Why are Large Corporations Allowed Tax Deductions for Violation Settlements?

Wednesday, April 02, 2014

When banks and other corporations get accused of breaking the law and wind up settling out of court, has the federal government really punished them … particularly if these lawbreakers are allowed to turn around and write off substantial portions of their penalties?


These million- and billion-dollar tax deductions have become quite common in an era that has also witnessed the Department of Justice avoiding prosecution of executives involved in the violations.


Instead, deals are cut that result in companies and financial institutions paying record-breaking fines, prosecutors like to point out.


But the sting of these penalties is not nearly so sharp if the perpetrators are able to deduct as much as one-third of the amount paid for violating the law.


Take JPMorgan Chase for example. It agreed to pay $13 billion to settle its toxic mortgages violations. But nearly $4 billion of this amount will be reclaimed through a tax deduction.


BP, which was responsible for the worst oil spill in U.S. history, received a $10 billion tax break after writing off its settlement related to the Deepwater Horizon disaster.


Members of Congress have decided to do something to address this situation, though they are not willing to eliminate the tax deductions for settlements.


Rather, legislation introduced in both the House and Senate would make such write-offs more transparent by requiring corporations and banks to disclose them to the public.


“This much needed legislation would compel transparency from both corporations and federal agencies,” Representative Matt Cartwright (D-Pennsylvania), coauthor of the Truth in Settlements Act of 2014 (pdf), said in a statement. “Government has an obligation to disclose information when it is pertinent to the public’s interest and well-being.  If an agency chooses to reach a settlement with an offender, then that agency must be willing to disclose the terms of the agreement or come up with a good reason for not doing so.  We must hold offenders accountable for their actions.”


The bill, as well as an identical one in the Senate, would require agencies to publish on their websites the amount and details of settlements over $1 million, including whether any portion can be deducted and what part of the total is comprised of “credits” for other business activities, according to the Corporate Crime Reporter.


In addition, corporations would have to tell the Securities and Exchange Commission if they have deducted settlements.


The change seems only right, says the U.S. Public Interest Research Group (U.S. PIRG), a consumer organization.


“Americans don’t deduct their parking tickets or library fines from their taxes. Corporations like JPMorgan or BP shouldn’t be able to deduct their settlements for wrongdoing, either,” Phineas Baxandall, senior policy analyst with U.S. PIRG, said in a press release.


The Senate bill (pdf) was introduced by Senators Elizabeth Warren (D- Massachusetts) and Tom Coburn (R-Oklahoma), while Tom Cole (R-Oklahoma) coauthored the House bill with Cartwright.


“With bipartisan support now in the House and Senate, there’s no excuse for this commonsense reform not to become law,” added Baxandall. “Settlement agreements are signed in the name of the American public and we should be able to see what’s in them.”

-Noel Brinkerhoff


To Learn More:

Tax Writeoffs for Corporate Criminals (Corporate Crime Reporter)

Truth in Settlements Act – Fact Sheet (U.S. Senator Elizabeth Warren) (pdf)

JP Morgan Chase's $13B Settlement -- and Whale-Sized Tax Deduction (by Robert Wood, Forbes)

No Tax Write-Offs for Health Care Fraud (U.S. Public Research Interest Group) (pdf)

Big Corporations Accused of Crimes Usually Pay Fines while Avoiding Jail Time (by Noel Brinkerhoff and Danny Biederman, AllGov)

Corporations Offset Fines and Penalties with Tax Write-Offs (by Matt Bewig, AllGov)


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