JP Morgan Chase’s $13 billion settlement and a possible whale-sized tax deduction

At JPMorgan Chase, you want record earnings and deals, not record settlement payments. But the nation’s biggest bank with $2.4 trillion in assets could be days away from the biggest and most painful settlement ever. As big as the $13 billion number is, it may not preclude criminal prosecution. What’s more, it could involve an express admission of wrongdoing, something that could curtail tax deductions and fuel shareholder suits.

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JP Morgan Chase already paid more than $1 billion to resolve U.S. and U.K. queries into its whale trades. But those numbers pale now. Among the difficult mechanics are the numerous agencies involved. But even the $13 billion is less controversial than a possible admission of guilt.

A non-prosecution agreement has been floated but seems unlikely. An acknowledgement of wrongdoing is becoming more standard from the SEC and others. Admissions of guilt would tarnish the bank’s public image and foment shareholder litigation.

The $13 billion deal under discussion would resolve a suit by the regulator of Fannie Mae and Freddie Mac and another by New York’s attorney general. Civil charges by the Justice Department are pending but not yet filed. Nine billion dollars of the $13 billion would apparently be called fines but would help partially repay taxpayers for the $188 billion bailout of Fannie Mae and Freddie Mac.

The other $4 billion, even more expressly remedial, would help homeowners struggling with their mortgages. And remediation (as opposed to payments to punish) should mean tax deductions. Paying nondeductible fines and penalties is doubly painful.

Despite their punitive sounding names, some fines and penalties are viewed as remedial (and thus deductible) rather than penal in nature. For that reason, defendants want a settlement agreement to confirm that payments are not penalties and are remedial. Tax language in settlement agreements doesn’t bind the IRS, but it goes a long way toward avoiding tax disputes.

The U.S. Public Interest Research Group thinks precluding JPMorgan Chase from claiming tax deductions should be explicit to safeguard taxpayers. The group claims that unless JPMorgan Chase is explicitly forbidden, it will write off the settlement. That would make taxpayers bear 35% of the cost of the settlement.

Can JPMorgan Chase find a way to deduct the $13 billion in the absence of an express prohibition? It depends, but the nature and scope of any admissions of fault may be pivotal. At the same time, some admissions may allow deductions, even for some fines or penalties.

The tax code prohibits deducting ‘‘any fine or similar penalty paid to a government for the violation of any law,’’ including criminal and civil penalties plus sums paid to settle potential liability for fines. See IRC Section 162(f). In reality, many companies deduct settlements even those that are quasi-fine-like in character. Exxon’s $1.1 billion Alaska oil spill settlement cost Exxon $524 million after tax. More recently, BP’s Gulf spill raised similar issues. See BP, Oil, and Deducting Punitive Damages.

In determining what is a nondeductible fine or penalty, names alone are not controlling. If the fine or penalty is intended to be punitive, then the payment is probably nondeductible. But if it is remedial, it may be deductible despite a “fine or penalty” label.

It is sometimes even possible to settle with a government agency and explicitly address taxes in the settlement agreement, specifying that any “fine” is actually remedial rather than punitive in character. But the government often won’t agree, as occurred in Fresenius Medical Care Holdings Inc. v. United States. Fresenius (a medical device company) resolved claims for criminal and civil health care fraud.

It paid a criminal fine of $101 million and a civil settlement of $385 million. The company deducted the payments, but the IRS claimed they were non-deductible penalties. The IRS said the only way Fresenius could deduct the payments would be if the settlement agreement expressly allowed it. Yet the government had refused to address taxes in the underlying agreement.

But JP Morgan Chase is facing bigger issues than taxes. Still, given the large dollars at stake, the bank may well be able to negotiate for tax deduction language or at least for language that doesn’t preclude it. Funny how hard CEO Jamie Dimon and Chase are fighting for mercy when they spared so little to their clients. This time though the DOJ insists investigations will continue, in what still seems like a windfall to the banksters.

Jerry Mazza is a freelance writer and life-long resident of New York City. An EBook version of his book of poems “State Of Shock,” on 9/11 and its after effects is now available at Amazon.com and Barnesandnoble.com. He has also written hundreds of articles on politics and government as Associate Editor of Intrepid Report (formerly Online Journal). Reach him at gvmaz@verizon.net.

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5 Responses to JP Morgan Chase’s $13 billion settlement and a possible whale-sized tax deduction

  1. Pingback: Tell the Department of Justice: American taxpayers have already paid enough for Wall Street’s fraud | Sunset Daily

  2. Fred Harden III

    Brilliantly written as usual by Jerry Mazza. At the time one of my brokers was trying to get me to invest heavily [at least heavily for me] in one of these mortgage-backed schemes. Fortunately I passed at the time! Conversely I waited a tad too long before I dumped my AIG common stock and other fiduciary investments during some of the financial meltdown. Live and learn…

  3. Re: Fred Harden III. Thanks for the compliment Fred. Good to hear from you. And great that something in you (a conscience?) made you pass on the “mortgage-backed scheme.” It was right action. As to AIG, they were loaded up with “insurance swaps,” probably on their risky mortgage bets. Because any USG bailout to them went in the front door and out the back door in record time to pay off some of their debt. In retrospect, you lived and learned quickly and relatively painlessly. Right action pays.
    Regards,
    Jerry.

  4. Re pingback, Don Lichterman: Don, “No Tax Break For Wall Street Crooks” is my mantra. It goes to the heart of these banksters taking all the risk, and the taxpayers picking up all the tabs. Also, notice how the only financial schemer in this decade who’s gone to jail was Bernie Madoff for his “Ponzi Scheme.” I think that Eric Holder, the DOG, and SEC, has to deal far more harshly with people like Jamie Dimon, who should do some jail-time as well as Bernie. There are too many “slaps on the wrists” for these guys. And they consider fines, whether remedial or punitive as the cost of doing business. It is completely unfair to investors and is warping the system. People are seriously walking away from the market and looking for safety in gold and other commodities, although they too have a halo of corruption about them. If we don’t “fix” the market, given the other pressures on our currency (war debt, an inept Congress, corruption by personage for large corporations), we won’t have a market. China will own us. Bottom line, “harsh measures for hard times” are in order, and sooner better than later.
    Regards,
    Jerry.

  5. Jagmohan Khosla

    Smart, but funny, as are many of your posts. I read through the past entries over the past week, and I must say I think I’m smitten.