Government Settlement Transparency and Reform Act

Mr. President, today I am reintroducing, along with Senator Grassley, the Government Settlement Transparency and Reform Act. This bill closes a loophole in the Tax Code that allows corporations to claim tax writeoffs for payments made at the direction of the government to settle investigations into illegal and abusive corporate behavior.

Corporations accused of illegal activity routinely settle out of court with government agencies because it allows all parties to avoid the time, expense, and uncertainty of going to trial. While there is nothing wrong with settlements that correct wrongful corporate practices and compensate for the resulting harm caused by a corporation, the Tax Code often permits offending companies to claim a business tax deduction for any portion of a settlement that is not paid directly to the government as a penalty or fine for a violation of the law. The Tax Code on this point is vague, and big businesses exploit this by characterizing settlement penalties as tax-deductible business expenses.

Illegal corporate behavior is not an ordinary business activity, and it shouldn't be subsidized by taxpayers. Yet, according to a 2015 study by U.S. Public Interest Research Group, PIRG, corporate settlements over a single 3-year period totaled nearly $80 billion, and corporations could claim business deductions for at least $48 billion of that amount. Moreover, there is no consistent, transparent way to track how these settlements can and will be treated by businesses for tax purposes.

The Reed-Grassley bill addresses these problems by amending the Tax

Code to require the government and the settling party to reach clear agreements on how settlement payments should be treated for tax purposes. It also clarifies which settlement payments are punitive and therefore nondeductible. It increases transparency by requiring the government to file a return at the time of settlement that accurately states the tax treatment of amounts to be paid by offending businesses. Last Congress, it was estimated that this legislation would raise $218 million in revenue over a ten-year budget window.

When a major corporate scandal breaks national news, Rhode Islanders and all Americans deserve to know that Federal regulators are protecting their interests by handing down punishments that deter future illegal and abusive business practices. That deterrent effect is undermined if corporations can claim a deduction for any penalty and build the cost of breaking the law into their business models.

I want to thank Senator Grassley for working with me again on this legislation and for being a champion for reform in this area. I urge our colleagues to join us by cosponsoring this legislation and seeking its passage.

Mr. President, today I am reintroducing, along with Senator Grassley, the Government Settlement Transparency and Reform Act. This bill closes a loophole in the Tax Code that allows corporations to claim tax writeoffs for payments made at the direction of the government to settle investigations into illegal and abusive corporate behavior.

Corporations accused of illegal activity routinely settle out of court with government agencies because it allows all parties to avoid the time, expense, and uncertainty of going to trial. While there is nothing wrong with settlements that correct wrongful corporate practices and compensate for the resulting harm caused by a corporation, the Tax Code often permits offending companies to claim a business tax deduction for any portion of a settlement that is not paid directly to the government as a penalty or fine for a violation of the law. The Tax Code on this point is vague, and big businesses exploit this by characterizing settlement penalties as tax-deductible business expenses.

Illegal corporate behavior is not an ordinary business activity, and it shouldn't be subsidized by taxpayers. Yet, according to a 2015 study by U.S. Public Interest Research Group, PIRG, corporate settlements over a single 3-year period totaled nearly $80 billion, and corporations could claim business deductions for at least $48 billion of that amount. Moreover, there is no consistent, transparent way to track how these settlements can and will be treated by businesses for tax purposes.

The Reed-Grassley bill addresses these problems by amending the Tax

Code to require the government and the settling party to reach clear agreements on how settlement payments should be treated for tax purposes. It also clarifies which settlement payments are punitive and therefore nondeductible. It increases transparency by requiring the government to file a return at the time of settlement that accurately states the tax treatment of amounts to be paid by offending businesses. Last Congress, it was estimated that this legislation would raise $218 million in revenue over a ten-year budget window.

When a major corporate scandal breaks national news, Rhode Islanders and all Americans deserve to know that Federal regulators are protecting their interests by handing down punishments that deter future illegal and abusive business practices. That deterrent effect is undermined if corporations can claim a deduction for any penalty and build the cost of breaking the law into their business models.

I want to thank Senator Grassley for working with me again on this legislation and for being a champion for reform in this area. I urge our colleagues to join us by cosponsoring this legislation and seeking its passage.