Last week, Marsh & McLennan Cos. agreed to pay $850 million to settle charges of fraud and anti-competitive practices stemming from an investigation by New York State Attorney General Eliot Spitzer. The world’s largest insurance broker stressed that none of the payment is a fine or penalty.

At the time, the company — which had already established a $232 million reserve in the third quarter of 2004 — announced that it would “take a pre-tax charge to fourth-quarter 2004 earnings of $618 million.”

That $850 million, however, might not represent the true cost to Marsh.

The Wall Street Journal reported that as much as the entire settlement may be tax deductible, precisely because the payment is restitution to the company’s clients rather than a fine or penalty. The Journal pointed out that although penalties and fines are generally not tax deductible, restitution or disgorgement of profits have been deductible expenses in prior settlements with state and federal regulators.

During the past four years, Marsh’s statutory tax has hovered around 35 percent, reported the newspaper, citing Morningstar analyst Justin Fuller. If the settlement is fully deductible, the company could write off nearly $300 million; even a partial deduction could reduce Marsh’s net settlement cost by hundreds of millions of dollars.

Howard Mills, acting superintendent of the New York State Insurance Department and a participant in the latter stages of the negotiations, told the Journal that he believes the settlement is deductible; a spokesman for Spitzer’s office noted that the tax code is outside the office’s jurisdiction.

“This restitution payment would seem to be deductible under current law,” said Timothy J. McCormally, executive director of Tax Executives Institute, reported the Journal. The settlement “appears to be tax deductible as it doesn’t represent a fine or penalty,” Vinay Saqi, an analyst who covers Marsh for Morgan Stanley, wrote in a research note last month, according to the paper.