A District Court in Virginia recently ruled in Altria Group, Incorporated v. United States (2022 U.S. Dist. LEXIS 10612) that the portion of punitive damages that the defendant paid that were redirected to the state of Oregon were deductible business expenses under Section 162.
The taxpayer in Altria initially received an unfavorable judgment and assessment for punitive damages in a wrongful death case brought by the estate of an Oregon resident. At the time, Oregon’s split-recovery statute was in effect, which allowed the state to take 60% of all punitive damages awarded to the prevailing party (in this case, the estate of an Oregon resident). As described in the case, the intention of the split-recovery statute generally was to eliminate a perceived windfall while maintaining a deterrent effect by redistributing a portion of the award to the state for a fund providing assistance to victims of crime. The taxpayer timely deducted the total cost of the punitive damages paid on its 2012 tax return—both the amount to the prevailing party and the amount redistributed to Oregon. The IRS disallowed the portion paid to Oregon, citing Section 162(f), and assessed tax and penalties. The taxpayer received a subsequent denial of refund request, resulting in the present case.
Section 162(f), as enacted during the year at issue, generally states that no deduction is allowable for any fine or similar penalty paid to a government for the violation of any law. As the parties stipulated that the amount in question was paid to a government, the crux of the case relied on whether this amount was a fine or similar penalty for the violation of any law. The court fixated on the origin of the liability for payment to Oregon.
The court concluded that the origin of the liability was the split-recovery statute—which merely made Oregon a judgment creditor—instead of the initial wrongful death case. Further, the court highlighted that without the split-recovery statute, the entire amount of the punitive damages would have gone to the prevailing party. Similarly, the court concluded that the split-recovery statute does not include a violation of law element and the factual basis of the underlying litigation has no bearing on the statute—thus, the amount paid to Oregon was not a fine or similar penalty paid to the government for the violation of any law. After this analysis, the court concluded, the full payment of punitive damages was deductible under Section 162.
The court additionally opined that if it were to consider this matter while reviewing the current version of Section 162—after the 2017 Tax Cuts and Jobs Act (Pub. L. No. 115-97)—the same conclusion would apply.
Partner, Washington National Tax Office
Sharon Kay is the National Managing Partner of Grant Thornton LLP's Washington National Tax Office. Sharon has over 25 years of tax experience and primarily advises clients on federal income tax issues such as accounting method changes, income and expense recognition, inventories, tangible and intangible asset capitalization and recovery, and certain business credits.
Washington DC, Washington DC
- Strategic federal tax
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.
More tax hot topics
No Results Found. Please search again using different keywords and/or filters.