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Harry Cassin
Publisher and Editor

Andy Spalding
Senior Editor

Jessica Tillipman
Senior Editor

Bill Steinman
Senior Editor

Richard L. Cassin
Editor at Large

Elizabeth K. Spahn
Editor Emeritus

Cody Worthington
Contributing Editor

Julie DiMauro
Contributing Editor

Thomas Fox
Contributing Editor

Marc Alain Bohn
Contributing Editor

Bill Waite
Contributing Editor

Russell A. Stamets
Contributing Editor

Richard Bistrong
Contributing Editor

Eric Carlson
Contributing Editor

Deducting Disgorgements

A reader asked a question we hadn’t seen before. Is an FCPA-related disgorgement tax deductible? We’ve talked about disgorgement (here) and taxes (here). But we’ve never put the two together in a post. So we began checking the cases but nothing came up. Then we dove into the Tax Code and the Treasury Regulations and landed on Subchapter A, Sec. 1.162-21. It deals with the deductibility of “fines and penalties.” We’re always expecting to find straight lines and right angles in tax land. But once again we were in a grey area.

The law says fines and penalties aren’t deductible. But even the TaxAlmanac (here), with lots of examples of fines and penalties, didn’t mention disgorgement. So we were left wondering.

That’s when we punted the question to George Clarke, a tax lawyer in the District of Columbia. He said:


Whether a disgorgement payment made pursuant to a settlement with the SEC/DOJ is deductible turns on whether it is a “fine or similar penalty” under the internal revenue laws. Under those laws, a payment is a “fine or similar penalty” if the purpose of the payment is punitive. To determine the purpose of the payment, the taxpayer must look to the statute under which the SEC/DOJ brings its action as well as to the facts of the taxpayer’s case, especially the specific language of the settlement agreement, the history of the enforcement action, and the context in which the payment was made. The taxpayer can to some extent influence deductibility by carefully considering these issues during settlement negotiations.

As a very general matter, unless the language of the settlement agreement or the history and context of the settlement compels the conclusion that the disgorgement is intended to punish, a taxpayer should be able to effectively argue that the purpose of the payment was not to punish (i.e., that it was remedial, to encourage future compliance, or to compensate the government or other harmed parties). The IRS may try to analogize the disgorgement payment to a criminal forfeiture of assets (and the authorities thereunder) as a basis for an argument that such payments are non-deductible. But the purpose of criminal forfeiture is, in the main, different and more akin to a fine or similar penalty than is disgorgement worked by a settlement agreement in these situations.

The lesson is that FCPA-related disgorgements — which have reached hundreds of millions of dollars — may be deductible. It depends chiefly on what the SEC intends and how the agreement describing the disgorgement is written to reflect that intent.


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