Marsh & McLennan Cos., which agreed to pay $850 million to settle charges of bid-rigging brought against it by New York regulators, may fork over a lot less than that amount, thanks to a tax deduction that could shave hundreds of millions of dollars from the headline figure, The Wall Street Journal reports.
Last October, New York Attorney General Eliot Spitzer sued the financial services giant's insurance brokerage unit for steering business toward insurers that paid it lucrative contingent commissions. The agreement between Spitzer's office and Marsh, the largest the Attorney General's office has struck with a single company, was reached on Jan. 31, after an intense negotiation period.
According to the agreement, Marsh cannot use insurance to foot the $850 million bill. The company, which did not admit any wrongdoing, had set aside $232 million to pay settlement costs and said it would take a $618 million charge against fourth-quarter earnings, which it will announce on March 1.
But the caveat that allows Marsh to claim a healthy tax break on the $850 million is that it is money allotted towards restitution. Penalties and fines are generally not tax-deductible, but restitution, or disgorgement of profits to clients, can often be claimed as a deductible business expense, according to tax experts.
The exact amount that can be deducted from taxes depends on the company's tax rate and the amount of settlement that qualifies for a deduction. With a 30% tax rate and three-quarters of the settlement qualifying for a deduction, for instance, Marsh could cut its tax bill by $191 million. Several firms that were embroiled in the Wall Street research scandal and the mutual fund scandals used similar tax strategies to reduce their headline settlements.