One more tax loophole to close

Gazette Editorial Board

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During the 2012 presidential campaign, there was considerable debate about the U.S. corporate income tax rate, and that it was not competitive with that of many other countries. There was some bipartisan support for lowering that rate, while also closing many of the tax code loopholes that allow companies a variety of deductions and tax dodges.

One of those loopholes is getting specific attention this week in a bill co-sponsored in the Senate by Chuck Grassley, Iowa's Republican senator, and Jack Reed, Rhode Island Democrat.

Similar to legislation in the House, theirs would close a loophole that has allowed some corporations to reap tax benefits from payments they agree to make to settle illegal corporate behavior allegations brought by the federal government.

Cheers to Grassley and Reed for this single but significant step.

Case in point: One of the nation's giant financial services companies, J.P. Morgan Chase, negotiated a $13 billion settlement over alleged low-quality mortgage securities.

However, $5.1 billion of that total would be tax deductible because it's going to Fannie Mae and Freddie Mac, quasi-government mortgage agencies. Under current law, portions of a settlement not directly paid to the government can become a tax deduction. This deduction, according to a Wall Street Journal report, is worth as much as a $1.5 billion write-off to J.P. Morgan Chase.

The Government Settlement Transparency & Reform act aims to close that loophole. While current law is clear that punitive fines and penalties issued by the government are not tax deductible, settlements often don't define how much is punitive.

The Grassley-Reed bill would mandate pre-filing agreements as part of government settlements that would specify how the payments are treated for tax purposes. It also would clarify rules regarding what kinds of penalties are punitive.

“A penalty should be meaningful or it won't have the deterrent effect it's supposed to have,” Grassley said.

No kidding.

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