Victory for Taxpayers and Consumers as Justice Dept. Denies Toyota $1.2 Billion Write-Off in Criminal Probe Settlement

Today, the Justice Department acted in the best interests of taxpayers and consumers, by denying Toyota a hidden $420 million tax benefit on its settlement for misleading consumers about dangerous car malfunctions. One line of text in the settlement made the difference: "Toyota agrees that it will not file a claim, assert, or apply for a tax deduction or tax credit."

The Justice Department often fails to include such language and more typically does not disclose to the public the terms of its settlement deals. The IRS has found that unless agencies specifically prohibit it, companies typically write off these entire settlements as tax deductions. By law, fines or penalties are not supposed to be tax-deductible, but settlements typically get deducted unless agencies specifically forbid it. A 2005 GAO report recommended that agencies institute clear rules around the tax treatment of settlements, but the Department of Justice has never indicated that it has done so.

"The Justice Department today protected taxpayers along with protecting Americans out on the roads," said Phineas Baxandall, a Senior Analyst at the U.S. Public Interest Research Group. "These are real dollars this time, not just numbers for the press release," he added.

Attorney General Eric Holder said today that the carmaker "intentionally concealed information and misled the public" about unintended acceleration of Toyota cars that have been related to accidents and deaths. The company initially denied that it knew about a defect, but a subsequent F.B.I. investigation revealed internal company documents in which the company discussed it knew about problems.

In October a jury in Oklahoma awarded $3 million as the result of a crash that killed one woman and injured another, finding that the company had acted with "reckless disregard" for problems reported to the company.

Toyota posted a $5.2 billion profit in its last quarter alone, according to the AP. If the company had been allowed to deduct today's settlement, then the tax windfall - assuming the statutory 35 percent rate on reported profits - would likely have reached $420 million.

"The DOJ did well by the public today is posting its settlement and preventing hidden tax deductions from subsidizing Toyota's misdeeds. Transparency and protection against back-door write offs should be standard policy, but unfortunately it isn't."

Congress has begun to take notice of the "settlement loophole" and the lack of transparency in settlements. The bipartisan Truth in Settlements Act (S. 1898 - fact sheet) was introduced in January. A separate bipartisan bill that would restrict write offs on settlements (S. 1654) was introduced in November and has a House counterpart (HR 3445).

You can read U.S. PIRG's research 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 has created a fact sheet on the settlement loophole, and separate factsheets on settlement write offs related to: Wall Street scandals, consumer rip offs, and health care scams.

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