IRS concludes payment of FINRA fine is not deductible

Tax Hot Topics:  FINRA fine deductibilityIn a Chief Counsel Advice memorandum (CCA 201623006), the IRS national office addressed whether the Financial Industry Regulatory Authority (FINRA) is a “corporation or other entity serving as an agency or instrumentality” of the federal government for purposes of Section 162(f) (which provides that fines are not deductible). FINRA is a nonprofit corporation that is a registered self-regulatory organization (SRO) under the Securities Exchange Act of 1934 (’34 Act). FINRA enforces compliance with the ’34 Act, SEC regulations and its own rules by bringing disciplinary proceedings to adjudicate violations, which are subject to SEC review.

Relying primarily on the Tax Court’s opinion in Guardian Industries Corp. v. Commissioner, 143 T.C. 1 (2014), the IRS concluded that FINRA is a corporation serving as an agency or instrumentality of the government for purposes of Section 162(f) when it is performing its federally mandated duties under the ’34 Act of conducting enforcement and disciplinary proceedings relating to compliance with federal securities laws, regulations and its own rules promulgated pursuant to that statutory and regulatory authority. The IRS noted, however, that Section 162(f) would not apply to a fine paid to FINRA solely for a violation of a “housekeeping” rule that is a matter of private contract between FINRA in its capacity as a professional organization and its members. Finally, the IRS recognized that some taxpayers have raised a number of arguments that an SRO such as FINRA is not an “instrumentality” of the government for purposes of Section 162(f). The IRS in the Chief Counsel Advice rejected these arguments.                

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