Tuesday, January 15, 2013
With multibillion-dollar mortgage settlements making headlines this year and last, the question has come to the fore again. Why should taxpayers subsidize corporations that are paying to right sometimes egregious wrongs? That is a particularly weighty question, given the urgent need for tax revenue to offset the ballooning federal budget deficit.
Under federal law, money paid to settle a company’s actual or potential liability for a civil or criminal penalty is not deductible. But, this being taxes, the issue is complicated. As Robert W. Wood, a tax lawyer, said in a 2009 Tax Notes article, “The tax deduction for business expenses is broad enough to include most settlements and judgments.”
In an interview last week, Mr. Wood, who is also the author of Taxation of Damage Awards and Settlement Payments, said the test for deductibility boils down to whether the payment is a penalty or is meant to be remedial. “I don’t know the specifics on these mortgage settlements,” he said, “but if any of the lenders are putting a bunch of money into a pot that goes to help people, yes, I would assume that everybody will deduct that.” ...
Phineas Baxandall, senior analyst for tax and budget policy at the United States Public Interest Research Group, a consumer-oriented nonprofit, and Ryan Pierannunzi, a tax and budget associate there, explored this issue in a report published last week. The report, titled Subsidizing Bad Behavior, details the history of the practice and suggests that government agencies should follow the SEC’s lead and disallow deductibility in settlements. Barring that, the authors said, regulators should disclose only the after-tax amounts of settlements, so that people understand how much money is really being paid.
(Hat Tip: Mike Talbert.)