Wednesday, January 2, 2013
BP’s recent $4.5 billion legal settlement with the Justice Department for its misdeeds in the Gulf oil spill was historic for being the largest ever criminal settlement. But it was historic for another reason as well—none of it is allowed to be tax deductible. Unfortunately, too many settlements for wrongdoing end up as tax deductions.
Corporations accused of wrongdoing commonly settle legal disputes with government regulators out of court. Doing so allows both the company and the government to avoid going to trial and the agency gets to appear as if it is teaching the company a lesson for its misdeeds. However, very often the corporations deduct the costs of the settlement on their taxes as an ordinary business expense, shifting a significant portion of the burden onto ordinary taxpayers to pick up the tab. ...
Taxpayers should not subsidize BP’s recklessness and deception in the Gulf, big banks’ costly tampering with interest rates in the Libor scandal, or other wrongdoing.
The law clearly states that punitive penalties and fines issued by government agencies are not tax-deductible, but agencies that negotiate settlements all too rarely make clear what portion of a settlement should be regarded as punitive. Corporate tax lawyers can take advantage of this ambiguity by acting as if none of the settlement was meant to be punishment for misdeeds. The IRS is ill prepared to challenge these claims, and taxpayers end up holding the bag.
To help ensure that corporate wrongdoing is not publicly subsidized and that taxpayers are not saddled with the burden, U.S. PIRG offers the following policy recommendations that could save billions of dollars each year.