In an effort to protect taxpayers, hold corporate wrongdoers accountable, and deter future fraud and abuse, U.S. Senators Jack Reed (D-RI) and Chuck Grassley (R-Iowa) are introducing bipartisan legislation today to rescind tax write-offs for illegal corporate behavior. The Government Settlement Transparency & Reform Act would close a loophole that has allowed some corporations to reap tax benefits from payments made to resolve allegations of illegal conduct.
Corporations accused of illegal activity routinely settle legal disputes with the government out of court because it allows both the company and the government to avoid the time, expense, and uncertainty of going to trial. A 2015 study by U.S. Public Interest Research Group (PIRG) showed that the largest corporate settlements over a single three-year period totaled nearly $80 billion, and corporations could claim business deductions for at least $48 billion of that amount. Currently, there is no consistent, transparent way to track how these settlements can and will be treated by businesses for tax purposes.
Federal law prohibits companies from deducting public fines and penalties from their taxable income. But under current law, companies may often write off any portion of a settlement that is not paid directly to the government as a penalty or fine for violation of the law. This allows some companies to lower their tax bills by claiming settlement payments to non-federal entities as tax deductible business expenses.
The Reed-Grassley bill would amend the tax code to require the government and the settling party to reach clear agreements on how settlement payments should be treated for tax purposes. It also clarifies which settlement payments are punitive, and therefore non-deductible. It increases transparency by requiring the government to file a return at the time of settlement that accurately states the tax treatment of amounts to be paid by offending businesses. Last Congress, it was estimated that this legislation would raise $218 million in revenue over a ten-year budget window.
“There shouldn’t be a tax write-off for corporate wrong doing. This bipartisan bill would close the so-called “settlement loophole” that currently allows bad corporate actors to write off billions in fines. Companies that break the law shouldn’t get a tax break, they should be held accountable. The law needs to change to ensure that taxpayers aren’t subsidizing corporate misdeeds,” said Reed. “Even as punitive settlements grow in size, the punishment is being diluted in the form of tax savings for the wrong doer. If the status quo continues it means taxpayers are being asked to subsidize more corporate wrong doing and that is unacceptable.”
“A penalty should be meaningful or it won’t have the deterrent effect it’s supposed to have,” Grassley said. “Federal agencies too often don’t consider the tax implications, but you can be sure the company does. The government should understand this. The public should be accurately informed of the real penalty even when taxes are considered. This bill will ensure that government agencies think of the tax consequences in settlements going forward and increase transparency for the public.”
Summary: The Government Settlement Transparency & Reform Act
• Closes tax loophole that allows tax write-offs for corporate violations.
• Denies tax deductions for certain fines, penalties, and other amounts related to a violation or investigation or inquiry into the potential violation of any law.
• Exempts amounts paid by corporations in the form of restitution for damages caused by the violation of any law. Also requires the government to clearly stipulate the tax treatment of settlement agreements.