[Congressional Record Volume 161, Number 21 (Monday, February 9, 2015)]
[Senate]
[Page S860]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

      By Mr. REED (for himself and Mr. Grassley):
  S. 413. A bill to amend the Internal Revenue Code of 1986 to deny tax 
deductions for corporate regulatory violations; to the Committee on 
Finance.
  Mr. REED. Mr. President, today I am reintroducing, along with Senator 
Grassley, the Government Settlement Transparency and Reform Act. This 
bill aims to end the subsidization of illegal corporate behavior by 
taxpayers by closing a loophole that allows corporations to reap tax 
benefits from payments made to the government stemming from settling 
corporate misdeeds.
  Corporations accused of illegal activity routinely settle legal 
disputes with the government out of court because it allows both the 
company and the government to avoid the time, expense, and uncertainty 
of going to trial. Under Federal law, money paid to settle corporate 
civil or criminal penalties is not deductible. But under the tax code, 
offending companies may often write off any portion of a settlement 
that is not paid directly to the government as a penalty or fine for 
violation of the law. Corporations exploit this provision by later 
characterizing settlement penalties as restitution and a tax-deductible 
business expense.
  I think most would agree that, for example, a corporation should not 
come to an agreement with the government to pay $500 million in 
criminal or civil fines and then when they file their taxes count those 
very fines as a business expense and take a tax windfall. Corporations 
that do this are effectively using taxpayer dollars to subsidize their 
illegal behavior. In 2005, the Government Accountability Office found 
that of the 34 companies and $1 billion in settlements they examined, 
20 companies took a tax deduction for some or all of the money it paid 
to the government. Those settlements were silent on whether that $1 
billion to the government counted as penalties or restitution. 
According to GAO, in two of those settlements, company representatives 
said they made a mistake in deducting civil penalty payments totaling 
$1.9 million and said they would amend their tax returns.
  To address these practices, the Reed-Grassley bill would amend 162(f) 
of the tax code and require the government and the settling party to 
reach pre-filing agreements on how the settlement payments should be 
treated for tax purposes. Our bill also clarifies the rules about what 
settlement payments are punitive and therefore non-deductible. 
Furthermore, it increases transparency by requiring the government to 
file a return at the time of settlement to accurately reflect the tax 
treatment of the amounts that will be paid by the offending party.
  Last Congress it was estimated that over a ten-year budget window 
this legislation would raise $218 million in revenue.
  With this legislation we can close this tax loophole that flies in 
the face of sensible and fair tax policy. The tax code should not be 
used to subsidize illegal activity by corporations. Indeed, when a fine 
is levied, that fine should not be construed as a legitimate business 
expense. Instead, it should be paid in full, with no tax deduction 
taken.
  I want to thank Senator Grassley for working with me again on this 
legislation. He has long championed closing this loophole. I urge our 
colleagues to join us by cosponsoring this legislation and seeking its 
passage.
                                 ______