Ever wonder why it is that when a company gets caught lying to, and/or cheating investors that they so often settle the case quickly, agreeing to pay millions of dollars back but "without admitting or denying" they did anything wrong?
Simple -- because the IRS kicks back a big hunk of the fine to them in the
form of a tax write off.
That's right, you and I -- through the IRS -- subsidize corporate wrongdoing
by providing substantial tax breaks to companies that settle shareholder
lawsuits or regulatory actions in the right way.
For example, the Wall Street Journal reports that Merrill Lynch will likely harvest a fat $30 million tax write off this year -- a 30% kickback of the $100 million it agreed to cough up to settle fraud charges with New York prosecutors. The key here is that company officials insisted that the following magic words be included in their settlement agreement -- "without admitting guilt." The company had been charged with an elaborate pump and dump scheme in which its analysts falsely promoted stocks in companies underwritten by Merrill Lynch.
By being allowed to not admit guilt, the $100 million payment could be classified for tax purposes as "compensatory" damages rather than as a "fine" for wrongdoing.
This is a longstanding practice with both the SEC and IRS. And, in spite
of the cascade of corporate evildoing, the IRS reinforced it in a similar case this April. The IRS ruling not only enshrines the practice but also appears to concede that that getting caught and fined for lying and cheating is now a legitimate expense of doing business.
"It appears that the proximate cause of the litigation was
the dissemination of false and misleading statements and press releases.
Such dissemination of financial information is a routine business activityand
therefore the expense of settling allegations regarding disseminating inaccurate
information may be considered ordinary."(IRS ruling, April 2002)
Under the IRS's corporate tax rules settlements that result in a
company having to pay "compensatory" damages are fully deductible as legitimate
business expenses. This includes both compensatory as well as punitive "compensation."
So, the next time you hear that bad-boy companies like WorldCom, Enron,
Halliburton, Global Crossing and CitiGroup are being sued blue
by investors and pursued by the SEC, deduct at least 30% of your glee -- the IRS certainly will.
Maybe it's time for the IRS to revisit this issue. In the meantime the tough-talking SEC commissioner, Harvey Pitt, might want to order his enforcers to dig in their heels and refuse to include that money saving caveat -- "neither admitting nor denying wrong doing," from all future settlements. Otherwise they are doing nothing less than playing their role in an elaborate kickback scheme that buffers the full consequences of corporate misbehavior with tax breaks.
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