No More Perks for Punitive Damages

A bank put a northern California couple through what a U.S. bankruptcy judge called a “Kafkaesque nightmare” that caused them to lose their home and suffer medical problems due to the “brazen and heartless” behavior of bank employees after the family sought a loan modification for their house.

A San Bernardino health clinic acted with “malice, fraud and oppression” when it retaliated against an employee who was forced to resign her position for refusing to falsify patient and clinic data and charge patients for services that were already covered by insurance.

An auto parts retailer retaliated against a female manager for becoming pregnant, demoting her after giving birth and then firing her when she complained about the discrimination.  At trial, a former district manager testified that a vice president reprimanded him for having so many women in management positions, telling him, “What are we running here, a boutique? Get rid of those women.”

What these three cases have in common is a judge or jury found the defendants’ behavior so reprehensible that they awarded punitive damages to punish the offenders and to send a message to deter others from engaging in such outrageous acts.

Unfortunately, the intended punishment inherent in punitive damages often equates to a slap on the wrist.  A 1980 Internal Revenue System administrative ruling allows corporations to write off punitive damages on their taxes as a normal expense of doing business.  This allows egregious misconduct that in some cases kills or maims workers and customers to be subsidized by taxpayers.

My Senate Bill 66 will close this unjustifiable loophole.  It is unconscionable to award a tax break to a company that acts with reckless and dangerous disregard for the law. To award punitive damages, a jury must find that there is clear and convincing evidence that the defendant acted knowingly and willingly with malice, oppression or fraud.  This means the conduct is so despicable that it subjects a person to cruel and unjust hardship in conscious disregard of their rights.  Does that sound like behavior a government should reward with a tax break?

Punitive damages are rarely levied against offenders.  The Department of Justice found they are awarded in only 2 percent of civil cases that go to trial. Nor are they exorbitant.  The median punitive damage award ranges between $38,000 to $50,000.

Because SB 66 eliminates deductions for punitive damages on personal and corporate tax filings it requires a two-thirds vote.  This is a high but not insurmountable threshold.  Just three years ago, after then Los Angeles Clippers owner Donald Sterling made comments widely condemned as racist, he was fined by the National Basketball Association.  The Legislature and Governor approved a bill prohibiting professional sports franchise owners from deducting on their taxes fines and penalties imposed by the professional sports league.

If an arbitrary fine from a sports commissioner cannot be written off on an owner’s taxes, then neither should punitive damages imposed on billion-dollar corporations in a court of law.  The Legislature must be consistent and punish this reprehensible behavior.  Tax breaks should promote actions that benefit society, not reward corporations for defrauding customers and oppressing employees.

Senator Bob Wieckowski is a member of the Senate Judiciary Committee and represents the 10th District, which includes parts of southern Alameda County and northeast Santa Clara County.

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