demanded that companies agree, as part of settlements, to foreswear deductions. Last year, Justice said it would not allow BP to write off a settlement stemming from the 2010 oil spill in the Gulf of Mexico, a move that came after the company took big write-offs for earlier deals tied to the accident.

The Securities and Exchange Commission usually includes provisions barring deductions, which in 2010 forced Goldman Sachs to forgo the tax breaks that would have come with a $500 million settlement with the agency.

More typically, agencies allows the tax breaks if it means they can get a bigger payment from the company, even if they know that number will be reduced later though the tax code, said Lee Sheppard, a contributing editor for the nonpartisan Tax Notes.

“They want a nice-looking number,” said Sheppard. Grassley complained that means “a billion-dollar fine isn’t really a billion-dollar fine.” He said, “If you’re going to have a billion-dollar fine, it ought to be a billion-dollar fine.”

The government usually doesn’t make it easy to know exactly how much of a given settlement is deductible, said Phineas Baxandall, a tax analyst at the consumer group U.S. PIRG, which tracks the issue. That makes it hard to figure out its true size.

“Despite the fact that tax deductibility hugely changes the real value of settlements, it is never mentioned in press releases,” he said. “At best, agencies post the legal terms on their websites where they can be deciphered by experts. At worst, agencies don’t disclose the terms.”

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