Goldman Sachs Sees Silver Lining in $5 Billion Mortgage Settlement

Yesterday's agreement in principle struck between Goldman Sachs and federal regulators to settle allegations of the bank's misconduct in connection with the mortgage crisis includes a $936.25 million tax windfall for the bank.

"Goldman is rightfully paying the price for its alleged role in marketing and selling soured mortgage securities, but the price should come from the bank's bottom line--not the taxpayer's," said Michelle Surka, program associate with U.S. Public Interest Research Group.

The proposed deal includes a substantial $2.385 civil monetary penalty, an $875 million cash payment, and $1.8 billion in consumer relief. The civil monetary penalty is non-deductible as per the tax code, but the remaining $2.675 billion is entirely tax deductible for the bank as an ordinary business expense.

By law, fines and penalties cannot be treated as regular business expenses, and therefore are not tax deductible. The cash payment and consumer relief portions of the payment, however, are not specifically designated as penalties and can therefore be deducted from Goldman's taxes. The bank reported that the settlement would reduce its earnings in this period by roughly $1.5 billion on an after-tax basis.

The foregone tax revenue must ultimately be paid for by ordinary taxpayers in the form of higher individual taxes, program cuts, and more national debt. Government agencies could prevent this type of tax write off for corporations by explicitly denying them even for consumer relief payments.

The bipartisan Truth in Settlements Act (S.1109) was unanimously voted through Senate in September. The legislation, which has a bipartisan counterpart in the House, would require federal agencies to disclose the tax deductibility of future settlements and would require corporations to disclose when they deduct those settlements. Such measures would protect taxpayers and allow for greater public scrutiny of settlement agreements.

You can also read U.S. PIRG's reports on tax write-offs in settlements here: "Settling for a Lack of Accountability"