The Tax Aspects Of The Massive Fox Settlement With Dominion
[Editor note: This is a guest post by my friend Bob Lord. I am no tax policy legal expert, but he really is and I ask him to weigh in occasionally. Commenters asked about this question previously, so here is the answer. – bmaz]
My friend bmaz, noting reporting in The Lever that Fox News could claim a tax deduction for its massive settlement payment to Dominion Voting Systems, asked me to explain it further here.
Yes, Fox News claiming a massive tax deduction, resulting in a $200 million or so tax reduction, is an unpleasant thought.
It’s also sound tax policy. Fox News is a business. A shady one perhaps, but still a business. In the course of operating a business, employees sometimes screw up. Businesses get sued. Sometimes the suits are justified. Sometimes they’re not. Sound tax policy dictates that the cost of resolving such claims reduce the taxable profits of a business.
To see this, consider a different scenario. Say Donald Trump, who we know to be litigious, files a bogus claim against your corporation for trade libel. You hire lawyers to defend the corporation and the corporation eventually agrees to pay a small amount to settle, rather than incur the expense of going to trial. Should the cost of settling be deductible by your corporation? Obviously, yes.
Objectively, Fox News’ position is the same as yours. The corporation was sued for trade libel, and it settled the case. If your corporation is entitled to a deduction, so is Fox News. We all may be sure Fox News’ employees promoted lies here, but the objective facts are that Dominion agreed to settle for less than half the amount it was claiming in damages.
Should the tax result be the same if the case had gone to trial and Fox lost? Should the payment of the judgment be deductible? Yes, for multiple reasons. First, judgments in civil cases are not definitive. They are decided based on a preponderance of the evidence. Second, the claim arose out of the conduct of Fox’s business operation, the same operation that generates its profits. Third, treatment of payment of a judgment differently from payment of settlement would put defendants in these cases in an untenable position, as their financial incentive to settle would be greater than that of the plaintiffs.
To be sure, as The Lever’s reporting mentions, there are areas where public policy considerations are so compelling that tax deductions for payments of legal claims should not be allowed. But for that to make sense in Fox’s case, it would have to make sense in all trade libel cases. Yes, Fox’s alleged conduct here was particularly odious, but consider the case of a company that settles a claim for an allegedly false statement about a competitor’s product. Do public policy considerations demand that the company not be allowed a tax deduction? In evaluating this, remember that if the company is allowed a deduction, the tax outcome is a breakeven for the government, as the claimant would be required to pay tax on the settlement payment, and if the company is not allowed a deduction, the government gets a windfall. Also, making the economic consequences of trade libel more harsh by not allowing damage payments to be deductible would have a chilling effect on speech.
So, does all that mean our tax system is not really rigged in favor of the rich? No, it absolutely is rigged in favor of those at the top. Louis Brandeis famously said that “we can have democracy in this country or we can have great wealth concentrated in the hands of the few, but we can’t have both.” I’d put it differently: “We can have democracy in this country or we can have a tax system that allows great wealth to be concentrated in the hands of the few, but we can’t have both.”
For over four decades, our tax system has failed us and the failure now threatens our democracy. When 13,000 out of 130 million households (that’s 0.01 percent) hold close to ten percent of the country’s wealth, that’s great wealth concentrated in the hands of the few. The average wealth of those 13,000 families, by the way, is very close to one billion dollars. And this situation is the direct result of over four decades of tax policies rigged in favor of the rich.
Those who did most of the rigging want to rig it further. A few weeks ago, 41 Republican Senators introduced their “Death Tax Repeal Act.” That bill, as I explain more fully here, would allow Jeff Bezos to pass his Amazon shares to his children on his death, who then could sell them for about $130 billion, with zero income tax and zero estate tax paid on the entire amount. We’re already likely to have families with wealth in excess of one trillion dollars (think about that) within the next decade or so. If the Republicans’ bill were to become law, that likelihood would become a certainty. And, by the way, when a similar bill was passed by the House in 2015, Kyrsten Sinema, then a House member, voted for it.
That’s why the Patriotic Millionaires, the organization I advise on tax policy, has proposed a complete overhaul of the federal tax code. You can read about it here.
The bottom line: You shouldn’t be angry about Fox News’ tax deduction, but you should be very angry about the state of our tax system and join the effort to fix it, before it’s too late.
Bob Lord is Senior Advisor, Tax Policy at Patriotic Millionaires and an Institute for Policy Studies associate fellow.
I’ve never heard of the Patriotic Millionaires before today, but I loudly applaud them, and you.
I agree on pretty much every point.
The other half of this equation is Dominion’s position. As I understand it, they can deduct the expenses of defending themselves and pursuing this settlement, but will pay taxes on the net income they received from Fox as a result of the settlement.
Can they also deduct anything for the contracts (if any) that were cancelled by states or localities because of The Big Lie? Can they deduct anything for contracts that went to other companies, that they might have won had it not been for The Big Lie? Does it make a difference, from the POV of the tax code, that this was a pre-trial settlement rather than a court-ordered payment after a guilty verdict?
As you say, there is plenty of room for reform in the tax code.
On the cancelled contracts and contracts that went to other companies, their loss largely is income that they won’t receive and, since they won’t receive it, they’ll never have to pay tax on it. There could be some costs they incurred that for some reason had to be capitalized into the carrying value of the contract, which they normally would amortize over the life of the contract. When they lose the contract, or when a potential contract becomes ungettable, those costs could be deducted immediately.
Thanks much to Bob (and bmaz) for the salient digression!
It is all Bob. I merely asked a question.
Well, if they are ever successful in repealing the death tax, maybe Barron Trump could become the world’s first trillionaire? Uck.
I think in name only. TrumpOrg is a house of cards about to collapse from litigation-itis. I suspect that is one of the key reasons Ivanka ditched her joint legal team with Eric and DJTJ to go it alone.
The tax records we did see don’t point to such a valuation, and FWIW we don’t know just how leveraged the properties are.
Yes the top 0.01% do everything possible to accumulate even more wealth, but they do this by convincing the lower 99 to fight amongst themselves. Fox News is the conduit where right and left argue about things as sensible as a vaccine, or what shoes the M&M characters are wearing. Really. The the Republican Party sets the boundaries to keep the poor people poor….. “no birth control for you!”
Is the deck permanently stacked against reform?
That was an interesting read. Thank you.
Abolishing death/inheritance taxes really doesn’t make much sense. Its a method of defunding the government which needs the money to pay for social programs, road, bridges, military, FBI, even the House of Representatives and Senate. The person is dead. Its not going to effect their taxes. The inheritors perhaps, but really, if the death person is leaving several million or billions it isn’t going to hurt them to pay taxes.
Also don’t understand the business of being able to deduct the interest you pay on your mortgage from your income??? It seems stange to me, but I live in Canada and we don’t have that deduction. When home owners are able to deduct the interest from their taxable income, it reduces the amount of money the government collects. It seems rather unfair that renters are not able to have a deduction of some sort because they usually rent because they can’t afford a home.
In Canada we do have one tax break: if you have lived in your principle residence for at least a year and you sell your home, the money you receive from the sale is non taxable. It works very nicely if you have paid $25K or $90K and then sell you home for $3M. Yes, people who purchased homes in Greater Vancouver, B.C. during the 1970s early 80s and stayed in those homes, are cleaning up.
That’s true, but Vancouver is a wonderful place to retire and if you sell your home, you won’t be able to afford anything there. Then what are you going to do? Move to Edmonton?
One of the conservative arguments against estate taxes has been that the money has already been taxed. What’s the best way to shoot that down?
My view is that all money has already been taxed. Governments tax a wide variety of transactions, and there’s no real division between money that has been taxed and money that has not. Even 401(k) balances have already been subject to FICA taxes on both the company making payroll and the recipient.
The entities that bought the goods or services from the company making the payroll likely also had that money taxed as income when it came to them to spend. Could a company argue that it shouldn’t pay taxes because its customers already paid taxes on the money they used to buy its products? Wouldn’t that be ridiculous.
In general, I think I prefer governments tax transactions rather than static wealth. When money moves, they can see it. I have not seen any reasonable plan to tax wealth when assets are static and hard to value. How would we tax fine art (which is valued in a market that appears to me to be corrupt) or crypto (and other high-volatility assets)? There could be a way, but it would be complicated, and billionaires can afford a lot of lawyers, accountants, and lobbyists to make sure it doesn’t work well.
My view is that governments should certainly tax wealth transfers, including passing the family farm to the next generation. We just need to find a way to do it that is navigable by those farms and other small businesses so that the big guys can’t continue to use them as a political crutch.
Finally, I’ll offer that I believe the rich use more government services than the poor. Richer people rely on the government’s legal and security apparatuses to protect their property rights, and they have a lot more property to protect. Richer people are more likely to need government services like air traffic control, passports, civil courts, police protection, etc.
Wealth is built in the US with significant help from public infrastructure, both physical and procedural. Estate taxes can help ensure that infrastructure is maintained for the inheriting generations.
[Welcome back to emptywheel. Please use the same username each time you comment so that community members get to know you. This is your second user name; “sandman-8” is not the same as “sandman8,” the latter of which you have used on your last 4 comments. Thanks. /~Rayne]
After decades of hearing Republicans squeal about “double taxation” they worked alongside Trump to assure homeowners in most Blue states are doubly taxed on the real estate taxes they pay to support local governments and schools. It was a very targeted move–aimed at the progressive, mostly northern states that Federal “Balance of Payment” analyses already demonstrate fund services and infrastructure in the “Welfare Queen” Red states.
This should have been corrected during the period of time when Democrats held the House, Senate and Presidency. My understanding is this type of change could have been enacted without sixty Senate votes using the reconciliation process.
Thanks Rayne. I was hoping I would remember sandman8 because it is exactly 8 characters, and yet my brain stuck in a hyphen this time. Stupid brain.
Plain and simple, there should not be any deductions when calculating income.
For business, just tax gross revenues less returns and for w-2 individuals earnings on the w-2.
The only concern then is rate of taxation which can be negotiated.
No need on almost impossible audits for business deductions. Thus the only type of audits is on revenues.
I like the simplicity of what you suggest, but I also like using the tax code to encourage certain behaviors. Number one is allowing pre-tax dollars to be invested in an IRA. Encouraging retirement savings is a good thing, and if we can do it through the tax code, I am all for it.
The only behaviors the tax system encourages is:
-draining taxpayers of prep fees and
-tax accountant, lawyer, wealth manager professionals wealth.
If you want to encourage certain behaviors, do it through increasing or decreasing tax rates.
Right now the tax code is probably tens of thousands of pages when all it should be is one line, “Taxable income is amount you earn.”
Thanks Bob for the excellent explainer. Does this also apply to expenses incurred in defending against fraud claims (civil or criminal) when the company itself is found responsible for the fraud?
Thank you, Bob, for your clear and concise explanation about the Dominion payout, and your galvanizing account of how the ultra-rich continue to rig the US tax system to their benefit, via the Republican party (with help from some Dems) and string-pullers like the Federalist Society.
I assume that Fox can’t take the deduction you describe until *after* it pays Dominion–that is, that the mere fact of a settlement (said by some to be under appeal) doesn’t suffice for the IRS. Is this true? And would it also be true for a judgment in a case that went to trial? That is, as long as Fox were hypothetically appealing a jury award, they could not take a deduction?
To my understanding, that transfer has already been made by Fox to Dominion. I have no cite for that though.
Thanks, bmaz. I didn’t know that. What I was asking about was the period after a jury has made an award but before various appeals have been resolved; the company found liable would not be able to write off the awarded amount prior to actually paying it, would they?
No write off until a final verdict. Even including appeal. But a stipulated settlement is final.
Thanks for an excellent explanation
To be clear, Fox only gets a tax deduction for expenses Fox itself pays; if the insurance pays, then there is no deduction. Furthermore, the amount of that deduction is limited by law (currently 21%, I believe,) and can only be carried for so many years.
If the insurance paid, what happens then is the insurance payments themselves go way up, or Fox may lose them together, because the last thing an insurer likes doing is actually paying. This is the more likely scenario, and it’s the reason Fox’s stock price is tumbling right now.
This combination will severely hurt Fox over the next few years. This was the second time Fox had to make massive payouts, and they still have more legal cases coming.