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New Bill Would End Corporate Tax Write-Offs for Punitive Damages

Most people don’t realize that when corporations are hit with massive punitive-damage awards, they actually pay far less than the amounts reported in news accounts. The financial sting of those awards can be eased because companies can deduct the amount paid from their taxes.




Update: SB 66 passed the Senate May 31 by a 27-13 vote and is headed for an Assembly vote in the coming weeks.

Punitive damages don’t always punish. The financial sting of those awards can be eased because companies can deduct the amount paid from their taxes.

“People will say to me, ‘No way,’” says California State Senator Bob Wieckowski (D-Fremont). “Even attorneys will say that’s not true. The taxpayers shouldn’t be subsidizing this type of behavior.”

But they do, and Wieckowski wants to do something about it.

He has introduced Senate Bill 66 to close a loophole in federal tax law, at least in California, by barring tax write-offs for punitive damage payments on state tax returns.

The whole idea behind punitive damages is to deter the most outrageous corporate behavior by hitting companies on the balance sheet. It is illegal to deduct compensatory damages, payments for a loss resulting from the negligence or unlawful conduct of another party. But the law is silent on punitive damages.

Most people don’t realize that when corporations are hit with massive punitive damage awards, they actually pay far less than the amounts reported in news accounts, Wieckowski says.

“My sense of justice is aggravated by it,” he tells Capital & Main.

A case in point is that of Erik and Renee Sundquist, a Sacramento-area couple who was forced into bankruptcy after their home was illegally foreclosed during a six-year struggle with their lender, Bank of America, Wieckowski says.

U.S. Bankruptcy Court Judge Christopher Klein awarded $45 million in punitive damages–$5 million to the couple and $40 million to law schools consumer advocacy groups. The judge wrote, “Franz Kafka lives.” The Sundquists’ case, Klein wrote, “reveals he works at Bank of America.”

The bank forced the couple through bureaucratic hoops on the false promise of a mortgage modification. The ordeal left the Sundquists physically and emotionally broken in a “battle-fatigued state of demoralization,” the judge wrote. Erik Sundquist had attempted suicide while his wife, Renee, was diagnosed with post-traumatic stress disorder and suffered migraine headaches.

Bank of America has appealed the judge’s ruling. However, if it stands, B of A will be able to write off the payment on its federal and California state taxes, essentially passing the cost of its misconduct on to taxpayers,

Wieckowksi stresses that punitive damages are rare. The federal Bureau of Justice Statistics found that in civil lawsuits where plaintiffs prevailed, punitive damages were awarded in only five percent of cases nationwide in 2005, the last year for which statistics are available.

SB 66 would save California only about $1.2 million annually, the state Franchise Tax Board estimates. But it would build awareness of the issue, and it could lead other states and the federal government to follow California’s lead, says Michelle Surka, a tax and budget advocate at the U.S. Public Interest Research Group.

“California is a big state,” she says. “That it’s drawing a line and taking a stand would help move the ball federally as well.”

Congressional action would save taxpayers much more money, but federal lawmakers have not agreed on legislation, despite some attempts and some bipartisan support, notably from Sen. Charles Grassley (R-Iowa), Surka notes.

In Sacramento, the California Labor Federation, along with some of the state’s largest unions and a handful of consumer groups, supports SB 66. Opponents include a number of business associations, among them the California Chamber of Commerce, the California Retailers Assn. and the California chapter of the National Federation of Independent Business (NFIB).

Ken DeVore, the legislative director of NFIB’s California chapter, argues that California is one of the most litigious states.

“Small businesses are the biggest targets of lawsuits because they’re the low hanging fruit,” DeVore says. He contends that the bill would force some small businesses to forgo their day in court to avoid big payouts.

“It’s going to result in them having to make a decision quickly,” Devore says. “Do I go to a jury and risk huge penalties or just settle? That’s just going to stir the shark tank when [attorneys] see people starting to settle.”

Four California counties – Santa Clara, Alameda, Contra Costa and Los Angeles ranked in the top 10 among 46 of the nation’s 75 largest counties in the percentage of punitive damage awards in 2005, according to the Bureau of Justice Statistics. But even in number two-ranked Santa Clara County, such damages were only awarded in 17 percent of civil lawsuits.

The legislature has defeated previous versions of SB 66, including a 2011 attempt by now-Los Angeles City Attorney Mike Feuer and a 2013 effort by Wieckowski.

The legislature, however, did approve a similar measure three years ago with bipartisan support, Wieckowski says. He and his colleagues barred former Los Angeles Clippers owner Donald Sterling from deducting a $2.5 million fine levied by the NBA on his state taxes after he was caught on tape making racially offensive comments. The law applies to all sports team owners who receive such league fines.

The NBA fine is not the same as punitive damages awarded by a court, but “the parallel is it’s a disgusting activity, and we can control what’s deductible and what not deductible,” Wieckowski says.

SB 66 passed the senate Governance and Finance Committee earlier this year on a 5-2 vote, with the committee’s two Republican members voting no. If the bill doesn’t attract enough Republican votes, it could still win approval if Wieckowski can line up all senate Democrats and nearly all on the assembly side.

“This year, it’s a different world, and I can’t predict anything this year,” Ken DeVore says of the bill’s chances. “Things that have died multiple times are passing.”

A floor vote is scheduled for tomorrow, Wednesday; a spokeswoman for Gov. Jerry Brown declined to say if he would sign SB 66, writing in an email that the office doesn’t usually comment on pending legislation.

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