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Senators Float Bill to End Tax Write-Offs for Corporate Fines

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Sens. Jack Reed, D-R.I., and Chuck Grassley, R-Iowa, introduced bipartisan legislation Monday to rescind tax write-offs for illegal corporate behavior.

The Government Settlement Transparency & Reform Act, according to the senators, would close a loophole that has allowed some corporations to reap tax benefits from payments made to resolve allegations of illegal conduct.

The bill also:

  • 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.
  • Requires the government to clearly stipulate the tax treatment of settlement agreements.

The senators, both members of the Joint Committee on Taxation, note that 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), they said, 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,” the senators said.  

As the two explained, 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, and clarifies which settlement payments are punitive, and therefore non-deductible.

It would require 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 10-year budget window.

“There shouldn’t be a tax write-off for corporate wrongdoing. 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 wrongdoer. If the status quo continues it means taxpayers are being asked to subsidize more corporate wrongdoing and that is unacceptable.”

The two also released a bill (S.779) Friday to increase civil penalties under federal securities laws designed to strengthen the Securities and Exchange Commission’s ability to crack down on violations of securities laws. 

The Stronger Enforcement of Civil Penalties Act (SEC Penalties Act) of 2017 would update and strengthen the SEC’s civil penalties statute by increasing the statutory limits on civil monetary penalties, directly linking the size of these penalties to the scope of harm and associated investor losses, and substantially raising the financial stakes for repeat securities law violators. 

The goal of the bill is to create “meaningful penalties to serve as an effective deterrent to crack down on fraud.”

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