Goldman could deduct $550M SEC settlement — but won’t

Goldman Sachs Group Inc. agreed to waive tax deductions it could have claimed after paying a $550 million penalty in a settlement with U.S. regulators, giving up as much as $187.5 million in savings.

In yesterday’s settlement with the U.S. Securities and Exchange Commission, the firm agreed “it shall not claim, assert or apply for a tax deduction” for any penalty amounts. Goldman Sachs will pay a $535 million civil penalty, which normally would be deductible, and give up $15 million in profits, which the firm likely can still deduct.

“It’s unusual, but not unheard of” for companies to forgo tax deductions when negotiating settlements, said Robert Willens, founder of Robert Willens LLC, a consulting firm that advises investors on tax and accounting rules. “It’s actually become a little more popular in recent years for the government to insist that no deduction be taken for any portion of the payment.”

In order to deduct the payments, Goldman Sachs would have had to argue that a portion were compensatory and would be paid to third parties rather than the government. Other companies have argued that position, said Ron Pearlman, a tax law professor at Georgetown University.

The settlement explicitly bars the company from claiming deductions “regardless of whether such penalty amounts, or any part thereof, are added to a distribution fund or otherwise used for the benefit of investors.”

In Goldman Sach’s case, Pearlman said, the company “likely concluded that it would not be good PR if it became known, as it undoubtedly would, that Goldman Sachs attempted to deduct the penalty.”

Giving up the tax deduction makes the penalty appear smaller than paying a larger penalty and retaining the deductions. Had Goldman Sachs agreed to a $1 billion fine and kept its federal and state deductions, the net outlay would have been about $600 million.

In the settlement, Goldman Sachs acknowledged that marketing materials for a 2007 deal at the center of the case contained “incomplete information.” The SEC’s suit filed in April accused the firm of defrauding investors in a mortgage- backed collateralized debt obligation by failing to tell them that hedge fund Paulson & Co., which was planning to bet against the deal, had helped design it.