Feds Lose Tens of Billions of Dollars a Year by Allowing Corporate Criminals to Deduct Settlement Amounts

The federal government loses tens of billions of dollars a year by allowing corporate criminals to deduct payments made to settle deferred and non prosecution agreements.

Corporate criminals cannot deduct criminal fines or penalties. But since the Justice Department shifted its practice more than ten years ago now from primarily corporate guilty pleas to deferred and non prosecution agreements, corporations generally don’t pay fines and penalties.

Not all federal agencies allow for this practice of allowing corporate defendants to deduct payments made to settle cases.

The Environmental Protection Agency (EPA), for one, generally does not.

“We know that the EPA has gotten good on this,” says Phineas Baxandall of the US PIRG Education Fund in Boston.

Baxandall has been campaigning on the issue for the past two years.

“The EPA has standard boilerplate language which forbids tax deductibility. The only exception to that is when the Justice Department is prosecuting those cases. Sometimes those cases can be deductible. The other exception is when the company will take some action to remedy pollution — that part of the settlement can still be deductible — it’s not covered by that boilerplate language. But generally, the EPA is very good on this issue.”

Not so good?

The Securities and Exchange Commission (SEC). Pretty bad? The Justice Department.

It doesn’t take legislation to prohibit tax deductibility of settlements — although legislation has been introduced in Congress. Any agency can, as a matter of policy, just not allow tax deductibility of settlements.

“There was no legislation to prompt the EPA to make this their standard language,” Baxandall said. “It could be the standard language at the SEC, the Justice Department, for every state Attorney General. It could just be the standard. And if it was the standard across the board, it would strengthen the public’s hand. Right now, these agencies have to expend leverage to get non tax deductibility into the agreements. If non tax deductibility were standard, they could get something else instead.”

“The standard procedure should be non deductibility,” he says. “These are payments in lieu of some other form of fine or penalty. This is something that the Obama administration could do with the stroke of a pen as an executive order. The Obama administration has been saying that it wants to find things it can do without Congress that would help the public. And this is exactly one of those things. Congress doesn’t have to be involved.”

How did Baxandall get involved with the issue?

“I read some news reports that BP had gained a $10 billion tax windfall through one of these settlements related to the oil spill in the Gulf of Mexico,” he said. “It would pay $32 billion for cleanup but would take a $10 billion tax credit. That struck me as fundamentally wrong.”

“There is a long standing law in the tax code that does not allow the deduction of a fine or a penalty. It’s one of these cases where corporations are just not like us little people.They don’t really ever pay a straight out fine or penalty. Instead, they have lawyers who negotiate settlements that have hidden extra benefits. Those announced settlement amounts end up being about a third less because they are tax deductible.”

“It’s a situation where it is in nobody’s interest — except for the public — to change the situation. Agencies get to stand up and announce settlement amounts that are larger than what the companies are going to pay when it’s all said and done.”

“The companies are okay with a public announcement that they are paying more than they actually are paying. Both parties at the table get to posture that they are doing more than they really are doing.”

Baxandall says that these settlements should all be made public.

“At a minimum, these settlements should be posted online,” he says. “But we also believe that the communications about these settlements should relate their real value. If a settlement is going to be deductible, they should calculate the after tax result.”

“They should make very clear in the press release if the value of the settlement includes credits for things like writing down home mortgages — or things the companies might be doing anyway.”

“Sometimes announcements of settlement amounts include past settlements that are wrapped into that amount. So, they are significantly smaller. The $13 billion JP Morgan settlement included past settlements.”

“There is a bi-partisan bill that has been introduced in Congress that would require all of those things. It would also require companies, when they make their SEC filings, to include information about deducting settlements in those filings.”

In the Senate, the original sponsors are Senators Elizabeth Warren (D-Massachusetts) and Tom Coburn (R-Oklahoma). In the House, the lead sponsors are Congressman Matt Cartwright (D-Pennsylvania) and Congressman Tom Cole (R-Oklahoma).

“There is a separate bill in the Senate and House that would restrict the deductibility,” Baxandall said. “So, this is beginning to become an issue both in Congress and in the public eye.”

And Baxandall’s campaign is delivering results on the ground.

“When we have made a huge public stink about a case, the Justice Department has done the right thing. In that $4.5 billion BP settlement, we had thousands of postcards and phone calls going into the Justice Department,” Baxandall says. “The denial of tax deductibility in that case could mean an extra $1.7 billion to the public instead of into BP’s coffers.”

“On the $13 billion JPMorgan settlement, six Senators wrote to the Justice Department, we delivered 160,000 postcards, and they at least partially addressed the deductibility. So, public pressure seems to make a difference.”

Last week, US PIRG released a poll that shows that public outrage has been building as federal agencies have allowed for tax deductibility for out-of-court settlements.

According to the poll, the public overwhelmingly disapproves of these write offs, and has a strong preference for federal agencies to be both more transparent and more restrictive of tax deductions for future settlements.

Substantial majorities across party lines would support reforms and greater transparency.

Americans express major concern with the fact that federal agencies are not required to disclose these settlements to the public (71% total concerns, 33% serious concerns) and that corporations are often allowed to write off these financial settlements as tax-deductible business expenses (75% total concerns, 43% serious concerns).

The public concerns cut across party lines, Baxandall says.

“It’s about the same among Democrats and Republicans,” he said. “These concerns are particularly strong in the Southeast — red state strongholds like Alabama and Texas.”

[For the complete q/a format transcript Interview with Phineas Baxandall, see 27 Corporate Crime Reporter 17(13), April 28, 2014, print edition only.]

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