Print Page   |   Contact Us
Federal Tax Deduction of Punitive Damages Position
Share |
The Industrial Minerals Association – North America (IMA-NA) opposes attempts to eliminate the currently allowed tax deduction for punitive damage payments by individuals and businesses.  The original establishment of this deduction was based on sound legal principles and a change only will serve to encourage extortionate tactics by personal injury attorneys.

For over 20 years, a federal tax deduction has been allowed for damages paid or incurred as ordinary and necessary expenses in managing a business.  During this same period of time, tort abuse has escalated dramatically.  It is a sad reality, in this the most litigious nation in the world, that paying punitive damages is both ordinary and necessary.  Deductibility of damage awards is one of the few relief mechanisms available to the American business owner who is penalized, appropriately or inappropriately, by the broken American tort system.

Under the Administration’s plan, not only would damage payments not be deductible, but payments made by insurance companies on behalf of defendants would be taxable as income.  This double blow would increase dramatically the damage done to American businesses, and would add significantly to the number of businesses that simply do not survive an experience with the American tort system.

Levying punitive damages should not be treated in the same manner as criminal damages.  This is a well-established and tested truth.  Criminal penalties are precise, whereas punitive penalties are not.  Criminal cases must be proved beyond a reasonable doubt, but civil cases are based on a preponderance of evidence.  Criminal penalties are set so that the punishment fits the crime, whereas most states have no limit on the amount of punitive damages that can be awarded.  Finally, criminal offenders are not subject to double jeopardy, whereas civil defendants, in most states, can be sued repeatedly for the same offense.

This legal principle which makes a distinction between civil and criminal is appropriate, tested and accepted.  Nothing has changed in the underlying arguments which have established this differentiation.  What has changed is an apparent political will to stimulate and reward a broken tort system which relies on inflicting hardship on American citizens and business owners. 

The American Tort Reform Association states that "lawsuits are bad for business…they are also bad for society.  They compromise access to affordable health care, punish consumers by raising the cost of goods and services, chill innovation, and undermine the notion of personal responsibility.  The personal injury lawyers who benefit from the status quo use their fees to perpetuate the cycle of lawsuit abuse.”

These same personal injury lawyers will be the real beneficiaries under this proposal.  They will use this new tax to pressure defendants into settlement because penalties paid under settlement will remain deductible.  Defendants thus will be encouraged to waive their right to legal process.  This is both illogical and counterproductive to the American system of justice.  Incentives to rightfully defend actions (which are sometimes wrong or unfair) should not be removed. 

IMA-NA is a trade association created to advance the interests of North American companies that extract or process minerals used throughout the manufacturing and agricultural industries.  IMA-NA stands ready to participate constructively in this important discussion involving the deductibility of punitive damages.