Published 5:50 PM EDT Sep 12, 2019
When Oklahoma Attorney General Mike Hunter announced in March that Purdue Pharma would pay the state $270 million to settle a lawsuit linked to the opioid epidemic, he declared the agreement “begins a new chapter for those struggling with addiction.”
The deal also appears to be part of the latest chapter in a saga where U.S. corporations trim their tax bills by writing lawsuit settlements off on their taxes.
Congress blocked many of those tactics in a major tax-cut law passed in 2017. However, a few initial settlements among the thousands of opioid lawsuits show the regulatory cat-and-mouse game continues.
In a settlement with Purdue Pharma, the payments will go to a new foundation and a center researching pain and addiction. An agreement with Teva Pharmaceuticals USA specified the firm’s payment would be restitution, not a penalty. And a settlement with McKesson declared the transaction wasn’t a fine, penalty, punitive damages, or forfeiture – all terms that might carry weight when companies file their taxes.
Purdue Pharma on Wednesday reached a tentative settlement of opioid lawsuits with thousands of local governments and nearly two dozen states. Details of the agreement have not yet been disclosed, so it is unknown whether the terms would enable the company to seek a tax deduction.
Infographic: How companies turn government settlements into tax write-offs
In the three agreements reached earlier this year, the companies did not acknowledge any wrongdoing. Tax law experts say the settlements appear to be structured in ways that could enable the companies to write off at least part of the payments on their taxes.
“It’s not pretty, but the tax lawyer’s job is to try to be inventive,” said Robert Wood, a tax lawyer at Wood LLP in San Francisco and author of a book on taxation, damage awards and settlement payments.
In some cases, that inventiveness means figuring out “out ways to circumvent what may have been Congress’ intent,” he said.
Corporate write-offs of government settlements exact a financial toll on millions of average Americans, according to reports by the U.S. Public Interest Research Group Education Fund, a government watchdog organization.
“When corporations deduct settlements for wrongdoing, the public is doubly harmed,” the organization warned in a 2015 report.
Settlements aren’t seen as a deterrent if companies can write them off on their tax returns, it said. And other taxpayers “must shoulder the burden of the lost revenue in the form of higher taxes for other ordinary taxpayers, cuts to public programs, or more national debt,” the report said.
A new spin on tax avoidance tactics
Companies have long tried to minimize the pain of settling lawsuits with government agencies.
BP agreed to a $20 billion settlement for the catastrophic 2010 oil spill in the Gulf of Mexico that killed 11 and caused an environmental nightmare. The deal qualified the company for a $15.3 billion tax deduction.
Nearly six years ago, JPMorgan Chase finalized a $13 billion government settlement over toxic mortgages like those that sparked the 2008 financial crisis. The banking giant afterward said more than half of the total would be tax-deductible.
The 2015 Public Interest Research Group report examined all out-of-court settlements between companies and five federal agencies between 2012 and 2014. The 10 largest settlements required companies to pay nearly $80 billion to resolve allegations of wrongdoing.
“But companies can readily write off at least $48 billion of this amount as a tax deduction,” the organization concluded.
In 2015 and 2017, U.S. senators from both major political parties renewed efforts to rein in the practice. The lawmakers proposed legislation that would have required government agencies to spell out whether any portion of such settlements could be deducted and whether the payments could be offset by tax credits.
The proposals ultimately died. But in 2017, the Tax Cuts and Jobs Act enacted by Congress and the Trump administration seemed to end most write-offs for corporate settlements with government agencies. Sen. Chuck Grassley, R-Iowa, who had co-sponsored one of the earlier crackdown efforts, added the provision, his office said.
The law was revised to say companies can’t deduct the cost of government settlements if the transactions are paid to or directed by a government agency “in relation to the violation of any law or the investigation or inquiry … into the potential violation of any law.”
To the average reader, that might have ended any debate. But the exceptions in the law included one for restitution: for “damage or harm which was or may be caused by the violation of any law or the potential violation of any law.”
Now, some of the settlements in opioids lawsuits appear to have been negotiated to take advantage of that exception, as well as other ambiguities and weaknesses in federal tax laws.
Oklahoma to set up foundation to accept money from Purdue Pharma
The Purdue Pharma settlement announced by the Oklahoma attorney general ended a lawsuit in which the state accused the Stamford, Connecticut-based company of overstating the effectiveness of opioid pain medications while falsely minimizing their addictiveness.
The consent judgment filed to settle the lawsuit says Purdue Pharma made no “admission of any wrongdoing or violations of applicable law.”
It calls for the state to create a foundation – an entity that’s typically nonprofit and tax-exempt – to accept the settlement, rather than have the money go directly to the state. Hunter said Purdue insisted on that arrangement, according to an Associated Press report.
The agreement also said members of the Sackler family, which once owned Purdue Pharma, would make a series of contributions to the foundation.
The bulk of the settlement payments are to go to the University of Oklahoma’s Center for Wellness and Recovery, a prominent organization that researches the causes and treatments for addiction and pain.
Hunter said in a March news conference the payment would help the center become a research and treatment powerhouse like the University of Texas MD Anderson Center, a cancer research organization in Houston.
“It can assist the whole country,” he said.
Robert McKenzie, a tax law expert and partner at the Chicago law firm of Saul Ewing Arnstein and Lehr, questioned the payment arrangements.
“That’s clearly a game – let’s create a charity and you’ll take a charitable deduction,” McKenzie said. “We’ll ignore the fact that you’re paying millions of dollars because you injured people.”
Tax deductions typically involve expenses that taxpayers, including businesses, incur during the year and can subtract from their gross income when calculating how much tax they owe. Although taxpayers may claim deductions, the IRS can overrule them.
Wood called the Purdue settlement terms “especially unusual” and added, “I would be surprised if Purdue hasn’t found a way to cleverly deduct everything.”
Neither Purdue Pharma nor Hunter’s office responded to requests for comment.
Teva agreement mirrors exception in federal law
In another agreement struck this year, Hunter’s office announced Teva Pharmaceuticals USA, part of a company headquartered in Israel, would pay $85 million to settle a lawsuit filed by Oklahoma. As with Purdue Pharma, the civil action accused Teva of overstating the effectiveness and understating the addictiveness of opioid medications.
The settlement language said the state and the company agreed the payment would be for “restitution” – a reference to one of the exceptions that could qualify for a tax write-off under the 2017 federal tax law.
The agreement also said none of the statements regarding the settlement “shall be deemed or construed to be a concession … of any liability or wrongdoing by Teva.” Penalties for wrongdoing typically are not tax-deductible.
Wood said he believes the settlement “probably should be deductible” because of the exception for restitution payments.
Kelley Dougherty, a Teva spokeswoman, declined to comment. Hunter’s office did not respond to requests seeking comment.
In another opioids settlement reached this year, McKesson, a pharmaceutical distributor and wholesale provider of medical supplies, agreed to pay the state of West Virginia $37 million. It too appears aimed at enabling the company to seek a tax write-off.
The suit filed by West Virginia Attorney General Patrick Morrisey accused the Texas-based firm of causing “injuries in West Virginia” by enabling addiction to prescription medications. McKesson, which denied the allegations, did not admit liability in the settlement agreement.
The agreement states that the settlement “is compensatory and not punitive or restitutionary in nature and is not a fine or penalty.” It also says the money can’t be characterized as payment for forfeitures.
“I imagine that McKesson asked for this,” Wood said. Why? Fines, penalties, and punitive settlements typically are not tax-deductible, he said.
In a written statement, McKesson spokesman David Matthews said the company’s tax return “is private and it hasn’t yet been filed, so we can’t provide you a comment at this time.”
Morrisey’s office did not respond to requests for comment.
Asked to comment on the terms of the three opioids settlements in the wake of the federal tax crackdown, Grassley issued a broad statement.
“Businesses shouldn’t benefit from favorable tax treatment on settlements for their wrongdoing,” Grassley said. “In any event, there should always be transparency so that the public, taxpayers, and stockholders are informed.”