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The fact that this week’s $13 billion JPMorgan settlement was a record between a U.S. company and the government is not the most notable part of this deal…
What’s more shocking about this record-high settlement is that more than half of it could be tax-deductible.
Under terms of the $13 billion deal, JPMorgan Chase & Co. (NYSE: JPM) will pay $4 billion toward consumer relief. The remaining $9 billion goes to settle federal and state civil claims stemming from entities involved in the mortgage securities. The state of New York will receive $613.8 million, California $298.9 million, Illinois $100 million, Delaware $19.7 million, and Massachusetts $34.4 million, according to the Department of Justice.
Included in the $9 million is a $2 billion non-tax-deductible fine to the Department of Justice.
But the rest – $7 billion – is tax-deductible thanks to part of the tax code that states costs associated with corporate legal cases can be treated similarly to a company’s wages or equipment expenses.
“From 1913, our tax laws have permitted companies to deduct their ‘ordinary and necessary’ expenses, which include compensation and restitution payments,” Steve Rosenthal, a lawyer specializing in financial institution taxation and a visiting fellow at the Tax Policy Center, told CNNMoney.
JPMorgan Chief Financial Officer Marianne Lake confirmed the tax deduction in a conference call Tuesday afternoon, and noted JPMorgan will seek to deduct those relief payments.
How much of a tax deduction the world’s largest bank (which posted a $21.3 billion profit for all of 2012) will get will eventually be determined by the Internal Revenue Service (IRS).
Fighting the JPM Settlement Tax Break
The potential tax break has angered interest groups in Washington who have been busy trying to change the law.
The Americans for Tax Fairness and the U.S. Public Interest Research Group earlier this month amassed a 160,000 signature petition that asked the Justice Department to add a provision to the settlement that would have prohibited any tax advantage.
Then, according to Business Insider, five Senators wrote a letter to the Department of Justice to “ensure the final settlement is clear about the tax treatment of the entire settlement amount and explicitly prohibits the tax deductibility of such payment.”
Finally, Congressman Peter Welch (D-VT) has proposed to the House of Representatives “The Stop Deducting Damages Act,” which would ban corporate tax deductibility of all legal settlements.
Welch issued the following statement after the JPM settlement was finalized:
“JPMorgan, whose conduct caused great harm to taxpayers and the American economy, should not ask the taxpayer to pay any portion of its penalty in the important settlement. Jamie Dimon should do the right thing and direct his accountants to forgo the exploitation of any tax loopholes that could reduce the burden imposed by this settlement. He should accept full responsibility for JPMorgan’s egregious conduct and that includes paying the full cost of this settlement.”
While it appears JPMorgan might reap a sizable tax benefit from this latest settlement, it might not be so lucky next time – especially if Welch’s bill is enacted. And you can be sure there’ll be a next time.
The bank is presently looking at at least nine other government probes that run the gamut from its hiring practices in China to its hand in manipulating the Libor benchmark interest rate.
And the company has prepared for more fines. JPM revealed in September it had set aside a whopping $23 billion to cover litigation fees and probes.
While the bank didn’t admit to any illegal violations in the deal, its acknowledgment of “serious misrepresentations” opens the floodgates for more securities fraud claims from private investors.
The result could be some very taxing issues for the bank, indeed.
The JPMorgan tax deductible settlement isn’t the only ridiculous part about this Wall Street drama: The $13 Billion JPMorgan Fine Was No Shakedown
- Reuters: JP Morgan Says ‘Mea Culpa’ in $13 Billion Settlement with U.S.
- The Wall Street Journal: JP Morgan, U.S. Settle for $13 Billion
- Business Insider: Every Taxpayer Should Watch What Happens to $7 Billion of JP Morgan’s Settlement