Opioid makers easing own pain
Drug firms settle lawsuits with tax breaks in mind
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 off lawsuit settlements.
Congress blocked many of those tactics in a major tax cut law passed in 2017. A few initial settlements among the thousands of opioid lawsuits, however, show that the regulatory catand-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.
Wednesday, Purdue Pharmareached 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 they would allow the company to seek a tax deduction.
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 let the companies 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 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.
New spin on tax avoidance
Companies have long tried to minimize the pain of settling lawsuits with government agencies.
BP agreed to a $20 billion settlement for the 2010 oil spill in the Gulf of Mexico that caused an environmental nightmare. The deal qualified the company for a $15.3 billion tax deduction.
The 2015 Public Interest Research Group report examined all out-of-court settlements between companies and five federal agencies from 2012 to 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 2017, the Tax Cuts and Jobs Act enacted by Congress and the Trump administration seemed to end most writeoffs for corporate settlements with government agencies.
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 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.
No admission of wrongdoing
The Purdue Pharma settlement announced by the Oklahoma attorney general ended a lawsuit in which the state accused the 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, an Associated Press report said.
Wood called the Purdue terms “especially unusual” and added, “I would be surprised if Purdue hasn’t found a way to cleverly deduct everything.”
In another agreement, Hunter’s office announced Teva Pharmaceuticals USA, would pay $85 million to settle a lawsuit filed by Oklahoma. The civil action accused Teva of overstating the effectiveness and understating the addictiveness of opioids.
The settlement 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.
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 the settlement “probably should be deductible” because of the exception for restitution payments.
In another opioids settlement, 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 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.”
West Virginia Attorney General Patrick Morrisey’s office did not respond to requests for comment.