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Yesterday Senator Tom Coburn (R-OK) published a guide to unjustified “giveaways” in the tax code. Included in the guide was a discussion and recommendation on the practice of corporations deducting the settlement payments they make in order to resolve accusations of wrongdoing against the public. He notes that the Department of Justice has the ability to render particular settlement payments nondeductible, but calls for legislation to disallow deductions for compensatory legal damages.
“Senator Coburn has identified some really senseless special-interest tax giveaways,” said Michelle Surka, a Tax and Budget Policy Associate with U.S. PIRG. “The loophole for deducting out-of-court settlements rewards those charged with harming the public,” she added.
Senator Coburn is a co-sponsor of the Truth in Settlements Act, a bipartisan bill that has passed the Senate Committee on Homeland Security and Governmental Affairs. A bipartisan companion bill was also introduced in the House.
The Senator states (page 78):
“Many corporations commonly deduct legal damages under Section 162. While Section 162(f) disallows deductions for “fines and penalties,” the deductions are allowed for other Committee on Homeland Security and Governmental Affairs forms of legal remedies paid. For instance, in November 2014, JPMorgan was forced to pay a $13 billion settlement, of which is composed a $2 billion nondeductible civil penalty, a deductible $4 billion consumer relief payment and a $7 billion portion that is partially deductible. Legal payments deemed as compensation are considered deductible according to the IRS and/or tax courts.
"Firms like JPMorgan are not alone. Exxon Mobile’s $1.1 billion Alaska oil spill settlement actually cost the company $524 million after taxes. In fact, a 2005 GAO report supports that such treatment is prevalent for businesses. In examining more than $1 billion in settlements paid by 34 companies, the report listed twenty companies that had claimed deductions for at least part of their payouts. The Department of Justice does have the ability to render the damages nondeductible, but a more systematic solution should be in place to determine deductibility.”
“We should urge Congress to act on Senator Coburn’s report and quickly push through the Truth in Settlements Act to require that agencies make clear when their settlements can be tax write offs. In the meantime, agencies like the Department of Justice should update their policies and insert language in settlements to deny tax deductions for corporate crimes,” said Surka.
You can 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.”
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