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Recent Guidance Regarding Deduction of Fines

By David E. Kahen and Elliot Pisem

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.

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