Bank Of America Corp (NYSE: BAC)’s Tax Break On $16 Billion Settlement

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By Mark Michaels on August 15, 2014 Company, Financial

Bank of America Corp (NYSE: BAC) is riding on the possibility of a $16 billion settlement with the United States government. Given the similar deals that other banks have struck with the government, the one with Bank of America will likely include a large portion that is tax deductible because it is considered a business expense.

The bank and the United States Department of Justice are in the process of negotiating the terms of a multi billion dollar settlement over bad mortgage bonds. This deal has not yet been finalized, but the result could be announced sometime next week.

Under the terms of similar deals signed between the United States Justice Department and large United States banks, large portions of the deals were marked as penalties, which cannot be written off as business expenses. However, as for the parts of their settlements that are not considered penalties or fines, banks can legally write those portions off as tax-exempt.

This means that Bank of America could write off billions of dollars in their potential settlement as tax deductible.

This policy has drawn criticism from those who do not think that banks should have a tax deduction for faults that many say have powered the worst economic crisis in the United States since the Great Depression.

A spokesperson from Bank of America refused to comment. A Department of Justice representative declined to comment as well.

It has not been disclosed how much of the settlement with Bank of America will be in a civil cash penalty, which would not be tax deductible. If the deal falls apart, the government will likely file a lawsuit against the bank.

If the deal does go through, this will be the largest civil deal between the United States government and a company. This deal would settle multiple state and federal civil disputes involving mortgage activities of Bank of America, Merril Lynch, and Countrywide Financial Corp.

Deductions Have Been Taken Already

A source familiar with the matter stated that approximately $9 billion of the settlement with Bank of America will be in two forms – a penalty payment to the government and a cash payment to federal agencies and states. The cash payments will be tax deductible, while the penalty payments will not be.

Bank of America is the nation’s second largest bank in terms of assets. It has already taken deductions by marking off and charging billions of dollars in mortgages that have gone bad and are the items in question of the civil disputes. Thus, the bank will not take additional tax deductions for the majority of the consumer relief part of the settlement, which is said to come out to about $7 billion. These consumer relief sections will be modifications and principal reductions for those who cannot pay back loans.

Rafferty Capital Markets analyst Richard Bove estimates the bank’s total deduction to come out to be between $400 million to $600 million.

Bank of America has taken enormous deductions from settlements before. In the first quarter of this year, the bank posted a deduction from a $9.5 billion settlement with the Federal Housing Finance Agency.

Lawmakers Seek Change

Outraged over companies that are receiving these tax reductions, lawmakers have made efforts to improve the transparency of these deductions or remove them completely.

In November of 2013, Democratic senator John Reed and Republican senator Chuck Grassley introduced the bill for the United States tax code to take back tax write offs for settlements regarding the illicit behavior of corporations.

Another bill, sponsored by Democratic senator Elizabeth Warren and Republican senator Tom Coburn, calls for government agencies to release information about settlements over violations of criminal or federal laws, including the amount that is not tax exempt. This bill passed the Senate Homeland Security and Governmental Affairs Committee last month. It is now up for debate in the Senate.

The tax analyst for the United States Public Interest Research Group stated that the just simply the government policy of allowing portions of the settlements to be tax exempt portrays the wrong message to the public. The amount of money in tax write offs for the companies must be made up for by the United States government in the form of higher taxes, funding cuts to programs, or increased national debt.

In other words, in the eyes of the public, they are the ones who pay for the errors of these companies.