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IRS: certain disgorgement payments not deductible

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Tax Hot Topics -  IRS: certain disgorgement payments not deductibleThe IRS Office of Chief Counsel issued a chief counsel advice (CCA) memorandum (CCA 201619008) to the Large Business and International Division regarding the deductibility of certain disgorgement payments.   

The taxpayer that was the subject of the advice entered a consent agreement in a proceeding brought against it by the SEC and agreed to pay disgorgement representing profits gained from falsified books and records related to value given to government officials of a foreign country in violation of the Foreign Corrupt Practices Act. The issue addressed in the advice was whether Section 162(f), which disallows a deduction for any fine or similar penalty, applied to the disgorgement payment.

The taxpayer raised three arguments as to why Section 162(f) shouldn’t apply to the payment. The IRS spent little time dismissing two of the arguments: (1) that the payment was made to encourage prompt compliance and (2) that the consent agreement didn’t include language prohibiting deductibility. Most of the analysis in the advice addressed a third argument advanced by the taxpayer — that the payment was intended “as a compensatory or remedial measure” and not to “penalize or punish.”  

The IRS advised that, depending on the facts, a disgorgement under federal securities law could either be compensatory (deductible) or punitive (nondeductible). Based on the taxpayer’s facts, the IRS found no indication that the purpose of the disgorgement payment was to compensate the U.S. or another party for specific losses caused by the taxpayer’s conduct. Therefore, the IRS concluded that the disgorgement payment would not be deductible.

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