Fox Can Claim Tax Writeoff For Defamation Settlement

Fox’s massive settlement with Dominion Voting Systems didn’t just spare the conservative news organization from a legal and public reckoning for its election lies — according to today’s featured story below, it could also mean a gigantic tax break for the news company.

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A headline about President Donald Trump displayed outside Fox News’ New York studios. (AP Photo/Mark Lennihan, File)

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Fox’s massive settlement with private equity-backed voting machine company Dominion Voting Systems didn’t just spare the conservative news organization from a lengthy public defamation trial or a full public reckoning for its election lies — it could also mean a tax break as large as $213 million, according to a Lever review.

On Tuesday, Fox News and its parent company Fox Corporation agreed to pay a $787 million settlement to Dominion, the largest-known media defamation payout in U.S. history, concluding two years of litigation over the news network’s false claims that the 2020 election was rigged.

Thanks to an arcane line in the tax code, Fox can deduct that settlement payment from its income taxes, according to a company spokesperson and tax experts consulted by The Lever. That’s because federal law allows taxpayers to write off many legal costs, providing that they are “ordinary and necessary” business expenses. The IRS has repeatedly affirmed that for major corporations, paying out settlements is just part of the cost of doing business.

In Fox’s case, that business involved ginning up false claims that the 2020 election was stolen from former President Donald Trump.

“If your business model is to tell lies so that you’ll get viewers and have lots of advertising revenues, then, odious though this business model may be, the tax system’s job is to tax you on the profits that you actually make from it,” Daniel Shaviro, a professor of tax law at NYU, told The Lever. “And those profits are indeed reduced when you are successfully sued by the victims of your malicious falsehoods.”

Brian Nick, Fox Corporation’s chief communications officer, told The Lever that “I can confirm tax deductibility but not the amount.”

Exceptions to these tax write-off rules exist for settlement payments in sexual harassment or abuse cases with non-disclosure agreements. Fox has paid out several such sexual harassment settlements, including a 2016 settlement with former host Gretchen Carlson, and also settled with shareholders in 2017 for creating a culture of sexual harassment that had a negative effect on the company’s value.

Tax law also prohibits deductions for most fines and penalties paid to the government. But when corporations cut deals to settle claims of legal wrongdoing with the government, they often reap tax benefits.

That was the case for major corporate settlements between banks and the federal government after the financial crisis, and between drug companies and localities amid the opioid crisis.

When JPMorgan settled with the federal government in 2013 over charges that the bank lied about the quality of mortgages it underwrote, $11 billion of the $13 billion settlement was tax deductible, news reports indicated.

At least $2.7 billion of a $5 billion settlement between the government and Goldman Sachs in 2016 for that bank’s misconduct in the leadup to the financial crisis was tax deductible, earning the company a $936 million tax rebate. Of an $11.6 billion settlement between Bank of America and the federal government in 2014, $10 billion was tax deductible, ensuring the bank a $4 billion windfall from the IRS.

The 2017 Republican tax law, the Tax Cuts and Jobs Act, amended the IRS statute so payments to government entities could not be deducted if they were related to the “violation of any law,” but were deductible if they constitute “restitution” or “remediation” payments or are the cost of “coming into compliance with a law.”

The drug companies that paid a combined $26 billion to settle litigation in 2021 over their roles in the opioid crisis indicated in financial filings they intended to recoup more than $4.5 billion from deducting the settlements from their taxes. (Congress asked the Biden administration to investigate the planned write-offs in March 2022.)

However in the case of settlements between private entities, the entity making the payment can deduct the cost entirely — while the recipient pays corporate income taxes on it.

Fox Corporation reported $1.2 billion in net income in 2022, so the $787 million Dominion settlement is equivalent to about two-thirds of the company’s profits last year.

However, Fox could save hundreds of millions of dollars in taxes on the settlement payment. The firm reported paying an effective income tax rate of 27 percent in 2022 — a combination of federal and New York corporate taxes. If Fox can write off the full settlement payment to Dominion, it could amount to an estimated $213 million in tax savings for the company.

If any of Fox’s settlement payment is covered by insurance, Fox could not write off that portion of the payment. However, the company would then be able to deduct any subsequent higher premiums triggered by an insurance payout.

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