Tax Deductions Blunt Impact of Large Corporate Settlements

Tax Deductions Blunt Impact of Large Corporate Settlements. Tax Deductions Blunt Impact of Large Corporate Settlements.

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Tax Deductions Blunt Impact of Large Corporate Settlements, Report Says




DECEMBER 3, 2015

Corporations continue to use big civil legal settlements with federal regulators as a way to deduct billions of dollars from their American tax bills, largely because the regulators fail to forbid the practice in the terms of the settlements.


BP’s pending $20.8 billion settlement with the Justice Department and other federal and state regulators related to the Deepwater Horizon oil spill in 2010 allows about $15.3 billion to be classified as a tax-deductible business expense, according to an analysis by the United States Public Interest Research Group, a nonprofit advocacy group.


Likewise, the Justice Department’s $25 billion mortgage settlement with Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial in 2012 — billed at the time as the largest consumer financial protection settlement in United States history — allowed $20 billion to be eligible as a deduction for those banks.


U.S. PIRG analyzed the 10 largest settlements by five federal regulators since 2012, six of them bank settlements in the aftermath of the financial crisis.


The report, to be released on Thursday, found that while corporations paid a collective $80 billion to resolve federal charges of wrongdoing, some $48 billion of that amount was eligible as a deduction.


The end result was a loss of $17 billion in tax revenue, more than the annual amount in estate taxes collected by the Internal Revenue Service, the group noted.



In BP’s case, the company had already written off $37.2 billion in cleanup costs arising from the Deepwater Horizon spill and claimed a $10 billion tax credit.


Short of changing the federal tax code, which allows companies to classify civil settlements, including restitution and other payments, that are not fines as tax-deductible, U.S. PIRG is urging agencies to disclose more details about their agreements.


“The public deserves transparency and accountability,” said Michelle Surka, U.S. PIRG’s tax and budget program director, in an interview.


Big settlement announcements that fail to disclose how much of the payment is tax-deductible diminish the deterrence value for companies, she added.


“Large legal settlement agreements often serve as an expeditious way for a corporation with strong legal muscle to negotiate its way out of a potentially larger fine or penalty without admitting or denying wrongdoing,” the report says.


A similar sentiment was voiced by Senator Elizabeth Warren, Democrat of Massachusetts, and Senator James Lankford, Republican of Oklahoma, in legislation they introduced this year, which passed the Senate unanimously in September. That measure, called the Truth in Settlements bill, would require more disclosure about settlements with enforcement agencies. The House has yet to take up the bill.


Regulators do not have a strong motive to prohibit the practice in settlements because the tax benefits are one way to bring parties to the negotiating table. “It’s a powerful incentive for companies,” said Lisa B. Petkun, a partner at Pepper Hamilton in Philadelphia. “And to the extent that it’s a sweetened deal by being deductible, it’s a carrot for regulators.”


With federal corporate taxes at about 35 percent and state taxes pushing that up to 40 percent in some cases, “you’re not going to get a better incentive than a tax incentive” to settle, said Diane Giordano, a tax partner at the accounting and advisory firm Marcum.


Policies are unevenly applied, U.S. PIRG found in its research. Only about 18 percent of the publicly announced settlements by the Department of Justice explicitly prohibited tax deductions on settlement payments, while 15 percent of cases resolved by the Securities and Exchange Commission had the prohibition, according to the report.


Companies have been willing to fight for years to preserve the deductions.


Fresenius Medical Care Holdings, a kidney dialysis services provider, settled Medicare civil and criminal fraud charges with federal regulators in 2000, agreeing to pay $486 million. It deducted the $385 million in civil claims and fought the government in court over the deduction, ultimately winning in 2013. It even received a $50 million tax refund, plus interest, U.S. PIRG found.


The I.R.S. said that unless enforcement agencies explicitly forbade it, corporations generally deducted settlements as a business expense.



The group’s report picks up from a 2005 study by the Government Accountability Office that found the tax-deduction eligibility was rarely addressed in agreements between regulators and corporations.


U.S. PIRG examined publicly available out-of-court settlements from 2012 to 2014 involving the Justice Department, the Environmental Protection Agency, the S.E.C., and the Department of Health and Human Services. It also looked at the Consumer Financial Protection Bureau, which was created in 2010 by the Dodd-Frank financial reform law.


None of the five agencies have publicly announced policies for the tax status of settlements, though the E.P.A. and the C.F.P.B. have acted consistently in making sure portions of their settlements were not tax-deductible, U.S. PIRG said.



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Tax Deductions Blunt Impact of Large Corporate Settlements

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