Friday, February 6, 2015

Corporate Tax Deductions for Settlements, Fines and Damages

When you do something wrong and are punished for it by having money taken from you the purpose of that little exercise is to convince you not to break the law or violate the rules again. The size of the fine may vary depending on how serious the offense is, whether the person who is being fined is a first time offender, how much money the person who is being fined has, whether or not the person or institution levying the fine is in a bad mood that day or is looking to make an public example of some schmuck or a million other reasons. But the purpose of the fine remains the same regardless of whether you are an NFL player who doesn't like to talk to the media, an NBA player who publicly questions the integrity of the league or its referees, or a taxpayer who simply doesn't like paying his taxes when the city, state or country says that he must. For example, in my younger days (i.e four years ago) I used to consider posted speed limits on expressways as something more akin to suggestions than hard and fast rules. I certainly wasn't the only motorist inclined to do this. On some local expressways if you aren't doing at least 80 mph you just aren't trying. However, four years ago a friendly police officer stopped me to let me know that no, he for one really did take those speed limits seriously. He thought I should as well. To assist me in reaching this future goal he wrote out a ticket that had a fine which I found to be entirely too high. Well I suppose it had the desired effect. I got a radar detector and kept a closer lookout for cops. Most days I rarely drive more than 3-4 mph over the posted speed limit. I simply don't have the money to give away to a podunk municipality over nonsense like that.
But imagine if instead of having to pay the entire fine myself and wreak havoc in my monthly budget I could come to you and force you to pay a significant portion of that fine. You might protest that you weren't the big dummy who was driving significantly over the speed limit. I would respond with something along the lines of how we were all in this together. I would help you out if it came to it. So suck it up buttercup and hand over some cash. If you were forced to pay part of my penalty not only would you be upset (something I wouldn't care about that much to be honest) but more importantly the fine wouldn't be enough to deter my future behavior. Because the net fine to me would then be much lower I would be less likely to be deterred from speeding. That would be a really good deal for me. It might not be such a great deal for you or for the rest of society. The person who incurred the cost and broke the law/rules is not the one who is paying the cost.

When a Montana judge ordered Hyundai to pay $73 million in punitive damages last year to the families of two teenagers killed in a car crash, she found that the South Korean automaker had “recklessly” ignored scores of warnings over more than a decade about the steering defect blamed for the accident. But even if Hyundai is eventually forced to pay the full amount of the damages, the punishment could be substantially reduced through a tax loophole that permits the company to save millions of dollars by deducting any court-ordered punitive damages as an ordinary business expense. The result, critics say, is that taxpayers are in effect subsidizing corporate misconduct. 

Carmakers are far from the only companies that can exploit loopholes that allow them to lower their tax bill by deducting fines, forfeitures and other payments related to wrongdoing. Although the tax law forbids deductions for criminal fines and penalties owed to the government, other kinds of payments — to compensate victims or correct damages — are eligible for a tax deduction.  The rating agency Standard & Poor’s, which was accused of helping to cause the financial crisis with its inflated assessments of mortgage investments, is eligible to deduct half of the $1.37 billion settlement with state and federal prosecutors it agreed to this week, according to the U.S. Public Interest Research Group, a consumer-oriented nonprofit. The result would be a roughly $245 million reduction in its tax bill, the research group calculated.  

At least 80 percent of the more than $42 billion that BP has paid out because of the 2010 Deepwater Horizon rig explosion that killed 11 people and spewed oil into the Gulf of Mexico qualifies for a tax deduction, according to U.S. PIRG. That has saved an estimated $10 billion to $14 billion for the company. The exact amount is uncertain because of the lack of transparency, the group complained.  Brandon Garrett, a law professor at the University of Virginia and author of “Too Big to Jail,” said that BP was “asking taxpayers, in effect, to pay for the victim compensation fund it agreed to set up.”

So this is an incredibly good deal for companies which have to pay for wrongdoing. Not only do the company officers and owners generally avoid personal damages and/or prison time for misdeeds they even are able to avoid the full impact of the fine by getting the government (i.e. you) to help pay for it. Often they can get the fine or settlement reduced on appeal. It might not be such a great deal for you or for the rest of society. The person who incurred the cost and broke the law/rules is not the one who is paying the cost. That seems to violate basic fairness. This is another example of how our tax code and public perception of welfare leeches. This is why as we recently discussed one has to be careful when one reads about this or that inner-city ghetto or poor trailer park person "cheating" the system out of a few hundred dollars each month. Your disgust or contempt should be saved for the big dog who's crapping on the floor, not the little puppy. Corporations are cheating the government out of BILLIONS. Technically I shouldn't even use the term "cheating" as this is all quite legal. Moral outrage doesn't trump law. The fact that these tax code provisions are still in place proves the amount of power that corporations and their armies of lobbyists and attorneys can bring to bear. A great many of these mega corporations don't pay many, if any income taxes in the first place so this is just par for the course. Until enough people get angry enough to demand changes, these policies will continue. But to demand change you have to know what's going on behind closed doors and out in the open. This is why it's so important to read, inform yourself and get politically active.
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