Do New Mortgage Settlements Contain a Hidden $7 Billion Tax Subsidy for Banks?

Media Contacts
Ryan Pierannunzi

Statement Calls on Feds to Prevent Write Offs that Would Force Taxpayers to Pick Up the Tab


Statement by Senior Analyst for Tax and Budget Policy Phineas Baxandall on the potential tax subsidy banks will collect if allowed to write off as an ordinary business costs the billions in yesterday’s announced mortgage settlements. Bank of America agreed to an $11.6 billion negotiated settlement to Fannie Mae to settle charges that its Countrywide Financial subsidiary sold the agency mortgages obtained with improper underwriting and other practices. Ten banks including Bank of America yesterday separately agreed to pay $8.5 billion in direct and other benefits to homeowners for knowingly violating regulatory procedures and wrongfully foreclosing on hundreds of thousands of homeowners who should have been allowed to stay in their homes.

“Taxpayers should not be subsidizing, or in any way paying for, these corporations’ wrongdoing. But that’s exactly what will happen unless the IRS or other federal agencies prevent it. 

“Based on past experience, unless federal agencies expressly forbid it, these banks will write off the cost of these settlements as ordinary business payments and taxpayers will be forced to pick up a significant part of the tab. That could be the equivalent of giving a $4.06 billion tax subsidy to Bank of America and a $2.975 billion subsidy to the other banks that includes BoA. It’s a total of about $7 billion that will need to be made up for in the form of public program cuts, higher taxes or more federal debt.

“While the law clearly states that companies should not deduct government penalties, fines or settlements in lieu of those payments, corporations that negotiate settlements typically deduct them anyway — claiming that they are normal costs of doing business. In this case, the banks will likely also say that they can deduct the government-negotiated settlements because they are paid to private parties.

“Just because these banks treat law-breaking as an acceptable risk and a “normal” part of doing business doesn’t make it right and the public certainly shouldn’t have to pay for it.

“The question boils downs to whether these banks will be allowed to use the settlement costs to reduce their taxable income or whether the money will come directly out of their profits.

“The Department of Justice and Securities and Exchange Commission (SEC) have clamped down on preventing these kinds of hidden subsidies in recent settlements with the oil company BP and UBS, a bank cited for money laundering. But neither agency is involved here nor is there any systematic disclosure of information about this issue to the public. Unless we hear otherwise, we can assume the public will end up subsidizing this wrongdoing. Think of it as $7 billion in hidden bank fees for taxpayers.”

A new study, released last week by the U.S. Public Interest Research Group (U.S. PIRG), details the common practice where corporations that commit wrongdoing and agree to financial settlements with the federal government go on to claim such settlement payments as tax-deductible business expenses. It suggests a number of reforms to halt the practice and make it more transparent to the public.