kickback

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Kickback

The seller's return of part of the purchase price of an item to a buyer or buyer's representative for the purpose of inducing a purchase or improperly influencing future purchases.

Under federal law kickbacks involving government officials or funds provided by the government are illegal. Kickbacks between a contractor and a government official or government employee are prosecuted under the federal Bribery statute, 18 U.S.C.A. § 201. Kickbacks between private contractors working under a federal contract are prosecuted under 41 U.S.C.A. §§ 51–58, otherwise known as the Anti-Kickback Enforcement Act of 1986. Kickbacks to employees or officials of foreign governments are prohibited under the Foreign Corrupt Practices Act of 1977 (15 U.S.C.A. § 78dd-1 et seq.). Most states have commercial bribery statutes prohibiting various forms of kickbacks.

One notable public figure accused of profiting from a kickback scheme was Spiro T. Agnew, vice president of the United States under richard m. nixon. While governor of Maryland, Agnew oversaw a system in which engineering firms working under state construction contracts paid kickbacks that went 25 percent to the state official who arranged the deal, 25 percent to the official who brought the deal to Agnew, and 50 percent directly to Agnew himself. In another arrangement Agnew demanded a kickback of five cents for every pack of cigarettes sold in vending machines located in Maryland state buildings. These kickbacks were secret, illegal, and not reported on Agnew's income tax returns. Agnew continued to collect them after he became vice president. He resigned the vice presidency in 1973 as part of a plea bargain that allowed him to avoid going to jail for income Tax Evasion in connection with those kickbacks.

Though many types of kickbacks are prohibited under federal and state law, kickbacks are not illegal per se. If a kickback does not specifically violate federal or state laws and such kickbacks are made to clients throughout the industry, the kickback may be normal, legal, and even tax deductible. According to section 162(a) of the Internal Revenue Code (26 U.S.C.A. § 162), "all the ordinary and necessary expenses" that an individual or business incurs during the taxable year are deductible, including kickbacks as long as the kickbacks are not illegal and are not made to an official or employee of the federal government or to an official or employee of a foreign government.

On several occasions the courts have ruled on the deductibility of specific legal kickbacks. In most cases the courts have found these kickbacks to be not deductible because they are not ordinary in the sense of usual and customary. In Bertoloni Trucking Co. v. Commissioner of Internal Revenue, 736 F.2d 1120, 84-2 U.S.T.C. P 9591 (1984), however, the Court of Appeals for the Sixth Circuit interpreted the term ordinary quite differently. Reviewing Supreme Court cases dealing with the interpretation of ordinary in section 162(a), the court identified two lines of interpretation: one held that the term meant "usual and customary," the other held that the term was intended to distinguish payments of a capital nature from payments of a recurring nature, which were thus deductible currently. In Bertolini the court held that this second line of interpretation was more consistent with legislative intent, and thus ruled that kickbacks made by the Bertolini Trucking Company were tax deductible.

In a very similar case, the same court came to a different conclusion. In Car-Ron Asphalt Paving Co. v. Commissioner of Internal Revenue, 758 F.2d 1132 (6th Cir. 1985), Car-Ron Asphalt Paving Company had paid legal kickbacks to Nicholas Festa, the same contractor to whom Bertolini Trucking had paid kickbacks. As in Bertolini the Tax Court had ruled that such payments were not tax deductible because they were not necessary and ordinary. As not in Bertolini, the appeals court ruled that the payments Car-Ron had made to Festa were not necessary business expenses, since, throughout its thirteen-year history, the company had obtained nearly all of its contracts without making such payments.

Beginning in the 1970s, the health care industry became the particular focus for government efforts to prevent kickbacks. As health care costs escalated in the late 1980s and 1990s, efforts to prevent Fraud intensified, resulting in 1995 in the passage of the Medicare Fraud Statute (42 U.S.C.A. §§ 1320a–1327b). This statute prohibits kickback schemes such as those in which hospitals pay physicians in private practice for patient referrals, and drug companies and medical device manufacturers pay physicians to prescribe their products to patients. The Medicare Fraud Statute makes it illegal for anyone to pay or receive "any remuneration (including any kickback, bribe or rebate)" to induce the recipient to purchase, order, or recommend purchasing or ordering any service reimbursable under Medicare or Medicaid. Some experts in the area of health care fraud suggest that the Medicare Fraud Statute should be used as a model for constructing a general antikickback statute that would prevent kickback arrangements in all areas of the health care industry, not just Medicare and Medicaid.

Further readings

Chemerinsky, Erwin. 1983. "Controlling Fraud Against the Government." Notre Dame Law Review 58.

Szarwark, Ernest J. 1986. "Bribes, Kickbacks, and Rebates: How New Developments Affect the Tax Results." The Journal of Taxation 64.

Williams, Charles J. 1995. "Toward a Comprehensive Health Care Anti-Kickback Statute." University of Missouri—Kansas City Law Review 64.

kickback

noun bribe, criminal gift, criminal share, graft, hush money, illegal commission, illegal compensaaion, illegal cut, illegal payment, illegal percentage paid, illlegal recompense, illegal remuneration, payoff, payola, protection money
Associated concepts: anti-kickback law, illegal kickback scheme, official corruption
See also: bribe, graft, gratuity
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