US Senators Seek End To Tax Deductible Civil Settlements

by Mike Godfrey, Tax-News.com, Washington

03 August 2006

Senate Republicans have expressed support for new legislation to prevent companies deducting settlements imposed in civil law suits against their taxable income.

Senators John McCain (R - Ariz) and John Warner (R - Va), who serve on the Armed Services Committee, were highly critical of the fact that Boeing could have deducted $565 million of a $615 million civil and criminal settlement with the Justice Department from its taxes during a committee hearing on Tuesday.

However, it was the Justice Department, rather than Boeing, that was singled out for the harshest grilling by the Senators for its ducking of the tax deductibility issue.

"How in the world do you duck the obligation to determine" if the settlement payments "can be laid off to the taxpayer?" McCain asked Deputy Attorney General Paul McNulty.

"The taxpayers shouldn't be picking up the bill," he argued.

A number of Senators, including Sen. Jeff Sessions (R - Ala) have expressed support for a change in the law with regards the deductibility of civil settlements.

"Maybe it's time for us to confront that," Sessions stated.

Sen. Chuck Grassley, chairman of the Senate Finance Committee, which has jurisdiction over taxation, has pledged legislation clarifying what is and isn’t deductible in settlements. He also wants OMB Director Portman to help "end this problem and protect the taxpayers".

Meanwhile, Boeing, which was found to have improperly procured contracts for launch services worth billions of dollars from the US Air Force and NASA, seems to have come out of the debacle with the most credit. After deciding to ignore the advice of its lawyers and not deduct the civil penalty, Boeing chief executive, Jim McNerney, told the committee that the company was keen to be seen "doing the right thing."

"We didn't think the taxpayers should bear the brunt of our wrongdoing," he stated.

This earned the company praise from McCain, who has been one of Boeing's fiercest critics in the procurement affair.

"I would like to say how encouraged I am by Boeing’s decision not to write-off any part of the payments it was required to make under the Settlement Agreement," he stated.

"The fact of the matter is that Boeing did not have to make the decision it made on deductibility. But, it did. And, when coupled with the internal changes the Company has made, what Boeing did here conveys to me how serious the Company is to truly reforming and starting fresh," he added.

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