Page 2 - Proposed Regulations Provide Guidance on Deducting Fines and Penalties Paid to the Government: Important Questions Still Remain

or incurred by suit, agreement, or otherwise; to, or at the court order or settlement agreement specifically state that
direction of, a governmental entity; in relation to the vio- the payment, and the amount of the payment, constitutes
lation, or investigation into the potential violation, of any restitution, remediation, or an amount paid to come into
civil or criminal law. The general rule applies whether the compliance with the law. If the order or agreement states that
taxpayer admits guilt or liability, or pays the government’s a payment constitutes restitution, remediation, or an amount
claim for any other reason, including to avoid the expense or paid to come into compliance with the law, a presumption
uncertainty in the outcome of the investigation or litigation. arises in the taxpayer’s favor that the identification require-
The proposed regulations provide that an amount is paid ment has been met.
or incurred for restitution, remediation, or paid to come into The proposed regulations leave unanswered several
compliance with the law if it restores, in whole or in part, the important questions regarding the identification requirement.
person, governmental entity, or property harmed by the vio- For example, the provisions fail to address how to satisfy the
lation or potential violation of the law. Payments qualifying identification requirement in the case of lump sum payments
as restitution, remediation, or paid to come into compliance that may include both deductible and nondeductible compo-
with the law may be made under settlement agreements, nents, or agreements that include multiple taxpayers, with
nonprosecution agreements, deferred prosecution agreements, multiple damage awards, that do not allocate the payments
judicial proceedings, administrative adjudications, and similar among the taxpayers.
legal actions that impose liability on a taxpayer. Deductible The identification requirement in the proposed regulations
payments do not include amounts paid to reimburse the has additional deficiencies. The provisions do not consider
government for investigation or litigation costs. the fact that it may be beyond the expertise of the relevant
The proposed regulations contain a provision that is government or governmental entity to place a value on the
likely to cause continuing dis-
putes between taxpayers and
the government. The provi-
sion ensures that payments
for restitution, remediation or
paid to come into compliance
with the law do not include
forfeiture or disgorgement.
Taxpayers have often argued
that payments of forfeiture
and disgorgement can be
compensatory in nature, and
are therefore deductible. In
light of the limitation in the
proposed regulations, particu-
lar care must be exercised in
negotiating settlement agree-
ments with the government
to make certain that payments
that have compensatory pur-
poses are not misidentified
as forfeiture or disgorgement.

Identification and Estab-
lishment Requirements
The proposed regulations
contain what are referred to
as “identification” and “estab-
lishment” requirements. To
satisfy the identification
requirement, the proposed
regulations require that the

SEPTEMBER 2020 | THE CPA JOURNAL 69

9/15/20 10:53 AM
09-2020 TPP_.temp.indd 69
09-2020 TPP_.temp.indd 69 9/15/20 10:53 AM