Federal Tax

Deductibility of Illegal Payments, Fines, and Penalties (Portfolio 524)

  • This Portfolio explores the requirements of §162(c) and (f), which specifically address the deductibility of bribes, kickbacks, other illegal payments, fines, and penalties.

Description

Bloomberg Tax Portfolio, No. 524, Deductibility of Illegal Payments, Fines, and Penalties, consists of two elements, broadly speaking.

In Parts I through VI, the Portfolio explores the requirements of §162(c) and (f), which specifically address the deductibility of bribes, kickbacks, other illegal payments, and fines and penalties. Broadly speaking, payments made to officials or employees of a foreign government are not deductible if the payments are unlawful under the Foreign Corrupt Practices Act of 1977. Payments made to officials or employees of any government other than a foreign government are not deductible if the payments constitute an illegal bribe or illegal kickback. Similarly, no deduction is allowed for any payment made to a person who is not an officer or employee of a government if the payment constitutes an illegal bribe, an illegal kickback, or other illegal payment under any law of the United States, or under any generally enforced law of a state, that subjects the payor to a criminal penalty or the loss of a license or privilege to engage in a trade or business. Deductions are also not allowed for any bribes, kickbacks, or rebates by any person who furnishes items or services for which payment is or may be made under Medicare, or in whole or in part out of federal funds under Medicaid, if such bribes, kickbacks, or rebates, are made in connection with the furnishing of such items or services or the making or receipt of such payments. Finally, deductions are disallowed for fines or similar penalties paid to a government for the violation of any law.

In Part VII, the Portfolio briefly describes the general requirements that are applicable to all expense deductions, including those for bribes, kickbacks, illegal payments, fines, and penalties. The Portfolio explores the meaning of “ordinary and necessary” under §162(a) (trade or business expenses) and §212 (investment or tax-related expenses). It also considers the extent to which expenditures must be capitalized, deducted as a loss, treated as cost of goods sold, or treated as something other than a currently deductible expense.

Table of Contents

I. Deductibility of Illegal Payments, Fines, and Penalties: Background and General Principles
II. Deductibility under § 162(c)(1) of Illegal Payments to Foreign and Non-Foreign Government
III. Deductibility under § 162(c)(2) of Illegal Payments to Persons Other Than Government
IV. Deductibility under § 162(c)(3) of Kickbacks, Rebates, or Bribes under the Medicare or Medicaid System
V. Deductibility of Fines and Similar Penalties under § 162(f)
VI. The All-Inclusiveness of the Public Policy Considerations Set Out in § 162(c), (f) and (g)
VII. Overview of General Requirements for an Expense Deduction

Christopher Stoneman
Christopher Stoneman
Tax Management Portfolio Authors
Sykes_Thomas
Thomas Sykes
The Law Office of Thomas D. Sykes LLC
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