A Big Loophole Lets Wall Street Banks Write Off Government Fines On Their Taxes

Following their roles in the housing collapse and financial crisis, some of Wall Street’s biggest banks faced fines from federal regulators reaching into the hundreds of millions of dollars. Now, a loophole in corporate tax law is allowing them — and other corporations that get penalized by Uncle Sam — to write off those fines as losses, letting them off the hook for millions of dollars in tax payments.

Fir example, Bank of America settled claims that it discriminated against African American and Latino mortgage borrowers for $335 million. The company will save more than a third of that — $117 million — on its tax bill, and other companies that have faced fines stand to benefit in similar fashion, the Washington Post reports:

Corporations can write off any portion of a settlement that is not paid directly to the government as a penalty or fine for violation of the law. A majority of the settlements that federal regulators announced in the past year include some form of restitution that is eligible for a tax deduction.

That means Wells Fargo could claim its $175 million fair-lending settlement with the Department of Justice as a deductible corporate expense. Or Capital One could write off a portion of the $210 million agreement it reached in July with the Consumer Financial Protection Bureau. And American Express can save millions on the $112.5 million settlement it negotiated last week.

Lawmakers have proposed legislation to limit or eliminate this deduction, but the bills floundered in Congress. Some tax policy experts told the Post that the deduction should continue to exist because “punitive and compensatory damages are essentially business expenses,” an argument that unlawful foreclosure practices, mortgage discrimination, and other violations perpetrated against consumers are merely the cost of doing business.


Other experts argue that instead of eliminating the deduction, regulatory agencies and the Internal Revenue Service should coordinate to levy larger settlement penalties. Consumer advocacy groups like the U.S. Public Interest Research Group, meanwhile, have called on the Dept. of Justice and other agencies to use their authority to prohibit companies from using the deduction following settlements.