Congress May Limit Deductibility Of Investigation Costs, Fines

by Mike Godfrey, Tax-News.com, New York

04 September 2002

US firms which can currently write off the costs of fighting investigations and court cases brought against them by the Government, even if they are found to have transgressed, may be prevented from setting off such costs against tax in future, if a proposed law is passed.

Riding the current wave of anti-business sentiment, Senate Finance Committee Chairman Max Baucus (D., Mont.) is thinking about bringing forward such legislation right now, says a spokesman, which would affect companies such as Enron and WorldCorp, advisory accounting and law firms implicated in wrongdoing, and Wall Street firms penalized by the SEC or other investigatory bodies.

Committee officials emphasize that they have reached no decisions, and it's far from easy to decide where to draw the line. Lots of companies settle lawsuits that their executives legitimately believe have no merit, because it's cheaper that way. And where does the shareholders' interest lie?

Currently, Congress prohibits only deductions of government fines and penalties, along with some damages from antitrust cases and out-and-out bribes. In practice, that means a lot of civil settlements with government agencies remain deductible. The IRS tries to distinguish between settlements with the government that are compensatory, and therefore deductible, and those that are punitive, and therefore aren't.

But it's often not clear cut - the IRS says that a civil penalty, "even if it is labeled a penalty, may be deductible if it is imposed to encourage compliance with the law or as a remedial measure to compensate another party."

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