Senate to Probe Tax Aspects of Accounting Settlements

Senate Finance Committee Chairman Max Baucus said his committee is reviewing rules that permit companies to take tax-deductions for settlements related to the recent wave of accounting scandals. Sen. Baucus is responding to a Wall Street Journal article that explained how huge tax breaks are softening the financial blow of the settlements.

The Journal reported that government lawyers don't usually worry about whether or not a settlement is tax-deductible. In the words of former Securities and Exchange Commission Chairman Richard Breeden, "We will go for the largest recovery we can obtain."

But, the Journal says, it can make a big difference in the company's cash flow if the recovery is characterized as compensation to the victims, rather than a fine or penalty. A fine or penalty is not likely to be tax-deductible. But restitution may be 100% tax deductible, with the result that a company may be able to recover up to 40% of the cost of the settlement, depending on its specific effective tax rate.

Lewis Steinberg, a tax attorney for Cravath Swaine & Moore, summed up, "The moral view is, you've got to be kidding me - it's a subsidy for corporate wrongdoing." (Wages of Corporate Sin: Tax Breaks," Wall Street Journal, September 3, 2002.)

Sen. Baucus predicted that a proposal would be forthcoming within the next week or two on protecting workers' pensions after the recent slew of corporate scandals, and he said that bill may also include some provisions on tax shelters and executive compensation. It is not yet clear whether or not the bill will also address the tax aspects of accounting settlements.

-Rosemary Schlank

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