In a recent post, Kevin examined the revolving door between JPMorgan and the Department of Justice team charged with negotiating its record-breaking settlement. He concluded that the DOJ attorneys would likely be rewarded in the private sector for their roles in the JPMorgan deal, leaving democracy to foot the bill for their soft negotiations.
That same day, Reuters and other outlets put the brakes on the high-dollar induced awe, reporting that the $13 billion “record” settlement would likely be greatly diminished through some clever tax tricks that would allow JPM to write off much of its punitive payment as a “business expense.”
Turns out they were both right. New York Times’ Deal Book reported that during a conference call with shareholders on Tuesday, “Marianne Lake, JPMorgan’s chief financial officer, emphasized that $7 billion of the settlement was tax-deductible.”
Last year BP agreed to what was heralded as one of the largest criminal settlements to date over the Deepwater Horizon disaster in the gulf, yet the company claimed $10 billion in tax credits by writing off cleanup expenses as an “ordinary and necessary” business expense. Similarly, Exxon famously wrote off nearly all of its settlement for its 1989 Valdez disaster in Alaska.
Not admitting fault and then writing off punitive damages as business risks for tax purposes is a common practice. So common, in fact, that some companies agree to give up that option as part of the settlement. That’s right, they agree not to write off their penalties for tax credits in exchange for lower settlements. Six of one, one half dozen of the other, except the latter looks a lot better to the public.
In a 2010 settlement, Goldman Sachs negotiated a lower overall settlement with the SEC, just $550 million, in exchange for not writing off the settlement. This was likely just a PR move, as Bloomberg pointed out:
In Goldman Sach’s case, Pearlman said, the company “likely concluded that it would not be good PR if it became known, as it undoubtedly would, that Goldman Sachs attempted to deduct the penalty.”
Giving up the tax deduction makes the penalty appear smaller than paying a larger penalty and retaining the deductions. Had Goldman Sachs agreed to a $1 billion fine and kept its federal and state deductions, the net outlay would have been about $600 million.
Most unsettling is the prevalence of this practice. US PIRG released a report in 2012 that detailed nearly 100 instances of corporations writing off punitive settlements as tax deductions. Last January the New York Times reported on the details of the practice and was highly critical of the lack transparency around these types of settlements:
Certainly, a settlement’s punitive effect is lessened by any tax sweeteners it generates. Perhaps that’s why it is rarely clear from the public announcements that some or all of the settlement amounts will be deductible.
Given the revelations from Kevin’s post, it is likely that allowing the deduction was indeed part of the deal to artificially gin-up a high-dollar punishment for better optics.