Justice Department Settlements Last Month Could Leave Taxpayers Subsidizing $220 Million for Corporate Misdeeds

During the month-long period between July 30^th and August 30^th, eight corporations signed undisclosed settlements with the Justice Department totaling close to $630 million to head off potential criminal charges for wrongdoing. Unless these settlements forbid companies from writing off the payments as a tax deduction, taxpayers could end up shouldering up to $220 million in tax breaks as a result.

"Taxpayers shouldn't be forced to subsidize corporate wrongdoing," said Francisco Enriquez at the U.S. Public Interest Research Group, "Every dollar that companies write off must be paid for through cuts to public programs, higher taxes or more government debt."

Federal law forbids companies from deducting public fines and penalties from their taxes, but payments made as part of a settlement are treated differently. Companies that negotiate penalties through a legal settlement typically manage to deduct these penalties as a tax write-off unless their settlement agreement specifically forbids it.

The Justice Department does not make it a general practice to publicly disclose settlement agreements like the EPA does, nor does the Department of Justice have clear policies like the SEC doesfor addressing tax deductibility on a case by case basis. FOIA requests filed by U.S. PIRG for the Department of Justice settlement documents that might address the tax implications of those eight settlements have gone unanswered.

The eight settlements resolved potential legal action over a variety of activities harmful to the public such as money laundering, Medicare fraud, and housing discrimination.

The Justice Department negotiates billions of dollars in settlements every year, including the $634 million during the month-long period examined by U.S. PIRG. Between August 30 and September 30, the Justice Department signed a dozen such settlements. The three that were cosigned with the EPA were publicly posted and specifically not tax deductible, as is standard EPA practice. For the remaining eight cases, the Justice Department press releases failed to indicate whether the agency prevented the corporations from writing their settlement costs off as a tax break.

"The agency should follow the EPA's lead and disclose whether there are hidden tax benefits in these settlements," said Enriquez. "When corporations treat their settlement payments as an 'ordinary and necessary cost' of doing business and take them as a tax write-off, taxpayers are left to pick up the tab."

Between July 30^th and August 30^th, the Justice Department negotiated $634 million in undisclosed settlements with eight different corporations. Given the 35 percent corporate tax rate, the companies altogether could collect as much as $220 million in tax benefits if they write off the eight settlements that did not forbid such deductions.

The practice of companies deducting settlements has been the subject of ardent criticism in past years. Members of Congress from both parties, including Senators McCain and Grassley, have denounced the practice. In a 2005 study, the Government Accountability Office urged agencies to institute clear policies on the deductibility of settlements and provide the IRS with the information it needs to ensure that the Treasury does not unduly shoulder settlements costs. The issue has more recently gained prominence as a result of BP collecting nearly $10 billion in tax windfalls as a result of the Gulf spill.

"In its effort to protect against criminal activity, the Department of Justice has not made it clear if it is also protecting taxpayers," said Enriquez.

Details of the eight July 30^th through August 30^th Justice Department settlements can be found below, along with the three settlements that the Justice Department cosigned with the EPA:

You can read U.S. PIRG's report on the tax implications of legal settlements, "Subsidizing Bad Behavior: How Corporate Legal Settlements for Harming the Public Become Lucrative Tax Write-Offs."

U.S. PIRG's research and analysis of legal settlements has been featured in the New York Times, the Washington Post, and the Associated Press.