December 15,2003

Sens. Grassley and Baucus Raise Concerns About Government Settlement Payments

Deductions on Penalties May Improperly Lighten Punishments


(Washington, D.C.) U.S. Senate Finance Chairman Chuck Grassley and Ranking Member MaxBaucus today sent a letter to the General Accounting Office (GAO) raising serious concerns thatvarious settlements reached by Federal regulatory and oversight agencies may allow the paymentof penalties to be tax deductible. Grassley and Baucus are especially concerned by settlementsmade in various Securities and Exchange Commission (SEC) investigations.

"In the aftermath of the Enron scandal, I am very concerned that full penalties are notbeing felt by those guilty of securities law violations," Baucus said. "By making penaltypayments tax deductible, the tax burden is being shifted from the backs of the wrongdoer to thebacks of the American people. This is unacceptable. We must correct this injustice in order torestore faith in corporate America."

In April, Grassley and Baucus introduced the "Government Settlement TransparencyAct" to ensure that payments and fines paid in relation to the violation of any law arenondeductible. The legislation would deny deductibility for all payments, including cases wherethere has been no admission of guilt or liability and those made for the purpose of avoidingfurther investigation or litigation. The only exception would apply to individual restitutionpayments.

"The SEC's global settlement got a lot of headlines but not a lot of punishment of thewrongdoers," Grassley said. "Unfortunately, the SEC approved the settlement without addressingwho really pays. Ultimately, the commission agreed that wrongdoers should pay the price, notthe taxpayers or insurers, but it was too late. We need to know how many other commissionsand agencies are letting wrongdoers off with a slap on the wrist instead of hitting them where ithurts - their bank accounts. Taxpayers could be subsidizing hundreds of millions of dollars inpenalties. If so, that's unacceptable."

Grassley and Baucus have asked the GAO to review the largest settlements anddetermine how those settlements were reported for Federal tax purposes. The GAO will beauthorized to look at all relevant IRS files, records and returns for purposes of this review.Full text of letter attached:

December 15, 2003
The Honorable David M. Walker
Comptroller General
U.S. General Accounting Office
441 G Street, N.W.
Washington, DC 20548
Dear Mr. Walker:

Over the past several months, the Finance Committee has become increasingly concernedabout the approval of various settlements reached by Federal regulatory and oversight agenciesthat may allow penalty payments made to the government in settlement of a violation or potentialviolation of the law or regulatory requirement to be tax deductible. When penalty payments arededucted, the effective cost of the penalty to the wrongdoer is reduced and the economic cost forengaging in unacceptable behavior is unfairly shifted to the taxpayer.

Given the number of settlements and significant dollars amounts involved, it is importantthat taxpayers adhere to the rules governing the appropriate tax treatment of settlements. To gaininsight into how businesses are treating these settlements for Federal tax purposes, we requestthat GAO review some of the largest settlements and determine how these settlements werereported for Federal tax purposes. Please work with our staff representatives in determining howmany settlements over what period of time to include in your review.

With respect to this review, the Chairman is authorizing GAO, pursuant to Section6013(f)(4)(A) of the Internal Revenue Code, to conduct necessary work and report to theCommittee. He would expect your designated representatives to have access to all relevant IRSfiles, records, and returns for these purposes and comply with all of the restrictions that protecttaxpayer information.

We understand that GAO will need to conduct a design phase for this effort and requestperiodic briefings as you proceed. If you have any questions, please do not hesitate to contactDean Zerbe or Patrick Heck at 224-4515. Thank you for your assistance.

Sincerely yours,

Max Baucus 
Ranking Member

Charles E. Grassley
Chairman