A recent $700 million settlement over monopolistic practices at Google’s Play Store could implicate the limitation on deducting fines and government payments.
The December 18 motion and settlement in Utah v. Google LLC invoke one of the magic words — restitution — for preserving deductibility for a settlement with the government, but some questions remain.
The suit arose from allegations that Google exercised monopolistic power via its app store on Android devices. The litigation started with claims filed by consumers, state governments, and other companies, but the settlement addresses only the first two groups of plaintiffs.
Under the settlement, Google will pay $700 million and no more. The money will initially be split into a $630 million settlement fund for paying “compensatory restitution” to the settling consumers and a $70 million monetary fund to pay the states’ claims made on their own behalf.
The states represented both their own sovereign claims and those of the consumers in parens patriae. However, the settlement contemplates attorney fees and expenses for consumer counsel, saying any payment will come from the settlement funds rather than separately from Google. According to the settlement motion, the consumers’ counsel could ask for nearly $122 million in fees and $8.6 million in litigation expenses.
Under the settlement, only compliance and maintenance costs for the funds will come from Google.
The settlement also includes the following statement from Google: “Google has indicated that, absent this settlement, it intends to vigorously contest each and every Claim in the Actions, and Google denies all of the material allegations in the Actions. Google enters into this Settlement Agreement without in any way acknowledging any fault, liability, or wrongdoing of any kind.”
The consumer settlement fund will be used to fund payments to consumers who paid for apps through the Google Play Store. According to the settlement motion, once there’s too little in the settlement fund to effectively make a distribution to consumers, the remainder will go to the states’ monetary fund and none of the money will revert to Google.
The states’ monetary fund will distribute the money to the states for them to do whatever they deem appropriate with it.
The settlement repeatedly says, “For avoidance of doubt, the States take no position on Google’s tax liabilities.”
A Violation by Any Other Name
The Tax Cuts and Jobs Act tightened section 162(f)’s restrictions on deductions for penalties by sweeping in most settlements for litigation with the government. However, the new version of the provision retains an exception for restitution, remediation, and compliance costs, allowing those to remain deductible by the payer.
Lawmakers have been irked by what some see as improper limitations allowing malfeasant companies to enlist the public fisc in their effort to make their victims whole.
Other public settlements seem to have been written without interest in preserving the possibility of a deduction for any payment. Those settlements may be lower, leaving less for victims to collect, at least one observer has noted.
Any remaining deduction must still satisfy two requirements: The settlement documents must identify the restitution payments and the taxpayer must establish that those payments really are restitution.
Searching for the Answer
The biggest question for deducting the settlement is likely the treatment of the consumer counsel attorney fees, Connie Cheng Cunningham of BDO USA LLP told Tax Notes.
The IRS and Treasury have clarified the treatment of government and taxpayer litigation costs in the final section 162(f) regs (T.D. 9946), but haven’t said anything about third-party litigants’ costs, Cheng Cunningham noted.
While it’s certainly a gray area, there could be an argument that because the consumer counsel attorney fees aren’t going to the government — and without anything else in the section 162(f) regs to preclude treating them as part of the restitution — and restitution is about making harmed parties whole, their investigation and litigation costs should be included in the exception to the deduction denial, Cheng Cunningham said. The definition of restitution could be broad enough to include the consumer counsel attorney fees if Google deducts the settlement, she said.
The definition of a government suit is broad enough to include the parens patriae suit in section 162(f)’s general deduction denial, Cheng Cunningham said. Further, Google’s refusal to admit fault in the settlement shouldn’t be a barrier to the restitution exception and such clauses are common, she said.
That means that Google will need the restitution exception if it wants to deduct any portion of the $700 million.
Some portions of the settlement agreement also label the $70 million states’ monetary fund as “restitution,” but the establishment requirement paired with the broad discretion the states will have in using that money likely means Google won’t be able to deduct that portion as restitution, Cheng Cunningham said.
The remainder reversion from the consumer settlement fund will likely fit within the regs’ settlement fund requirements, Cheng Cunningham said. Any reversion will likely be fairly small, especially when comparing the billions of dollars of claimed harm discussed in the settlement motion with the $630 million settlement fund, she said.
Even if the consumer counsel attorney fees don’t qualify as restitution under section 162(f), Google should be able to deduct the rest of the consumer settlement fund payment, Cheng Cunningham said. The identification requirement includes some wiggle room for separating deductible restitution from nondeductible payments when the description is clear enough, and there may be nonpublic documents that could further support Google’s case, she said.