In 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.
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.