In an effort to protect taxpayers, hold corporate wrongdoers accountable,
and deter future fraud, Senators Jack Reed (D-RI) and Charles Grassley (R-IA)
introduced legislation to rescind tax deductions under the federal tax code for
payments made by companies to remedy illegal corporate behavior. The
bipartisan Government Settlement Transparency & Reform Act, S.
1654, would close a loophole that has allowed some corporations to reap tax
benefits from payments made at government direction stemming from settling
misdeeds. Senator Reed is a senior member of the Banking Committee; and Senator
Grassley is the Ranking Member on the Judiciary Committee.
Federal law currently prohibits companies from deducting public fines
and penalties from their taxable income, but 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. This allows
some companies to lower their tax bill by claiming settlement payments to
non-federal entities as tax deductible business expenses.
The Reed-Grassley Act would require the government and the settling
party to reach pre-filing agreements on how the settlement payments should be
treated for tax purposes. The legislation clarifies the rules about what
settlement payments are punitive and therefore non-deductible; and 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.
More specifically, S. 1654 would amend Section 162(f) of the
federal tax code to deny tax deductions for certain fines, penalties, and other
amounts related to a violation or investigation or inquiry into the potential
violation of any law. Amounts paid by corporations, which constitute
restitution for damage caused by the violation of any law are exempted and
remain deductible. This section requires that nongovernmental entities
which exercise self-regulatory powers be treated as government entities for
purposes of disallowing deductions under the section. The bill also requires
the government o stipulate the tax treatment of the settlement agreement.