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Statement by Francisco Enriquez, U.S. Public Interest Research Group Tax & Budget Associate, on the reported $2 billion settlement JPMorgan is reportedly close to reaching with regulators over allegations that it ignored signs of Bernard Madoff’s huge Ponzi scheme.
“It’s commendable that agencies seek to hold JPMorgan accountable for allegedly ignoring signs of the Ponzi scheme by which Bernard Madoff swindled investors across the nation. But regulators must also protect taxpayers against JPMorgan taking a massive tax windfall for its misbehavior.
“Unless regulators explicitly forbid it, taxpayers could end up shouldering $700 million of JPMorgan’s $2 billion settlement by writing off these payments on their taxes as an ordinary cost of doing business.
“Americans don’t deduct their parking tickets or library fines from their taxes. Corporations like JPMorgan shouldn’t be able to deduct their settlements for wrongdoing either.
“Once JPMorgan reaches an agreement with regulators, it will have paid $20 billion in the last 12 months to settle a wide array of criminal and civil charges. But, how many billions will taxpayers be on the hook for as a result of these settlements?
“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.
“Unfortunately, this ‘settlement loophole’ is far from rare. 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. It costs taxpayers many billions of dollars each year.
“Thankfully, Congress has begun to show bipartisan interest in addressing this outrage. Sens. Jack Reed (D-RI) and Chuck Grassley (R-IA) recently introduced the Government Settlement Transparency and Reform Act (S. 1654) that would restrict the tax deductibility of future corporate settlements.”
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.
See also U.S. PIRG’s fact sheet for more information about how companies like JPMorgan Chase take advantage of the settlement loophole.
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