05.26.22

Leahy And Allies Introduce Bill To Close Tax Loophole That Lets Corporations Write Off Penalties For Wrongdoing As Ordinary Business Expenses

(THURSDAY, May 26, 2022) — U.S. Senator Patrick Leahy (D-Vt.) Thursday reintroduced legislation to close a tax loophole that allows corporations to write off the punishment they receive for egregious wrongdoing as an “ordinary” business expense.

Punitive damages are rarely imposed, and only on bad actors whose reckless misconduct resulted in extreme consequences, and usually great harm to peoples’ lives.  Such damages are intended to impose a punishment on the wrongdoer so that more responsible decisions will be made in the future.  But enabling corporations to deduct these damages lessens the deterrent effect of that punishment.  Leahy first introduced legislation to close this loophole in 2011.  The bill is cosponsored by Senators Richard Blumenthal (D-Conn.), Jack Reed (D-R.I.), Sheldon Whitehouse (D-R.I.), and Maggie Hassan (D-N.H.).

Leahy said:  “For too long, our tax code has allowed corporations to claim a tax deduction specifically for their wrongdoing, passing it off as a business expense.  Breaking the law is not simply a cost of doing business.  Punitive damages are designed to protect workers, families, communities from harm, and eliminating this tax loophole reaffirms what is eternally clear: American taxpayers should not foot the bill for corporate misconduct.”

Corporate bad actors have been hit with punitive damages and penalties for causing tragic disasters such as the 1989 Exxon Valdez oil spill which devastated Alaska’s southern coast; the 2010 explosion at Big Branch mine in West Virginia that claimed the lives of 29 miners; and the 2010 Deepwater Horizon rig explosion in the Gulf of Mexico that claimed 11 lives and led to the worst oil spill in U.S. history.  But due to the existing loophole, these corporations were lawfully able to deduct these punitive damages and penalties as a mere cost of doing business.

The Joint Committee on Taxation has estimated that closing the punitive damages loophole could increase federal revenues by $310 million over 10 years.

Blumenthal said:  “Corporations should be held accountable for misconduct and wrongdoing, not rewarded with write-offs and tax loopholes. While Americans are left to deal with the consequences of corporate negligence, profit-hungry giants pad their margins and deduct penalties as a business expense. By closing the punitive damages loophole, this legislation will ramp-up enforcement, increase federal revenues, and prevent corporations from walking away from their misdeeds with a slap on the wrist.”

Reed said: “Fraud and gross negligence are not legitimate business activities, and penalties for these misdeeds should not be tax-deductible business expenses.  Taxpayers should not foot the bill for punitive damages that are designed to hold bad actors accountable for causing serious harm.  Congress needs to close tax loopholes that subsidize corporate wrongdoing.”

Whitehouse said: “Somehow corporate bad actors like Big Oil can claim massive tax write-offs on the punitive damages they incur for bad behavior.  That sticks American taxpayers with the bill for their corporate negligence.  Our bill closes this preposterous loophole, making our tax code fairer for regular Americans.”

The Leahy-authored legislation takes a meaningful step in the direction of making the tax code work for all Americans, not just corporations and the wealthy.  Passing the No Tax Write-Offs for Corporate Wrongdoers Act would advance that goal, holding corporations accountable for their reckless misconduct while simultaneously reducing the deficit and improving the fairness of the tax code.

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