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Bank of America could get tax break on part of $16 billion mortgage settlement

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Diedra Laird - dlaird@charlotteobserver.com
Bank of America and the Department of Justice are negotiating the terms of a potential settlement of more than $16 billion over soured mortgage bonds.

As Bank of America prepares for a possible multibillion-dollar settlement with the government, the deal is expected to share a feature common to similar settlements with other banks – a big portion that’s tax-deductible as a business expense.

The Charlotte bank and the Department of Justice are negotiating the terms of a potential settlement of more than $16 billion over soured mortgage bonds, in a deal that has not been finalized but could be announced as early as next week.

In similar deals recently struck by the Justice Department with large U.S. banks, portions of the overall settlement amounts were designated as penalties, which banks aren’t allowed to write off.

But by law, banks can write off portions of their settlements that aren’t considered fines or penalties, such as payments to states affected by their alleged misconduct.

That means billions of dollars in Bank of America’s expected settlement could be tax-deductible.

The practice has sparked criticism from some who think banks should not receive the silver lining of a tax deduction for misdeeds said to have fueled the worst U.S. economic crisis since the Great Depression.

“It’s wrong to make ordinary taxpayers shoulder a portion of these settlements, and it’s wrong to dilute the deterrents that these settlements are supposed to represent for future wrongdoing,” said Phineas Baxandall, tax analyst at the U.S. Public Interest Research Group, a consumer-advocacy nonprofit.

“If they’re allowed to be deducted, it means legally that they’re being treated as a normal business expense,” he said.

A Bank of America spokesman declined to comment. A representative for the Justice Department also declined to comment.

It’s not clear how much of Bank of America’s settlement might be in a civil cash penalty, which would go to the U.S. Treasury and not be tax-deductible. Also, the deal could still fall apart. If that happens, the government is expected to file a lawsuit against the bank.

If reached, the deal would be the largest civil settlement between the U.S. government and a company. It would resolve various federal and state civil probes into mortgage-related activities involving Bank of America, Countrywide Financial Corp. and Merrill Lynch.

Top executives with other banks that have reached settlements with the Justice Department have said portions are tax-deductible.

In November, JPMorgan Chase & Co. reached a $13 billion settlement with the Justice Department over soured mortgage bonds. On the day the deal was announced, JPMorgan’s chief financial officer said $7 billion was tax-deductible.

Citigroup and the Justice Department struck a $7 billion deal in July over shoddy mortgage securities. On the day of that deal’s announcement, the lender’s chief financial officer said payments to states and the Federal Deposit Insurance Corp. were tax-deductible, as well as costs incurred from consumer relief.

Some deductions taken already

A source close to the negotiations said roughly $9 billion of the Bank of America settlement is expected to be in two forms: a penalty payment to the U.S. government, and separate cash payments to federal agencies and various states.

Under U.S. tax law, that penalty payment would not be tax-deductible. The cash payments would be.

The remainder of the overall settlement figure, about $7 billion, would take the form of consumer relief, such as modifications and principal reductions for people struggling to pay home loans.

Bank of America, the nation’s second-largest bank by assets, has already taken tax deductions through charging off billions of dollars in mortgages that have soured and are the subject of the civil probes. That means the bank isn’t expected to take additional tax deductions for the majority of the consumer relief portion of the Justice Department settlement.

What’s left would be the cash payments to government agencies and the states – a figure that could be in the billions – and those would be tax-deductible.

Richard Bove, a bank analyst with Rafferty Capital Markets, told the Observer he estimates Bank of America’s total deduction from the remaining cash payments to total $400 million to $600 million.

It would not be the first time Bank of America has taken deductions from the billions of dollars in settlements it has reached since the financial and housing crises. For example, in the first quarter of this year, the bank recorded a deduction from a $9.5 billion settlement announced in March with the Federal Housing Finance Agency.

Lawmakers seek change

Lawmakers outraged over companies taking tax deductions after reaching government settlements have sought to make the deductions more transparent as well as take some away.

In November, John Reed, a Democratic senator from Rhode Island, and Chuck Grassley, a Republican from Iowa, introduced a bill to change U.S. tax code to rescind tax write-offs for settlements stemming from illegal corporate behavior. The bill has been referred to the Senate Finance Committee.

Another bill, co-sponsored by Sen. Elizabeth Warren, a Democrat from Massachusetts, and Sen. Tom Coburn, a Republican from Oklahoma, would require government agencies to post online various information about settlements over alleged violations of federal civil or criminal laws, including the amount that is not tax-deductible.

Last month, that bill won approval from the Senate Homeland Security and Governmental Affairs Committee, sending it to the full Senate.

Baxandall, the tax analyst for U.S. Public Interest Research Group, said the fact that a portion of settlements can be tax-deductible sends the wrong message to the public.

He said every dollar in tax write-offs for the companies has to be made up for by the government in higher tax rates, cuts to programs or more national debt.

“The way the public understands these settlements is that they are to atone for misdeeds,” he said.

“The really pernicious thing here is both the (government) agencies and the banks have an incentive to tout larger but illusory pretax numbers. The agency looks good because they get to hold up a bigger number. The company gets a better bottom line because it can get a big write-off.

“It’s a win-win for them. The only one who loses is the public.”

Roberts: 704-358-5248; Twitter: @DeonERoberts
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