Senate bill targets corporations that deduct settlement payouts

JPMorgan Chase’s pending $13 billion settlement with the Justice Department has revived calls from some in Congress that corporations should be prevented from claiming tax deductions on such deals.

The government in the past two years has exacted a series of ­multimillion-dollar settlements from companies accused of preying on consumers or defrauding investors. But many of these firms are entitled to write off as much as 35 percent of their payout as an ordinary business expense.

Sens. Jack Reed (D-R.I.) and Charles E. Grassley (R-Iowa) introduced legislation Wednesday that changes part of the law that lets companies receive tax deductions on payments made to resolve allegations of illegal conduct.

Companies can 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. Agencies, however, rarely spell out whether the entire monetary figure should be regarded as punitive — something Reed and Grassley aim to change.

The Government Settlement Transparency and Reform Act would require federal agencies to specify the tax treatment of payments in every settlement. It would also clarify rules about what types of penalties are punitive.

Reps. Peter Welch (D-Vt.) and Luis V. Gutierrez (D.-Ill.) introduced similar legislation in the House last week.

“If a company is paying thousands, millions or even billions in fines, it shouldn’t save money for those same misdeeds — it should be held accountable,” Reed said. “The law needs to change to ensure the punishment fits the crime.”

The Reed-Grassley bill is the latest in a long line of legislative attempts to rein in settlement deductions. Grassley and Sen. Max Baucus (D-Mont.) tried unsuccessfully to deny deductions for punitive damages in 2003 and 2005. The issue was revisited in 2010 when Sen. Bill Nelson (D-Fla.) called for a congressional inquiry of oil giant BP for claiming a $10 billion tax deduction for cleaning up the Gulf of Mexico oil spill.

The prospect of JPMorgan receiving a tax break has stirred up the debate again. The bank has been in protracted talks with the Justice Department to dispose of multiple government investigations into its sale of bad mortgage securities. A person familiar with the negotiations has said that the $13 billion deal includes at least $4 billion in aid to struggling homeowners, which would make the bank eligible for a tax deduction.

“Ordinary citizens don’t deduct their parking tickets or library fines from their taxes,” said Francisco Enriquez, a tax and budget program associate at the U.S. Public Interest Research Group. “Corporations like JPMorgan shouldn’t be able to deduct their settlements for wrongdoing, either.”

On Monday, U.S. PIRG and Americans for Tax Fairness sent a petition signed by 160,000 people to the Justice Department, urging prosecutors to bar JPMorgan from claiming a tax deduction on any part of the pending settlement. The request arrived days after five senators, including Nelson and Elizabeth Warren (D-Mass.), sent a similar letter to Attorney General Eric H. Holder Jr.

Justice Department and JPMorgan officials declined to comment on the terms of the tentative settlement.

It is possible that federal prosecutors will explicitly forbid JPMorgan from deducting any of the settlement, as they have done in the past.

A U.S. PIRG study praised the Justice Department for prohibiting BP from writing off any of the $4 billion the oil company agreed to pay over the drilling disaster in the gulf. Prosecutors included language that clearly defined the damages as a punitive penalty, a measure they also took in a $500 million deal with UBS over the bank’s alleged rigging of the benchmark interest rate known as Libor.

There is no uniform approach for addressing tax deductions. The Securities and Exchange Commission in 2003 instituted a policy of stating in its settlements that penalty payments are not deductible, but no other agency consistently spells out its position on tax treatment, according to the U.S. PIRG study.

Tax policy experts say deductions serve as a vital incentive for firms to settle claims out of court and forgo lengthy litigation that winds up costing taxpayers. The Reed-Grassley bill takes that position into account by not calling for an outright abolition of deductions, instead seeking a clarification of tax treatment.

Danielle Douglas-Gabriel covers the banking industry for The Washington Post.
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