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Wednesday, July 19, 2006 - Page updated at 12:00 AM

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Senators look into Boeing, U.S. settlement

Seattle Times Washington bureau

WASHINGTON — Three influential senators have questions about Boeing's recent $615 million federal settlement of its procurement scandals, and they want answers from Boeing Chief Executive James McNerney.

Sens. John Warner, John McCain and Charles Grassley have joined forces, and Warner, R-Va., chairman of the Senate Armed Services Committee, has called an Aug. 1 hearing on the settlement. McNerney will be asked to testify, as will Deputy Attorney General Paul McNulty, who helped negotiate the deal while he was the U.S. attorney in Virginia.

The company agreed to pay $565 million in civil penalties and $50 million for criminal fines, and the government agreed not to file any charges against the company in two major contracting scandals.

One scandal centered on dealings with former Air Force procurement official Darleen Druyun, who steered billions of dollars in contracts to Boeing. The other involved engineers who brought proprietary Lockheed Martin rocket data to Boeing.

The settlement, finalized June 30, ended a three-year investigation of Boeing by the Justice Department but seems to have begun another round of scrutiny in Congress.

Grassley, R-Iowa, chairman of the Senate Finance Committee, is concerned about whether Boeing will be able to deduct its civil fines from its income taxes. He pressed Attorney General Alberto Gonzales about it Tuesday during a Senate hearing.

On June 29, Grassley, Warner and McCain said in a letter to Gonzales that allowing tax deductibility would leave the American taxpayer to subsidize Boeing's misconduct.

The Justice Department responded last week that it would remain neutral on the tax issue.

Grassley complained Tuesday that if Boeing could deduct its $565 million civil fine from its taxes, that would lower the company's bill by 35 percent.

Grassley scolded Gonzales, saying: "It is actually worse that DOJ doesn't even know what the tax treatment is of the Boeing settlement. It tells me that DOJ lawyers gave away 35 percent of the store without even knowing it."

Meanwhile, McCain, R-Ariz., who has long been critical of the company, wants to know how the settlement with the Justice Department was negotiated. Published reports indicated some department lawyers wanted harsher treatment for the company and higher fines.

Boeing spokesman Tim Neale said the agreement with the department does not preclude Boeing from deducting its civil fine from its taxes.

"It is something that the company will decide in a couple of weeks. We are seeking the advice of tax lawyers," he said.

Boeing is due to release its second-quarter earning report next Wednesday, which will likely address the tax issue.

Neale said McNerney had not yet received his invitation to appear before the Senate, noting that much of the company leadership is at this week's Farnborough Air Show in England.

Charles Tiefer, a government-contracts law professor at the University of Baltimore, said, "It would be unfortunate if Boeing got to write off a sizable part of the $565 million. Such favorable tax treatment is reserved for 'ordinary and necessary' business expenses, not one of the largest rip-offs of the American people in recent years."

Tiefer pointed out that many settlements with the government contain clauses that prohibit use of fines as tax write-offs.

The exclusion of such a phrase in Boeing's agreement will be one of the issues to be raised at the Senate hearing.

Alicia Mundy: 202-662-7457 or amundy@seattletimes.com

Copyright © 2006 The Seattle Times Company

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