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Statement by Francisco Enriquez, U.S. Public Interest Research Group Tax and Budget Associate, in response to recent news reports that JPMorgan will most likely claim billions in tax deductions for settlements with federal authorities.
“Last week, reports emerged that a $13 billion proposed JPMorgan settlement, the largest single-company settlement in U.S. history, could be largely tax deductible — forcing taxpayers to pick up the tab for nearly $5 billion of the settlement.
“Unfortunately, this ‘wrongdoing tax break’ is far from rare. In fact, the corporate practice of taking a tax deduction for settlement payments made to federal agencies is ubiquitous.
“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. 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.
“In fact, according to the IRS, experience has shown ‘almost every defendant/taxpayer deducts the entire amount’ as a business expense unless doing so is explicitly forbidden in the settlement agreement.
“A 2005 Government Accountability Office released a study of 34 companies’ settlements worth more than $1 billion found that 20 companies deducted some or all of their payment. Due to the finding, the GAO recommended that federal agencies develop clear policies and provide the IRS with the necessary information to address the tax deductibility of settlement payments. However, most federal agencies still don’t make it a standard practice to address the tax deductibility of settlement payments.
“Agencies must explicitly prohibit such write-offs, as the SEC did with Goldman Sachs in 2010 and the EPA and State Department typically do.”
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.”
See U.S. PIRG’s recent commentary in the Huffington Post for more information about how JPMorgan Chase could take advantage of the settlement loophole in other pending cases.
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