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.”