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WASHINGTON-The minimum wage increase recently passed by the U.S. Senate embraces a new thorn in the side of big business: The end of income tax deductions for punitive damages and settlement payments. “Pure pork for the plaintiffs’ bar,” said Larry Akey of the U.S. Chamber of Commerce about the pending elimination of the deduction. “Outrageous” profiteering off injured people, countered Chris Mather of the American Association of Justice about the status quo. For at least two decades, a deduction has been allowed for damages paid or incurred as ordinary and necessary expenses in carrying on a trade or business, regardless of whether such damages were compensatory or punitive in nature, according to Mark Behrens, partner in the Washington office of Kansas City, Mo.’s Shook, Hardy & Bacon. “The addition of a provision that adversely affects larger companies, such as the punitive damages provision, could draw a larger spectrum of businesses against the whole bill,” he said. New Congress, new ballgame? Congressional attempts to end the business deduction for those payments are not new but they have been thwarted by the business community’s effective lobbying. But business’s lobbying effort this year is more difficult because of a Democratic-controlled Congress and the insertion of the provisions into the revenue-raising side of the popular minimum wage increase. The impact of eliminating the deductions, the Chamber’s Akey said, would be to “create additional leverage that trial lawyers can use to extort a settlement from defendants, regardless of the merits, by increasing the financial exposure a defendant might have should he take a case to trial.” The Chamber, the National Association of Manufacturers and other business groups also question whether the provision would raise much tax revenue. Behrens agreed, saying, it is “misleading” to look at the elimination of the deductions as revenue-raisers. “Very few cases filed ultimately reach a verdict at trial that result in payment of punitive damages,” he explained. “So in terms of how many payments are there relative to all cases filed, it’s a small part.” But it’s the “weapon” of punitive damages that drives settlement negotiations, added Behrens. Here, the impact on corporations would most likely be felt during settlement negotiations, he said. “It may give plaintiffs more leverage at the settlement table to demand higher settlements knowing that if I settle, we can characterize the amount as compensatory and the whole thing is deductible,” he said. “If I run the risk of going to trial and I lose, a punitive damages payment is going to come off my bottom line.” The minimum wage measure is now in the House.

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