While U.S. corporations paid $80 billion in out of court settlements to resolve federal charges of wrongdoing, they were able to claim more than half of that amount as tax deductions. This is based on a report released by the U.S. Public Interest Research Group (U.S. PIRG), a non-profit advocacy group.
The group found in total that the corporations were allowed to claim $48 million as tax write-offs.
For the study, U.S. PIRG researched publicly available out-of-court settlements from 2012 to 2014 that involved the Justice Department, the SEC, the Department of Health and Human Services, the Environmental Protection Agency and the Consumer Financial Protection Bureau.
They found that the out of court settlements resulted in a $17 billion loss in tax revenue to the government, more than collected by the Internal Revenue Service each year from estate taxes.
One case the group cited was BP claiming a $10 billion tax credit from the $37.2 billion it agreed to pay for the cleanup costs arising from the Deepwater Horizon spill.
U.S. PIRG says under current laws there is nothing that can be done to stop the practice. The group’s tax and budget program director Michelle Surka says the only thing that can be done is change the federal tax code, which allows companies to classify out of court civil settlements as tax-deductible.
“The public deserves transparency and accountability,” she says, adding big settlement announcements that “fail to disclose how much of the payment is tax-deductible, diminish the deterrence value for companies”.
“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,” says Surka.
Democratic Senator of Massachusetts Elizabeth Warren and Republican Senator of Oklahoma James Lankford agree with Surka. In September they introduced the Truth in Settlements Bill, passed unanimously by the Senate, which requires more disclosure about settlements with federal enforcement agencies. The bill has yet to be taken up by Congress.
However, experts doubt there will be changes to the tax code. Lisa B. Petkun, a partner at the Philadelphia law firm Pepper Hamilton, says regulators do not have a strong motive to stop the practice because the tax write-offs are one way to encourage companies to at least negotiate.
“It’s a powerful incentive for companies,” she says.“And to the extent that it’s a sweetened deal by being deductible, it’s a carrot for regulators.”
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