Addison Pierce

In December of 2009, Attorney General Eric Holder announced a precedent-setting $335 million settlement with Bank of America.[1]  The deal settled claims that Countywide Financial, acquired by Bank of America, charged black and Hispanic borrowers higher mortgage fees and steered them into risker loans.[2]  The Obama administration, among others, applauded the efforts by the Department of Justice (DOJ) in reaching the largest-ever settlement in a fair-lending claim.[3]  While the settlement and press conference sent a clear message to the lending community, it also produced an interesting byproduct; a $117 million tax savings for the wrongdoer.[4]  While the disconnect went unremedied back then, as JPMorgan Chase & Company (“JPMorgan”) and the DOJ continue to negotiate the details of a $13 billion settlement,[5] there has been a renewed call to address the provision in the tax code that allows corporation to write off portions of government settlements.[6]

On November 5, 2013, U.S. Senators Jack Reed (D-RI) and Chuck Grassley (R-IA) introduced Senate Bill 1654.[7]  Cited as the Government Settlement Transparency and Reform Act, the bill is an attempt “[t]o amend the Internal Revenue Code of 1986 to deny the tax deduction for corporate regulatory violations.”[8]  To that end, the bill requires federal agencies to specify in settlement agreements the taxable nature of any fines assessed.[9]  Currently, only the Securities and Exchange Commission has a policy of stating in its settlements that penalty payments are not deductible.[10]  Reed and Grassley argue that their bill is necessary for fines to produce the deterrent effect currently missing from many government settlements.[11]

The provision of the tax code to be amended is Section 162, under which businesses have been able to deduct as a business expense settlement payments to the federal government that are not classified as punitive in nature.[12]  Section 162 states, “[i]n general [t]here shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.”[13]  While limited in a multitude of ways, relevant here is subsection (f), fines and penalties, which states, “No deduction shall be allowed . . . for any fine or similar penalty paid to a government for the violation of any law.”[14]  While the language seems to preclude deductibility of government settlements, the agreements do not always indicate such.

Under the current code, Wells Fargo was eligible for a deduction of a portion of its $175 million settlement with the DOJ for similar treatment of Black and Hispanic customers as charged against Bank of America.[15]  Capital One Bank was eligible for a tax deduction of a portion of its $210 million settlement with the Office of the Comptroller of Currency over allegations by the Consumer Financial Protection Bureau that Capital One Bank employed deceptive credit card practices.[16]  American Express was eligible for a deduction of a portion of its $112.5 million settlement with the FDIC.[17]  In each of these cases, the terms of the settlement did not bring the payments within the non-excludable section of Section 162(f) as the settlement was not paid to the government for a violation of the law; rather it was an uncategorized settlement payment. In other cases, the DOJ has reached settlements with more specificity.  In its settlement with U.S. Bancorp for rigging the London Interbank Offered Rate, the DOJ included language that clearly defined the $500 million damages as a punitive penalty.[18]  This being the exception rather than the rule, Reed and Grassley are attempting to address settlement deductibility before JPMorgan and the DOJ reach a final settlement.

The crux of Reed and Grassley’s argument is that “[i]f a company is paying thousands, millions, or even billions in fines, it shouldn’t save money for those same misdeeds, it should be held accountable.  The law needs to change to ensure the punishment fits the crime.”[19]  The issue, however, is that the proposed change to the law will not increase accountability, nor will it ensure that the punishment fits the crime.

The proposed bill would amend subsection (f) of Section 162 to “deny tax deductions for certain fines, penalties, and other amounts related to a violation or investigation or inquiry into the potential violation of any law.”[20]  The amended subsection would also “require[] the government to stipulate the tax treatment of the settlement agreement[s].”[21]  There can be no doubt that this change would increase the transparency of such settlements, but from a material standpoint, little else would change.  If passed, this law would likely have one of two effects: (1) smaller settlements, or (2) fewer settlements.

Businesses do not approach taxes with the same wait-and-see-what-I-owe approach as some individual taxpayers.  The idea that simply making settlements non-deductible would make them more exacting on bottom lines implies an unstainable belief that businesses do not account for tax implications when negotiating settlements.  Today, if hypothetical Company A settles with the DOJ for $100 million of which $35 million can be realized in tax savings, the amendment to the tax code would likely produce a settlement for $65 million with no tax savings.  The government nets the same amount and the company losses the same, or is punished on the same level of severity.  For the two at the bargaining table, nothing changes.  Without the tax-chip in its pocket, the government is likely to post smaller monetary victories while netting the same amounts.

Assuming, arguendo, that Reed and Grassley are right, that this will create more exacting fines, settlements would likely be fewer and further between.  It would be implausible to assume that, all things being equal, JPMorgan would be as willing to settle for $13 billion as they would for $8.5 billion, the current after tax liability of $13 billion assuming a full thirty-five percent tax savings.  Returning to the Wells Fargo, Capital One Bank, and American Express examples above, fines tens of millions of dollars higher would likely result in increased litigation.  The millions the corporations are currently savings in taxes would be sooner used in the courtroom than written off.

Grassley is correct in arguing that “[a] penalty should be meaningful or it won’t have the deterrent effect it’s supposed to have.”[22]  He is also correct that “this bill would make deductibility clear going forward.”[23]  Where he and Reed are incorrect, however, is in the notion that this bill, while producing the desired clarity, would produce anything more.


[1] Brady Dennis, Bank of America to pay $335M to settle claims of unfair Countrywide loans, Wash. Post (Dec. 21, 2011),

[2]See Press Release, Dep’t of Justice, Justice Department Reaches $335 Million Settlement to Resolve Allegations of Lending Discrimination by Countrywide Financial Corporation (Dec. 21, 2011), available at

[3] See Dennis, supra note 1.

[4] See id.

[5] Devlin Barrett, J.P.Morgan Talks With Justice Department Gain Momentum, Wall St. J. (Nov. 4 2013, 9:58 PM),

[6] Danielle Douglas, Senate Bill targets corporations that deduct settlement payments, Wash. Post (Nov. 6, 2013),

[7] S. 1654, 113th Cong. (2013).

[8] Id.

[9] Id.

[10] See Douglas, supra note 6.

[11] Press Release, The Office of U.S. Senator Jack Reed, Reed-Grassley: Fines and Penalties For Wrongdoing Should Not be Tax Deductible (Nov. 6, 2013) [hereinafter Office of U.S. Senator Jack Reed], available at

[12] See 26 U.S.C. § 162(a) (2012),.

[13] Id.

[14] Id. § 162(f).

[15] Press Release, Dep’t of Justice, Justice Department Reaches Settlement with Wells Fargo Resulting in More Than $175 Million in Relief for Homeowners to Resolve Fair Lending Claims (Jul. 12, 2012), available at

[16] Treas. Order 2012-152, (2012) (Jul. 17, 2012), available at

[17] Federal Deposit Ins. Corp., Joint Consent Agreement In the Matter of American Express, (Oct. 1, 2012), available at

[18] See Douglas, supra note 6.

[19] See Office of U.S. Senator Jack Reed, supra note 11.

[20] See id.

[21] See S. 1654, supra note 5.

[22] See Office of U.S. Senator Jack Reed, supra note 11.

[23] See id.

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