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Washington, D.C. – A new factsheet from the U.S. Public Interest Research Group documents how health care and pharmaceutical corporations are able to write off the payments they make to settle charges of wrongdoing, such as fraud, on their taxes. As a specific example, last week, Endo Health agreed to a $193 million settlement for admittedly illegally marketing and promoting its drug Lidoderm for unapproved uses, thereby ripping off Medicare and other taxpayer-funded programs.
While federal law forbids companies from deducting public fines and penalties from their taxes, payments made as part of a settlement can be treated differently. According to the IRS, companies that cut deals with an agency to resolve charges through a legal settlement typically manage to deduct the penalties as a tax write-off unless specifically forbidden from doing so. In essence, companies are allowed to receive a tax break for their wrongdoing without the public ever knowing it.
“This fact sheet underscores why when government agencies reach settlements with companies that break the law, they should disclose the terms of those deals to the public,” said Sen. Elizabeth Warren (D-MA). “Anytime an agency decides that an enforcement action is needed, but it is not willing to go to court, that agency should be willing to disclose the key terms and conditions of the agreement. Increased transparency will shut down backroom deal-making and ensure that Congress, citizens and watchdog groups can hold regulatory agencies accountable for strong and effective enforcement that benefits the public interest.”
Last week, media outlets reported that Endo Health Solutions Inc. admitted that it intended that Lidoderm be used for unapproved indications and that it promoted the drug to health care providers for those unapproved indications. The company agreed to pay $193 million to resolve the civil and criminal charges. According to Daniel R. Levinson, Inspector General of the U.S. Department of Health and Human Services, "By marketing Lidoderm for uses not covered by federal health care programs, Endo profited at the expense of taxpayers and could have put patients at risk" (link).
However, the settlement agreement between Endo Health and federal authorities does not specify whether the company can claim the payment as a tax write-off, leaving open a window that is likely to leave ordinary taxpayers shouldering as much as $67.5 million in tax breaks for the company.
“Unfortunately, this tax break for wrongdoing is far from rare. In fact, the corporate practice of taking a tax deduction for settlement payments made to Health and Human Services, Department of Justice and other federal agencies is ubiquitous,” said Francisco Enriquez, Tax and Budget Associate for U.S. PIRG. “For every dollar that corporations claim in tax deductions for their wrongdoing, the public must pick up the tab in the form of cuts to public programs, higher taxes or higher government debt.”
The new factsheet provides an analysis with several examples of how health care and pharmaceutical corporations like Wyeth Pharmaceuticals, Amgen, and Fresenius Medical Holdings manage to secure massive tax deductions for misdeeds that victimize patients around the nation. The factsheet also provides a set of recommendations that detail how to close the egregious settlement loophole.
“Americans don’t deduct their parking tickets or library fines from their taxes. Corporations shouldn’t be able to deduct their settlements for wrongdoing, either,” said Enriquez.
The factsheet release comes on the heels of two bipartisan Senate bills, the Government Settlement Transparency and Reform Act (S. 1654) and the Truth in Settlements Act (S. 1898) that, together, go a long way towards both restricting the ability of corporations to negotiate tax deductible settlements behind closed doors. Just last week,
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.
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