[Congressional Record Volume 149, Number 62 (Tuesday, April 29, 2003)]
[Senate]
[Pages S5487-S5488]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. BAUCUS (for himself, Mr. Grassley, and Mr. McCain):
  S. 936. A bill to amend the Internal Revenue Code of 1986 to deny any 
deduction for certain fines, penalties, and other amounts; to the 
Committee on Finance.
  Mr. BAUCUS. Mr. President, today, we are introducing the ``Government 
Settlement Transparency Act of 2003.'' Over the past several months, we 
have become increasingly concerned about the approval of various 
settlements that allow penalty payments made to the government in 
settlement of a violation or potential violation of the law to be tax 
deductible. This payment structure shifts the tax burden from the 
wrongdoer onto the backs of the American people. This is unacceptable.
  The issue of tax deductibility is particularly relevant in the 
settlement of various SEC investigations into violations or potential 
violations of the securities laws. The corporate meltdown of the past 
two years has caused investors to lose confidence in the stock market. 
To address investors' loss of faith, Congress passed the Sarbanes-Oxley 
Act last July. However, Sarbanes-Oxley begins to address only part of 
the corporate reform problem, as it applies solely to future corporate 
activity. To more fully restore confidence in the markets, America's 
State and Federal regulators are also working to hold accountable the 
corporate executives and others in corporate America responsible for 
damaging investor confidence. With these efforts to achieve greater 
accountability in the business community and ensure the integrity of 
our financial markets, it is important that the rules governing the 
appropriate tax treatment of settlements be clear and adhered to by 
taxpayers.
  Section 162(f) of the Internal Revenue Code provides that no 
deduction is allowed as a trade or business expense under section 
162(a) for the payment of a fine or penalty to a government for 
violation of any law. The enactment of section 162(f) in 1969 codified 
existing case law that denied the deductibility of fines and penalties 
as ordinary and necessary business expenses on the grounds that 
``allowance of the deduction would frustrate sharply defined national 
or state policies proscribing the particular types of conduct evidenced 
by some governmental declaration thereof.'' Treasury regulations 
provide that fine or penalty includes an amount paid in settlement of 
the taxpayer's actual or potential liability for a fine or penalty.
  The legislation introduced today modifies the rules regarding the 
determination of whether payments are nondeductible payments of fines 
of penalties under section 162(f). In particular, the bill generally 
provides that amounts paid or incurred, whether by suit, agreement, or 
otherwise to, or at the direction of, a government in relation to the 
violation of any law or the investigation or inquiry into the potential 
violation of any law are nondeductible. The bill applies to deny a 
deduction for any payment, including those where there is no admission 
of guilt or liability and those made for the purpose of avoiding 
further investigation or litigation.
  An exception applies to payments that the taxpayer establishes are 
restitution. It is intended that a payment will be treated as 
restitution only if the payment is required to be paid to the specific 
persons, or in relation to the specific property, actually harmed by 
the conduct of the taxpayer that resulted in the payment. Thus, a 
payment to or with respect to a class broader than the specific persons 
or property that were actually harmed, for example, to class including 
similarly situated persons or property, does

[[Page S5488]]

not qualify as restitution. Restitution is limited to the amount that 
bears a substantial quantitative relationship to the harm caused by the 
past conduct or actions of the taxpayer that resulted in the payment in 
question. If the party harmed is a government, then restitution 
includes payment to such harmed government, provided the payment bears 
a substantial quantitative relationship to the harm. However, 
restitution does not include reimbursement of government investigative 
or litigation costs, or do payments to whistleblowers.
  The bill would be effective for amounts paid or incurred on or after 
April 28th, 2003, except that it would not apply to amounts paid or 
incurred under any binding order or agreement entered into before such 
date.
  We ask unanimous consent that the text of the bill be printed in the 
Record.
  There being no objection, the bill was ordered to be printed in the 
Record, as follows:

                                 S. 936

       Be it enacted by the Senate and House of Representatives of 
     the United States of America in Congress assembled,

     SECTION 1. SHORT TITLE.

       This Act may be cited as the ``Government Settlement 
     Transparency Act of 2003''.

     SEC. 2. DENIAL OF DEDUCTION FOR CERTAIN FINES, PENALTIES, AND 
                   OTHER AMOUNTS.

       (a) In General.--Subsection (f) of section 162 of the 
     Internal Revenue Code of 1986 (relating to trade or business 
     expenses) is amended to read as follows:
       ``(f) Fines, Penalties, and Other Amounts.--
       ``(1) In general.--Except as provided in paragraph (2), no 
     deduction otherwise allowable shall be allowed under this 
     chapter for any amount paid or incurred (whether by suit, 
     agreement, or otherwise) to, or at the direction of, a 
     government in relation to the violation of any law or the 
     investigation or inquiry into the potential violation of any 
     law.
       ``(2) Exception for amounts constituting restitution.--
     Paragraph (1) shall not apply to any amount which the 
     taxpayer establishes constitutes restitution for damage or 
     harm caused by the violation of any law or the potential 
     violation of any law. This paragraph shall not apply to any 
     amount paid or incurred as reimbursement to the government 
     for the costs of any investigation or litigation.
       ``(3) Treatment of certain nongovernmental regulatory 
     entities.--For purposes of paragraph (1), amounts paid or 
     incurred to, or at the direction of, the following 
     nongovernmental entities shall be treated as amounts paid or 
     incurred to, or at the direction of, a government:
       ``(A) Any nongovernmental entity which exercises self-
     regulatory powers (including imposing sanctions) in 
     connection with a qualified board or exchange (as defined in 
     section 1256(g)(7)).
       ``(B) To the extent provided in regulations, any 
     nongovernmental entity which exercises self-regulatory powers 
     (including imposing sanctions) as part of performing an 
     essential governmental function.''.
       (b) Effective Date.--The amendment made by this section 
     shall apply to amounts paid or incurred after April 27, 2003, 
     except that such amendment shall not apply to amounts paid or 
     incurred under any binding order or agreement entered into on 
     or before April 27, 2003. Such exception shall not apply to 
     an order or agreement requiring court approval unless the 
     approval was obtained on or before April 27, 2003.
                                 ______