[Congressional Record Volume 157, Number 53 (Tuesday, April 12, 2011)]
[Senate]
[Page S2395]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. LEAHY (for himself and Mr. Whitehouse):
  S. 794. A bill to amend the Internal Revenue Code of 1986 to disallow 
any deduction for punitive damages, and for other purposes; to the 
Committee on Finance.
  Mr. LEAHY. Mr. President, today I am introducing legislation that 
will stop businesses from deducting costs that result from their 
misconduct as a cost of doing business under our tax laws. Under 
current law, a corporation or individual business owner may deduct the 
cost of a punitive damage award paid to a victim as an ``ordinary'' 
business expense. This is wrong. It undermines one of the primary 
deterrent functions of our civil justice system, and American taxpayers 
should not subsidize this misconduct.
  Punitive damage awards serve in part to correct dangerous or unfair 
practices. These awards are reserved for the most extreme and harmful 
misconduct. Our legal history contains prominent examples of corporate 
misconduct that resulted in the deaths of Americans, and by virtue of 
our civil justice system was not only punished, but led to broad 
changes to improve the safety and security of American consumers. The 
justice system has and will continue to encourage the positive changes 
that cannot be brought about by regulation alone. But our current tax 
laws work against the well-established role of the justice system as a 
backstop to health and safety regulation.
  One year ago, the Deepwater Horizon drilling rig exploded, killing 11 
Americans and leading to the worst oil spill in American history. Just 
over a year ago, an explosion in the Upper Big Branch Mine in West 
Virginia claimed the lives of 29 miners. In both of these cases, I 
expect that all Americans, and particularly the family members of the 
victims, would be shocked to learn that any punitive damages that may 
result from these events will amount to a tax break for the 
corporations responsible.
  I was disgusted to learn that Transocean, the owner of the Deepwater 
Horizon, recently announced that it was giving ``safety bonuses'' to 
its executives. Maybe that company believes that the American people 
have forgotten about this tragedy. I have met with the families of the 
11 men killed, and I will never forget them. The tax treatment that the 
responsible companies will receive if we do not act will just add 
insult to injury.
  Let us also not forget Exxon's misconduct in 1989. I have chaired 
several hearings on Exxon's misconduct, which led to an ecological and 
human disaster that affects Alaskans even today. A jury awarded $5 
billion in punitive damages against Exxon for its actions, which 
devastated an entire region, the livelihoods of its people, and 
destroyed a way of life. For more than a decade Exxon fought this 
measure of accountability all the way to the United States Supreme 
Court. A divided Supreme Court invented a novel rule and held that in 
maritime cases, punitive damage awards could not exceed twice the 
amount of compensatory damages. I support Senator Whitehouse's wise 
legislation to overturn that Supreme Court decision, but some in 
Congress do not want corporate accountability. If we cannot muster the 
votes to make corporations that engage in such extreme misconduct 
accountable, we need to at least stop subsidizing it through our tax 
laws.
  Like so many Americans, I am weary of the preferential treatment that 
large corporations obtain at virtually every turn. It is disheartening 
to hear reports about enormously profitable corporations paying lower 
income tax rates than middle class American workers by exploiting 
loopholes or sheltering profits in foreign countries. It is 
unconscionable that big oil companies continue to be subsidized by 
taxpayers to the tune of billions of dollars each year, especially when 
Americans are facing increasingly high gasoline prices. I share the 
frustration of so many Americans who are making great sacrifices, yet 
who are not seeing their sacrifices shared by the most powerful in our 
society. As we approach the national tax filing deadline, I expect most 
Americans would agree that this punitive damages tax deduction is not 
only bad tax policy, but offensive to our basic notions of justice and 
fair play.
  In his fiscal year 2012 budget recommendations, President Obama and 
his administration requested an end to this deduction in the tax code. 
The Congressional Budget Office has estimated that doing so will result 
in increased revenues of $315 million over 10 years. As we collectively 
work to reduce the Federal deficit, it is important to recognize that 
increasing revenues will play an important part in this effort; 
particularly when those revenues are lost to a policy that is without 
any defensible justification.
  I hope all Senators will join me to protect American taxpayers. This 
legislation should be part of our bipartisan fight to reduce the 
national debt. When corporate wrongdoers can write off a significant 
portion of the financial impact of punitive damages, the incentives in 
our justice system that promote responsible business practices lose 
their force. These difficult financial times require us to close 
irresponsible tax loopholes. We can start with this one, which treats 
corporate misconduct as a cost of doing business.
  Mr. President, I ask unanimous consent that the text of the bill be 
printed in the Record.
  There being no objection, the text of the bill was ordered to be 
printed in the Record, as follows:

                                 S. 794

       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 ``Protecting American 
     Taxpayers from Misconduct Act''.

     SEC. 2. DISALLOWANCE OF DEDUCTION FOR PUNITIVE DAMAGES.

       (a) Disallowance of Deduction.--
       (1) In general.--Section 162(g) of the Internal Revenue 
     Code of 1986 is amended--
       (A) by redesignating paragraphs (1) and (2) as 
     subparagraphs (A) and (B), respectively,
       (B) by striking ``If'' and inserting:
       ``(1) Treble damages.--If'', and
       (C) by adding at the end the following new paragraph:
       ``(2) Punitive damages.--No deduction shall be allowed 
     under this chapter for any amount paid or incurred for 
     punitive damages in connection with any judgment in, or 
     settlement of, any action. This paragraph shall not apply to 
     punitive damages described in section 104(c).''.
       (2) Conforming amendment.--The heading for section 162(g) 
     of such Code is amended by inserting ``Or Punitive Damages'' 
     after ``Laws''.
       (b) Inclusion in Income of Punitive Damages Paid by Insurer 
     or Otherwise.--
       (1) In general.--Part II of subchapter B of chapter 1 of 
     the Internal Revenue Code of 1986 is amended by adding at the 
     end the following new section:

     ``SEC. 91. PUNITIVE DAMAGES COMPENSATED BY INSURANCE OR 
                   OTHERWISE.

       ``Gross income shall include any amount paid to or on 
     behalf of a taxpayer as insurance or otherwise by reason of 
     the taxpayer's liability (or agreement) to pay punitive 
     damages.''.
       (2) Reporting requirements.--Section 6041 of such Code is 
     amended by adding at the end the following new subsection:
       ``(h) Section To Apply to Punitive Damages Compensation.--
     This section shall apply to payments by a person to or on 
     behalf of another person as insurance or otherwise by reason 
     of the other person's liability (or agreement) to pay 
     punitive damages.''.
       (3) Conforming amendment.--The table of sections for part 
     II of subchapter B of chapter 1 of such Code is amended by 
     adding at the end the following new item:

``Sec. 91. Punitive damages compensated by insurance or otherwise.''.

       (c) Effective Date.--The amendments made by this section 
     shall apply to damages paid or incurred on or after the date 
     of the enactment of this Act.
                                 ______