We have written in previous issues about how corporate wrongdoers take advantage of taxpayers by writing off settlement payments. But the $2.6 billion settlement reached by the U.S. Department of Justice with JPMorgan Chase & Co. contained provisions to prevent the bank from taking a tax deduction on the payments. This was a victory for both Congress and U.S. taxpayers. In most settlements of this sort the corporate wrongdoer writes off as a tax deduction the amounts paid under the settlement. But it was reported that other agencies, based on past cases, are unlikely to insist on the tax issue during future settlement negotiations. That flies in the face of the efforts by some lawmakers who are trying to make the process more transparent. When JPMorgan agreed to pay for its wrongdoing relating to Bernard L. Madoff’s $65 billion Ponzi scheme, the Justice Department negotiated into the deal a rare clause that prohibited the corporation from deducting those costs from its taxable income.
In many cases regulators inflate the size of settlements by failing to tell the public about tax deductions corporations can take to offset costs. They also are prone to include credits for conducting routine activities as part of the total settlement amount. U.S. Senator Elizabeth Warren said in a statement:
Federal agencies are charged with holding companies and individuals accountable when they break the law, and their investigations regularly end in settlement agreements rather than public trials. All too often, the critical details of these agreements are hidden from the public.
In 2005, the Government Accountability Office (GAO) – the investigative arm of Congress – issued a report that said the Environmental Protection Agency, the Securities Exchange Commission, the Justice Department and the Department of Health and Human Services largely ignore the tax treatment of their settlements. The report stated:
Officials in the four agencies we surveyed said that they do not negotiate with settling companies about whether settlement amounts are tax-deductible. They said it was IRS’s role to determine deductibility.
In the JPMorgan settlement, the Justice Department avoided promising action by the IRS. Instead, they dictated in the settlement exactly how JPMorgan must act. The settlement specifically bans JPMorgan from claiming deductions on any of the money it pays to its victims. It’s really up to Congress to change the tax code so that corporate wrongdoers can’t continue to share their “pain” with U.S. taxpayers when settling cases. But the lawyers for the Justice Department should be commended for what was done in the JPMorgan case. Now it’s up to members of the U.S. House and Senate to step up to the plate and do their job on this issue.
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