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Recent Guidance Regarding Deduction of Fines
Internal Revenue Code section 162(f), which relates to fines and penalties that would otherwise constitute ordinary and necessary expenses deductible under Code ' 162(a), provides: “No deduction shall be allowed under subsection (a) for any fine or similar penalty paid to a government for the violation of any law.” The provision was added to the Code in 1969 as a codification of prior case law, under which certain such expenses were held nondeductible because allowing a deduction would be inconsistent with public policy. See H. Rep. No. 91-782 (1969), at 331; Tank Truck Rentals v. Commissioner, 356 U.S. 30 (1958).
The controversies that continue to arise under ' 162(f) are illustrated by two memoranda released within the past few months that address whether an amount paid to the U.S. Securities and Exchange Commission (SEC) and representing a disgorgement of profits from activities undertaken in violation of law is a “fine or similar penalty,” or whether it is compensatory in nature and therefore not subject to disallowance under ' 162(f). These memoranda also address whether the Financial Industry Regulatory Authority (FINRA) ' a self-regulatory organization with federally mandated duties under the Securities Exchange Act of 1934 (1934 Act) ' is a “corporation or other entity serving as an agency or instrumentality of” the federal government within the meaning of the regulations interpreting 162(f) (Reg. ' 1.162-21(a)(3)), such that an amount paid to FINRA should be treated as an amount paid to a government for purposes of this provision.
Punitive Versus Compensatory
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