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Friday’s $550 million settlement between the Federal Housing Finance Agency (FHFA) and HSBC North American Holdings Inc. can be treated as a tax write-off by the bank, shifting $192.5 million onto taxpayers. Because the FHFA did not specify that the settlement payment cannot be treated as a regular business expense, HSBC will be able to deduct the entirety of the $550 million payment.
“The FHFA has failed to protect taxpayers,” said Michelle Surka, program associate with the United States Public Interest Research Group. “Every dollar of lost revenue from HSBC’s write-off will be borne by ordinary Americans in the form of program cuts, higher taxes, or more national debt.”
The settlement resolves claims of HSBC violating federal and state securities laws in connection with false representation of mortgage-backed securities that contributed to the financial crisis in 2008.
By law, fines and penalties cannot be treated as regular business expenses, and therefore are not tax deductible. However, the FHFA does not designate the settlement payment as a “penalty,” instead calling it merely a “lump sum payment.” Even specified penalties sometimes get deducted as business expenses if corporations deem them to be “compensatory” or “restitutive” rather than punitive.
The settlement releases the bank from potential charges it would have faced in court. A September 29th trial was scheduled and HSBC had said it could have faced up to $1.6 billion in damages. The FHFA signed a similar settlement with Goldman Sachs last month, granting Sachs a similar tax windfall of $420 million.
“The door is open for HSBC to treat this settlement as a tax deductible expense, just another cost of doing business,” continued Surka. “The FHFA is continuing a practice in which part of the burden of these settlements is shifted back onto taxpayers.”
The bipartisan Truth in Settlements Act (S. 1898) passed through Senate committee without opposition in July. The legislation, which has a bipartisan counterpart in the House (H.R. 2434), 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 report on tax write-offs in settlements here: “Subsidizing Bad Behavior: How Corporate Legal Settlements for Harming the Public Become Lucrative Tax Write-Offs."
U.S. PIRG has created a fact sheet on Wall Street settlement tax deductions.
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