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

You may like these other stories...

A new government report on Monday found that the IRS may not be completing the required research steps in collecting delinquent taxes before considering the cases “not collectible.”The Treasury Inspector General...
The school year is off and running—have your start-up clients launched as well? It may make a big difference in tax status. If your clients can get their businesses up-and-running before the end of the year, they may...
Ernst & Young fiscal-year revenue rises 6% to $27.4 billionMichael Rapoport of the Wall Street Journal reported late Thursday that Ernst & Young's (EY) global revenue was $27.4 billion in its latest fiscal year,...

Already a member? log in here.

Upcoming CPE Webinars

Sep 30This webcast will include discussions of important issues in SSARS No. 19 and the current status of proposed changes by the Accounting and Review Services Committee in these statements.
Oct 9In this jam-packed presentation Excel expert David Ringstrom, CPA will give you a crash-course in creating spreadsheet-based dashboards.
Oct 15This webinar presents the requirements of AU-C 600, Audits of Group Financial Statements (Including the Work of Component Auditors).
Oct 21Kristen Rampe will share how to speak and write more effectively by understanding your own and your audience’s communication style.