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On Tuesday, the Justice Department acted in the best interests of taxpayers by blocking Credit Suisse from writing off their $2.6 billion settlement for aiding tax evasion. The unpublicized stipulation will likely save taxpayers hundreds of millions of dollars by preventing the bank from treating the payment as an ordinary business cost on its taxes.
Unfortunately, this type of stipulation has yet to become standard practice, nor was it dictated by the bank’s guilty plea. In the past, corporate wrongdoing settlements have left taxpayers on the hook for billions of dollars — such as when British Petroleum was collected a $10 billion tax windfall from settlement resulting from the Gulf oil spill.
“Payments for wrongdoing shouldn’t be treated as an ordinary cost of doing business. It would add insult to injury for Credit Suisse to use this agreement as a tax write off,” said Phineas Baxandall, Senior Analyst at the U.S. Public Interest Research Group. “The stipulation protected taxpayers. We call on the Justice Department to make it a standard practice.”
Page 6 of the Credit Suisse settlement , “Credit Suisse AG agrees that no portion of the fine or other payments made pursuant to this plea agreement will serve as a basis for credit Suisse AG to claim, assert or apply for, either directly or indirectly, any tax deduction, any tax credit, or any other offset against any U.S. federal, state or local tax or taxable income.”
Of the total payments, $1,333,500,000 are explicitly designated as fines and penalties and therefore would be very difficult for Credit Suisse to deduct. But the settlement stipulates that $666,500,000 must be paid to the IRS as restitution. Under current law companies can deduct settlement amounts that are not explicitly designated as penalties or fines — even when the payment results from criminal wrongdoing. Preventing the Swiss bank from deducting just this restitution will likely save taxpayers $233 million.
“Today, Credit Suisse is going to pay the full amount of their fine, and that’s the precedent that should be followed in the future" said Gynnie Robnett, coordinator of the Coalition for Sensible Safeguards. "When companies endanger the public and then take a tax break on their penalty it makes a mockery of our safeguards and of those working to deter future bad actors.”
“When companies write off settlements for wrongdoing as a tax deduction, ordinary taxpayers end up picking up the tab, either in the form of higher tax rates to make up for lost revenues, cuts to public programs, or higher national debt,” said Baxandall.
A bipartisan bill in the Senate (S. 1654) cosponsored by Senators Harry Reed (RI-D) and Chuck Grassley (IA-R) would restrict tax deductibility for settlements and require agencies to spell out the intended tax status of settlements. A similar bill in the House sponsored by Representative Peter Welch (VT-D) would also forbid such deductions.
Despite the huge consequences for taxpayers, the Justice Department did not mention the tax status of the Credit Suisse settlement in its press release or in published speeches about the settlement by two other DOJ officials. It could only be found by searching a linked PDF and interpreting the settlement language. The DOJ does not always post legal settlements and has not responded to calls to establish clear policies on the tax status and disclosure of settlements.
A separate bipartisan bill in both the U.S. House and Senate, The Truth in Settlements Act (S. 1898 – ) would require agencies to report the expected after-tax value of settlements and if they are allowed as tax deductions. It would also require agencies to post online a variety of details about settlements to make their true value apparent to the public. The bills are cosponsored by Sens. Warren and Coburn in the Senate, and Representatives Cole and Cartwright in the House,
In the Credit Suisse settlement, the bank signed onto a statement of fact about a long history of setting up mechanisms and conspiring with individuals to use its Swiss-based accounts to illegally evade American tax law and for destroying evidence once the investigation had begun. While Credit Suisse is the largest bank to plead guilty for 20 years, its top management will be allowed to remain in place, and U.S. regulators issued a special waiver not to revoke Credit Suisse’s banking license as rules would otherwise dictate. Despite earlier insistence from the DOJ, the bank also refused to agree to turn over the names of those Americans it helped evade taxes.
A was released last month by the U.S. Public Interest Research Group Education Fund, and conducted by Lake Research Partners, which found that substantial majorities across party lines overwhelmingly disapprove of settlement tax write offs and want federal agencies to be more transparent about them.
You can read Travel Buddy’s research report on the tax implications of legal settlements, “Subsidizing Bad Behavior: How Corporate Legal Settlements for Harming the Public Become Lucrative Tax Write-Offs.
Travel Buddy has created a on the settlement loophole, and separate factsheets on settlement write offs related to: , , and scams.
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