Hidden cost: Corporations see lower tax bill when they settle with the government

“This issue has fallen into a sort of regulatory black hole where agencies feel it’s a tax issue and therefore the IRS’s responsibility. And the IRS feels it’s not their responsibility because they follow the strict letter of the law,” said Phineas Baxandall, a senior policy analyst at U.S. Public Interest Research Group. “Unless some legislation passes, it’s unlikely to change.”

Tax policy experts argue that legislative attempts to eliminate the deduction have probably failed because punitive and compensatory damages are essentially business expenses. They say almost all other ordinary business expenses are deductible, and question why damages should be excluded.

“Our tax laws ought to measure tax income. And once we start to depart from the measure of income to pursue social goals, then a variety of complications arise in where do you draw the line,” said Steven Rosenthal, a visiting fellow at the nonpartisan Urban-Brookings Tax Policy Center.