Investment bank Goldman Sachs has decided to forgo a tax deduction on the unprecedented $550 million penalty and disgorgement it agreed to pay last week to settle SEC charges.
The firm could have deducted as much as $187.5 million in taxes on the penalty, according to Bloomberg Businessweek. However, in the settlement, Goldman agreed that it shall not claim, assert, or apply for a tax deduction or tax credit with regard to any federal, state, or local tax for any penalty amounts that Defendant pays pursuant to the Final Judgment, regardless of whether such penalty amounts or any part thereof are added to a distribution fund or otherwise used for the benefit of investors.
Goldman also agreed not to seek reimbursement or indemnification from any source for the penalty, including from insurance companies.
In the settlement, Goldman acknowledged that the marketing materials for its ABACUS 2007-AC1 transaction contained incomplete information.
In particular, it was a mistake for the Goldman marketing materials to state that the reference portfolio was selected by ACA Management LLC without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paulson's economic interests were adverse to CDO investors. Goldman regrets that the marketing materials did not contain that disclosure, said the settlement.
In order to claim the deduction, the bank would need to be able to show that some of the amount would be compensatory and distributed to third parties, such as investors, through the SECs Fair Fund.
But in waiving the tax deduction, Goldman may succeed in avoiding at least some of the negative PR it would attract if it tried to claim the deduction, not to mention a likely challenge from the IRS that would keep the Abacus scandal in the news for at least another year.
Besides, for a bank the size of Goldman, a $187.5 million tax deduction would be little more than a rounding error.