Statements on Introduced Bills and Joint Resolutionsby Senator Jack Reed
Posted on 2015-02-09
REED (for himself and Mr. Grassley):
S. 413. A bill to amend the Internal Revenue Code of 1986 to deny tax
deductions for corporate regulatory violations; to the Committee on
Mr. REED. Mr. President, today I am reintroducing, along with Senator Grassley, the Government Settlement Transparency and Reform Act. This bill aims to end the subsidization of illegal corporate behavior by taxpayers by closing a loophole that allows corporations to reap tax benefits from payments made to the government stemming from settling corporate misdeeds.
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. Under Federal law, money paid to settle corporate civil or criminal penalties is not deductible. But under the tax code, offending 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. Corporations exploit this provision by later characterizing settlement penalties as restitution and a tax-deductible business expense.
I think most would agree that, for example, a corporation should not come to an agreement with the government to pay $500 million in criminal or civil fines and then when they file their taxes count those very fines as a business expense and take a tax windfall. Corporations that do this are effectively using taxpayer dollars to subsidize their illegal behavior. In 2005, the Government Accountability Office found that of the 34 companies and $1 billion in settlements they examined, 20 companies took a tax deduction for some or all of the money it paid to the government. Those settlements were silent on whether that $1 billion to the government counted as penalties or restitution. According to GAO, in two of those settlements, company representatives said they made a mistake in deducting civil penalty payments totaling $1.9 million and said they would amend their tax returns.
To address these practices, the Reed-Grassley bill would amend 162(f) of the tax code and require the government and the settling party to reach pre-filing agreements on how the settlement payments should be treated for tax purposes. Our bill also clarifies the rules about what settlement payments are punitive and therefore non-deductible. Furthermore, it increases transparency by requiring the government to file a return at the time of settlement to accurately reflect the tax treatment of the amounts that will be paid by the offending party.
Last Congress it was estimated that over a ten-year budget window this legislation would raise $218 million in revenue.
With this legislation we can close this tax loophole that flies in the face of sensible and fair tax policy. The tax code should not be used to subsidize illegal activity by corporations. Indeed, when a fine is levied, that fine should not be construed as a legitimate business expense. Instead, it should be paid in full, with no tax deduction taken.
I want to thank Senator Grassley for working with me again on this legislation. He has long championed closing this loophole. I urge our colleagues to join us by cosponsoring this legislation and seeking its passage.
______ By Mrs. FEINSTEIN (for herself and Mrs. Boxer): S. 414. A bill to proide for conservation, enhanced recreation opportunities, and development of renewable energy in the California Desert Conservation Area, and for other purposes; to the Committee on Energy and Natural Resources.